Sebi cracks whip on shady IPOs but that's not enough

The Securities and Exchange Board of India is up from its slumber. It passed an order to bar 7 companies and their promoters for irregularities in IPOs, along with few other concerned merchant bankers, from approaching the capital markets till any further notices are served. The aggrieved have been given 21 days to respond.

The seven companies involved are: Bhartiya Global Infomedia, Tijaria Polypipes, Taksheel Solutions, RDB Rasayans, Onelife Capital Advisors, Brooks Laboratories and PG Electroplast. Firstpost had reported earlier about irregularities in most of these companies and had warned investors to stay away from the stocks.

The initiative by Sebi to look closely into the IPO issues and bring out the results of investigation in the same year is commendable. It must also be admitted that siphoning off IPO funds for other purposes can only be proved after the funds are actually misutilised. However, Sebi conveniently puts the blame of negligence in due diligence on the concerned merchant bankers. Here lies the problem.

There is a reason why prospectus is filed with Sebi and issues can be brought out only after Sebi approves it. Look at BGI. The promoter Rahul Bhatia has been associated withIPOs of three companies . One of them trades at Rs 3 today, one at 40 paise and the other cannot be traced. Now these are issues that the merchant banker and Sebi needs to look into, even before an issue is brought out. The companies can be barred from further capital raising, but how will one address the losses investors have already suffered?

The approval of Sebi should not be relegated to a rubber stamp that is taken as granted by ill-meaning companies. Otherwise all the good efforts by the regulatory body will be deemed as too little, too late.

Nevertheless, the investigations carried out by Sebi throw up some glaring violations. We list some main highlights of how the companies went about cheating the investors. These could act as case studies for investors who should be doubly cautious before putting in hard earned money.

Bhartiya Global Infomedia (BGI)

Out of Rs 55 crore collected via the issue, a maximum of Rs 18 crore has been spent on objectives mentioned in prospectus.

On being asked about whereabouts of rest of the money, the company submitted different accounts at different times about its investments and pay backs of intercorporate deposits (ICDs). Sebi says, the varying accounts make it clear the company was trying to suppress something.

One example of spending of money can be given. BGI paid around Rs 2.5 crore to Dhanmangal Developers to set up an office. Dhanmangal however had no fixed assets, investments, inventories or capital work in progress over last two years.The copy of the agreement between two companies dated 1 July has no address of the location of the plot.

Tijaria Polypipes

The retail allottees and three QIBs named Sparrow, Credo and Ipro (all of whom had more than 9 lakh share each) were given exit on the first day at premium to the issue price. The investors who gave the exit to them were neither original allottees nor subscribers to the IPO.

The stock broker Grishma Securities Pvt. Ltd. allowed its client Shri Jivraj Zala to trade heavily in the scrip of Tijaria Polypipes Ltd on listing day without collecting any margin despite the fact the client was a new and walk-in client and had annual income less than Rs 4 lakh. But he was provided the money by others to provide exit to the QIBs and retail investors.

Taksheel Solutions

The company made faulty disclosures in the prospectus including about an allotted land in Andhra Pradesh to set up an IT park. Even after the allotment had been cancelled due to no progress in work, the prospectus says the company is awaiting response of concerned authorities for further progress in work.

The company also said it had employees abroad where attaining visas and work permits were crucial for the company. This gave a sense that they had a pan global presence, while in fact, they have 64 employees, all posted in Hyderabad and Warangal.

The company used almost half of the IPO proceeds to repay ICDs which have no mention in the prospectus as well.

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RDB Rasayans

Just days before the IPO , the company agreed to give Rs 50 crore as loan to RDB Realty and Infrastructure, an amount which was thrice its networth at that time. No doubt, the company was thinking of using the IPO proceeds to finance the loan, something it never mentioned in the prospectus. The audit committee meeting that passed this judgment had 3 members and was chaired by a whole time director, who is also the brother of the promoter.

The investigation also showed money from IPO proceeds was channelised to bank accounts of four clients who made heavy losses by trading in the stock on the listing day.

57 allottees again had the same address of Harihar Chowk in Rajkot, who are related to the broker ANS, which has the same address.

OneLife Capital

Here, out of the total allottees in the retail category 80 of them had same or similar address of Harihar Chowk in Rajkot. And this address again matches with two NII allotteess who were given around a lakh shares each.

The two main brokers ANS and Alfa Fiscal Services had the same address of Harihar Chowk, and seem to be connected to each other. This is the same address that belonged to a number of allottees in RDB Rasayans IPO.

While the issue was open, the company had a crucial meeting where they decided to deploy Rs 20 crore of IPO proceeds for repayment of loans to two specific companies on an “urgent” basis, something they never disclosed.

Brooks Laboratories

Brooks after getting Rs 61 crore through IPO, transferred almost the full funds to 13 entities. 7 of them belonged to the same group with common promoters and same address. 2 more entities are also related to each other. In most cases the company had taken money to fund capital expenditure but paid no interest on the loan taken. Sebi thus declares that “agreements entered into by Brooks were only a cover up for a more sinister conspiracy designed to siphon the funds of the public issue.”

It was also noticed that the money transferred to most of these groups were to offset losses they suffered on the listing day.

PG Electroplast

The company which is involved in manufacturing consumer electronic components and finished products has mostly used the proceeds in purchasing land or equities, which indicates the IPO “was for siphoning off and/or diversion of funds.”

Sebi says the buyers of shares of PGE were created by the company itself and funds provided to these buyers were diverted by the company from IPO proceeds. Thereby, “the company and its directors, have created an artifice or means to create artificial market for the shares of the company and to attract unsuspecting 65 of 76 investors into subscribing to the shares of the company.”