Regulations
Financial Regulation: No uniformity

Mis-selling is easy because the rules are not uniform

Sunil Parekh, trustee of the Consumer Education & Research Centre (CERC), Ahmedabad, returned from a global, once-in-four-years summit of Consumer Union International at Hong Kong and reported that the single biggest concern for consumer groups all over the world is mis-selling of financial products. On 7th January, at a...

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Regulators: Holier than thou

Why do governance rules not apply to those who frame and administer the laws?

Over the past two decades of financial liberalisation, India’s investor population has shrunk to a third (from 20 million in 1992 to 8 million, according to official reports) as investors turned away from equities and mutual funds and plonked their savings in safe, bank fixed deposits, real estate and gold.

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IPO Crackdown-7: RDB Rasayans

A SEBI probe revealed that RDB Rasayans diverted its IPO proceeds to various entities, flouting several disclosure norms. The regulator also barred the company, its key management team and the merchant banker from accessing the market but such entities will continue to cheat the investors if stringent action against them is not taken

In the seventh and final part of our IPO-Crackdown series, we cover RDB Rasayans (RDB), a Kolkata based manufacturer of polypropylene (PP) tape, PP woven sacks, woven fabrics, industrial woven fabric and PP woven bags. The Securities Exchange Board of India (SEBI) has taken punitive action and barred RDB from accessing the securities markets. It also barred its key management team, directors, individual entities and the merchant banker Chartered Capital and Investment (CCIL).
 
RDB raised Rs35.55 crore through an initial public offering (IPO) of 45 lakh equity shares at Rs79 per share. The object of the issue was to utilize the net proceeds to finance capital expenditure of Rs27.82 crore to enhance the production facilities.

On 7 October 2011, the scrip listed at a price of Rs85, reached a high of Rs93.15 before crashing to Rs26.50. Investigations revealed that over 89% of the 45 lakh shares issued were sold off on the listing day itself. This figure was large enough to warrant SEBI’s attention.

There was a circuitous route through which the IPO proceeds were diverted through various conduits before reaching Prakash Rana, Dave Harihar, BMD Exports Pvt Ltd and Shreyanshnath Shares, the entities which had incurred losses of more than Rs50 lakh on account of their trading in the scrip of RDB on 7 October 2011. To make good on the losses, these clients received funds from Sardhav Investment & Finance (Sardhav), one of the entities involved in Onelife Capital Advisors (OCAL) scam. Sardhav received the IPO proceeds through various conduits from Mercury Fund Management, part of the Prudential Group of companies, which was implicated in the OCAL scam. We had covered OCAL previously (http://www.moneylife.in/article/ipo-crackdown-6-onelife-capital-advisors/23089.html). Also, Mercury Fund Management had received funds from RDB in a similar fashion.

The graph below illustrates how the funds were diverted from RDB. (Source: SEBI)

A telling aspect of this scam is the number of common entities being involved in not one but multiple scams! Apart from the above example, ANS Pvt Ltd (ANS), a stock broking entity, had common addresses with 56 other allottees of the RDB IPO, as well as 80 allottees of another IPO entity—OCAL. It is quite clear that ANS was involved in creating benami accounts in order to corner the IPO market, and yet the firm has not been punished. Whether or not SEBI will initiate action against this obvious crime is anybody’s guess. What is appalling is that ANS was found manipulating the market in April 2010, and yet SEBI let it off with only a small fine.

Another firm, (AFSPL) was also related to ANS as both shared the same address. AFSPL was involved in the PG Electroplast as well as OCAL scams. Again, AFSPL’s role here is “under investigation”.

In a daring move, RDB had (though) illegally, during IPO process period, convened an extraordinary general meeting (EGM), on 28 September 2011 for using IPO proceeds to the extent of Rs50 crore towards ‘loans’ to be given to its subsidiary—RDB Realty and Infrastructure (RDBRIL). The fact that it had planned to use IPO proceeds and ‘loan’ it to RDBRIL was never disclosed to the general public, thus violating SEBI’s disclosure norms, and instead mis-stated that the IPO proceeds would be deposited in high-graded liquid instruments.

RDB had flouted Clause 49 of the listing agreement, which states that the audit committee must be chaired by an independent director. However, the audit committee meeting, which was held on 7 October 2011, the listing day, was chaired by a whole-time director, Sandeep Baid, who is the brother of Sheetal Dugar, the promoter of the group. The audit committee sanctioned the loan to RDBRIL.

RDB had lied in its prospectus that it proposed to place orders for plant and machinery during September 2011 and take delivery of the same during December 2011. However, it never placed the order. Similarly, it was supposed to use Rs2 crore of IPO money as a security deposit with West Bengal State Electricity Distribution Company during October–November 2011, which never materialised.

SEBI has ordered RDB to call back Rs31.60 crore from RDBRIL which had been given as an inter-corporate loan. These amounts will be deposited in an interest-bearing escrow account with a scheduled commercial bank.

Some lessons to be learnt from this IPO Crackdown series:
1)    SEBI needs to improve the quality of its surveillance and investigations team to prevent past transgressors from participating in the market. Companies which have committed acts of transgressions in the past will continue to do so in the future if SEBI doesn’t punish them heavily.
2)    SEBI doesn’t seem to have taken the issue of past records of merchant bankers seriously enough (http://www.moneylife.in/article/sebi-action-on-merchant-bankers-a-bit-too-late/22897.html). Merchant bankers have essentially put investors’ hard-earned money on the line by doing shoddy due diligence.

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