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No beating about the bush.
Due to the sharp fall in price of the scrip on the listing day (from around Rs60 to Rs18.10), genuine investors who had purchased the shares on the first trading day have been left with no option, but, to continue holding the shares which have hardly any value and thus incurring huge losses
As part of the nationwide crackdown on Initial Public Offerings (IPO), the Securities Exchange Board of India (SEBI) has barred Tijaria Polypipes (TPL) as well as several individuals and stock brokers from accessing the securities market. As reported earlier, Hem Securities, the merchant banker to the issue, was spared from any wrongdoings. Incidentally, the merchant banker has had a history of violations in the past (see http://www.moneylife.in/article/72/22897.html).
On 27 September 2011, the company raised Rs60 crore to fund its proposed expansion and diversification plans at Rs60 per share. On 14 October 2011, the day of the listing, the stock trended much of the day between Rs40 and Rs60 before it collapsed to Rs18.10 towards the end of the day. SEBI received a complaint alleging insider trading and artificial volumes had caused huge losses to retail investors.
An investigation exposed a shocking tale of manipulation and deceit through the collusion with certain retail and qualified institutional buyers (QIBs). The three QIBs—Sparrow Asia Diversified Opportunities Fund, Credo India Thematic Fund (CREDO), and IPRO Funds were clearly allowed to exit the stock on listing day at a premium to the issue price. They exited at an average price of Rs62 per share, while the stock closed at Rs18.10 towards the end of the day.
The higher exit for QIBs was orchestrated through a set of brokers, namely—Grishma Securities Pvt Ltd (Grishma), Parklight Securities Ltd, Pinac Stock Brokers Pvt Ltd, and Volga International. These stock brokers used certain individuals as front-runners to buy the stock from QIBs and retail allottees who wanted to sell them. These individuals were neither original allottees nor subscribers to the IPO of TPL. A simple Google search will show that Parklight Securities has been habitually in trouble—it was banned for six months in 2003 was involved in the infamous Nissan Copper case and at least 15 other cases of manipulation. Each time, a generously indulgent SEBI allowed it to escape with a minor suspension, illegal administrative warning or a paltry settlement under its consent order scheme (see http://www.watchoutinvestors.com/history.asp?def_code=C0003520 ). Doesn’t this warrant a full fledged investigation?
These stock broking entities were creating artificial volumes in the scrip by carrying out structured reversal of trades, thereby inducing the innocent investors to purchase the shares of the company on the first day of its listing.
One of the stock brokers, Grishma, had used one particular client, Jivraj Zala to trade heavily in the scrip of TPL on the listing day leading to a loss of over Rs9 crore, without collecting any margin from the person. How did Grishma fund Mr Zala? Grishma manipulated the client ledger of Mr Zala to give an impression that there were funds in his account, by using other clients’ funds. This is not all. There were several other brokers who were front-running select clients in this manner, as well.
Grishma abused the KYC process by allowing Mr Zala to rack up several crores of losses, Rs9.95 crore to be precise, and yet KYC records showed that he had only an annual income of less than Rs4 lakh.
TPL lied in its prospectus that it had not raised any “bridge loans” when it had actually raised as much as Rs12.5 crore through inter corporate deposits (ICDs). According to the company, the ICDs were used to meet “business needs for a project under consideration”.
The companies that were issued ICDs, namely Nihita Financial Services Pvt Ltd, Bellisima Impex, Balasaria Holdings, were involved in diverting the IPO proceeds of TPL to select individuals and entities. For instance, Bellisima Impex transferred money received from TPL towards ICDs repayment, to Jivraj Zala, the very same retail client who lost crores of rupees.
Moreover, when the company was asked to produce evidence of ICD agreement papers, it produced fabricated copies, which were done in a very shoddy and amateurish manner, thinking it could outwit SEBI. Why did Hem Securities, the merchant banker to the issue, not verify this material fact?
To cut a long story short, TPL had orchestrated a very convenient exit for QIBs and certain retail allottees by arranging certain stock brokers to have a counter-party ready in order to buy out the IPO allottees at high prices, before the price plunged from roughly Rs62 to around Rs18.10. Due to the sharp fall in price of the scrip, genuine investors who had purchased the shares on the first day of listing have been left with no option, but, to continue holding the shares which have hardly any value and thus incurring huge losses.
The entire modus operandi was conducted in similar fashion with other brokers and entities which can be described in the graph below:
As a directive, SEBI has ordered TPL to deposit roughly Rs45 crore in an escrow account until further orders. This means the investors will not be getting back their money soon
New guidelines for public shareholding of listed companies may offer convenient exit route for some companies wanting to avoid public scrutiny
Corporate laws and frameworks are generally supposed to protect consumers and the society, at large, from any wrong doings incurred by a company. However, the newly revised guidelines of public listed companies drafted by the ministry of finance may actually provide an exit route to some of the companies which would prefer to avoid scrutiny and ire of shareholders and general public.
