How exactly did the seven IPOs that were the subject of SEBI’s regulatory action dupe investors? Aditya Govindaraj explains what they did and how...

(This is the first part of a series of articles on SEBI’s regulatory action)

The Securities & Exchange Board of India (SEBI) recently barred several directors and officials of Bharatiya Global Infomedia (BGIL) from the capital market as part of its crackdown on fraud and irregularities in the initial public offerings (IPOs) of seven companies. It also prohibited Almondz Global Securities, the lead manger from taking up any new assignment. What exactly did they do?  

In July 2011 BGIL raised Rs55 crore, at Rs82 per share with the stated objective of purchasing offices (Rs9.89 crore), investment in a digital post-production studio (Rs22 crore), expanding its R&D centre (Rs6.56 crore), repayment of bank borrowings (Rs2.69 crore) and for long term working capital (Rs5 crore).
 
It was the brazen manipulation of the BGIL shares on the listing day that caught the regulator’s eye. The shares, which were listed on 28 July 2011 at Rs81.90, on the Bombay Stock Exchange (BSE), rose to Rs83 and soon began to slide, plunging to Rs29.90 at close.

A SEBI investigation revealed that rigging its share price was just one of its many acts of mischief. Wrong disclosures in its prospectus (which is a legal document), misutilisation of IPO proceeds and other violations soon tumbled out.

* What is most shocking is the track record of the chairman & managing director (CMD) Rakesh Bhatia, who was involved in various questionable entities in the past. Mr Bhatia was, earlier a promoter and managing director of SRG (Infotech), a loss-making entity which had an IPO in 1994 and whose shares are currently trading below Re1. He was also the promoter and chairman of SRG Financial & Management when it came out with its IPO in 1996. The company doesn’t seem to exist today. Subsequently, he became the managing director of Visesh Infosystems, currently known as Visesh Infotechnics, which came up with an IPO in 1999, and quit in 2004. The pattern at which he was associating and disassociating himself with various entities involved in IPOs never caught the eye of the merchant bank and regulators.  This has raised questions about the efficacy and purpose of identification documents such as Know Your Customer (KYC) details and PAN cards details required by the Income Tax department. How did Mr Bhatia’s past record escape the regulator’s attention?

* BGIL claimed to have spent Rs2.50 crore to purchase offices at Mumbai and Noida. Documents revealed that the money was advanced to Dhanmangal Developers of Kolkata, which found no mention in the prospectus. Worse, there was no move to set up offices in Mumbai or Noida.

* SEBI rules require promoters to disclose a list of relatives of the promoters for the purpose of insider trading rules. BGIL conveniently omitted to disclose several of these, so that property deals could be done through them to siphon off IPO funds. For instance, the company signed up to acquire property from Gadeo Electronics owned by Richa Mittal (95% stake in the partnership firm) and R K Mittal (5%). The latter is the father of BGIL’s director Sanjeev Kumar Mittal. But the prospectus said: “Mrs Richa Mittal is wife of Mr Rajeev Mittal and a resident of A-147-148, Sector 55, Noida, Uttar Pradesh, and not related to our Company, our Promoters/Directors or Promoter Group Companies.”  Rajeev Mittal, the husband, is the brother of Mr Sanjeev Mittal