According to the revised guidelines, “all private sector listed corporates must have at least 25% public holding while listed PSUs should maintain a minimum public holding of at least 10%.” The deadline for this compliance is June 2013, roughly 18 months from now. The threshold was 10% in 2001, before being raised to 25% in 2006. However, there were relaxations in the regulations allowing companies to have promoter holding of up to 90% in most cases. This is the first time that the 25% public share holding mandate (and 10% for PSUs) will be strictly enforced by government authorities.
ICICIDirect.com had recently come up with a report naming as many as 18 potential de-listing candidates which may not comply with the new revised guidelines issued by the ministry of finance in August 2010. According to the report, some of these companies are “fundamentally strong multinational companies (MNC) [who] may not have the inclination to increase their public holding and may resort to delisting to have better flexibility in taking business decisions.”
Incidentally, some of the companies in the list had been covered by Moneylife in the past, namely: Oracle Financial Services (OFS), Kennametal India, Honeywell Automation, Fairfield Atlas and Gillette India.
Bigger companies like OFS, owned by US-based Oracle, have the resources to go private and it might opt for this route. According to the report, OFS might have to cough up as much as Rs3,986 crore for buying back its shares. Similarly, Novartis India, Honeywell Auto, Timken India, Thomas Cook and GMM Pfaudler have enough in their coffers to exit the market.
However, we learn from the report that there are some good companies which may not have the requisite funds to pay shareholders at time of delisting. For instance, 3M India, part of the well-known 3M and inventors of Post-It Notes, has only Rs267 crore on its balance sheet, whereas it would have to shell out Rs1,000 crore at time of delisting, assuming its market price is same as today. Similarly, local companies Blue Dart, AstraZeneca India, Swedish-based Alfa Laval India, Gillette India, Wendt India, Singer India and Kennametal India are examples of companies which, currently do not have the resources to exit and might have to borrow funds for this purpose. Further, Gillette India was cited as a ‘value destroyer’ in our 17 January 2008 issue of Moneylife.
We had covered Kennametal India in its reputed Street Beat section as part of the 26 January 2012 issue. The Moneylife team valued the company at Rs450, which is well below its current price of Rs789 (as on 13 January 2012). Hence, there’s a possibility investors will get a good deal in case the company decides to delist, if the price of the scrip doesn’t fall.
The report cites, “The chances of a delisting offer succeeding also appears higher due to a moderation in return expected by the public shareholders and the enhanced willingness to exit the stock even at a marginal premium to current stock prices.” Thus, some of the companies might want to take advantage of the new rules by exiting the markets, to focus on running their business, thus avoiding public scrutiny, endless compliance requirements and accountability.
The critical question to ask at time of delisting is whether a particular company offering a buyback is offering a “fair price” to the shareholders. According to the ICICIDirect.com report, “The case for delisting becomes stronger in the current weak trend prevailing in the equity markets, which has led to a substantial fall in stock prices providing an opportunity for such corporates to buy out the remaining stake with the public at lower valuations.” This may not be good news for investors who have bought shares in these companies at higher valuations during the market peak. Companies which have delivered poor returns for shareholders will obviously want to exit the market, further depriving of shareholders of any chance of getting back their capital.
It is not very good news to some companies either, as some of them, especially good ones, would be under pressure to offer securities to comply with the new requirements without having any regard to market conditions, which may in turn impact valuations that might prove to be harmful to shareholders.
Either way, we find that the new regulations do not provide an ideal situation for shareholders. Good companies do not generally delist as they usually make an effort to comply with regulations. The new regulations are merely giving a window of opportunity to companies who prefer not to be accountable to the public at large, and ultimately its shareholders.
SEBI has asked Brooks to call back the ICDs advanced by it to certain entities and together with all the IPO proceeds deposit it in an interest-bearing escrow account. Investors are not getting back their money yet; but the curious fact is that investors to these dubious IPOs don’t seem to be demanding a refund of their application money either
(This is the second part of a series of articles on SEBI’s regulatory action)
Brookes Laboratories’ (Brooks) chairman Atul Ranchal, managing director Rajesh Mahajan and six others, including the merchant banker D&A Financial Services (DAFS) have been barred from the capital market by the Securities & Exchange Board of India (SEBI) as part of its crackdown on seven companies.
Brooks, a Himachal Pradesh-based pharmaceutical contract research and manufacturing services (CRAMS) company is among those whose initial public offering (IPO) came under the regulatory scanner due to price manipulation and other irregularities.
On 16 August 2011, Brooks launched an IPO to raise Rs63 crore at Rs100 per share. The primary objective of the issue was to set up a manufacturing unit at JB SEZ Pvt Ltd, Panoli, Gujarat, for manufacturing of various pharmaceuticals formulations and to meet long-term working capital requirements, some of these which included paying off “questionable” inter-corporate deposits (ICDs).
The discovery that an entity called Overall Financial Consultants Pvt Ltd (OFCL) had bought and sold 6,65,000 shares raised a red flag and triggered SEBI’s investigation which exposed a conspiracy between Brooks and other entities to siphon off public money.
1) SEBI investigations showed that as many as 12 entities were involved in routing and masking the transfer of IPO funds from Brooks to OFCL. They used ICDs to transfer Rs2.5 crore to OFCL, which had run up losses of Rs2.13 crore by trading in the Brooks scrip.
The brazen manner at which the IPO monies were routed is described below:
A firm called Shardaraj Tradefin received Rs50 lakh from Brooks as repayment of ICDs, of which Rs25 lakh each was transferred to two entities namely Makesworth Projects & Developers Pvt Ltd and Shridhan Jewellers Pvt Ltd. These entities then transferred Rs25 lakh each to OFCL.
Similarly, another entity, Konark, received Rs5.50 crore of the IPO monies towards repayment of ICDs from Brooks. Konark then transferred the entire amount to Mangalmayee Hirise Pvt Ltd. Thereafter, Mangalmayee transferred Rs25 lakh to OFCL, and a further sum of Rs1.50 crore to Khusboo Complex Pvt Ltd, Rs50 lakh each to Growfast Realties Pvt Ltd, Jaganath Consultants Pvt Ltd, Silicon Hotel Pvt Ltd, and Neelkamal Dealcom Pvt Ltd, and Rs25 lakh each to Alishan Estates Pvt Ltd and Pushpanjali Hirise Pvt Ltd. These entities then in turn transferred Rs25 lakh each to OFCL.
The graph below illustrates the above transactions: (Source: SEBI)
2) Brooks never disclosed one telling fact—the relationship between the entities—and chose to hide it from the public at large. Out of the 13 companies which had ICDs with Brooks, seven of them had common directors. Even the entities involved in diverting the IPO funds had common directors between them. For example, three companies namely Shardaraj, Makesworth and Shirdhan all had common directors. Some of them even shared the same addresses. This is also case of shoddy due diligence or collusion by the merchant banker.
3) Brooks engaged itself in improper business practices with a supplier. It transacted with a Dubai-based supplier, Neo Power, for the purpose of acquiring machinery, using pro-forma invoices received through e-mail instead of properly signed papers. What is stark was that Brooks overstated the price of the machinery in its prospectus. Instead of Rs19 crore, as mentioned in the prospectus, the price of the machinery transacted turned out to be Rs14 crore. The company had, in fact, already paid 50% of the cost of machinery and had neither mentioned the supplier’s name nor this payment in the prospectus. In a sinister twist to this transaction, even after five months since Brooks placed the ‘order’, the machinery is yet to be delivered. Simply put, Rs5 crore had been siphoned off by merely mis-stating just one item in the prospectus.
4) Parag Dinesh Doshi, the signatory of the faux proforma and CEO of Neo Power, is also the director of Hillston Advisors, one of the 13 companies that lent funds through ICDs to Brooks. Apparently, Mr Parag’s relative, Dinesh Doshi is also a director of 10 different companies that are currently under SEBI scanner. In order to escape SEBI’s radar, Dinesh Doshi resigned from Hillston Advisors on 27 October 2010.
5) Brooks had lied in its prospectus that it intended to set up a factory in JB SEZ in Gujarat. What happened was that Brooks paid for plant and machinery and also for civil work contract even though the acquisition of land has still not been completed. Despite lack of infrastructure, Brooks proceeded to place orders for machinery from Neo Power.
6) Apart from using ICDs for routing and diverting investors’ money, it also abused ICDs in a clever way. The funds raised from ICDs were paid to related entities from whom the ICDs were originally received in the form of advances for equipment, project management fees, etc, while at the same time paying the original ICD providers also from the issue proceeds.
So far, SEBI has asked Brooks to call back the ICDs advanced by it to certain entities and together with all the IPO proceeds deposit it in an interest-bearing escrow account with a scheduled commercial bank. Investors are not getting back their money yet; but the curious fact is that investors to these dubious IPOs don’t seem to be demanding a refund of their application money either.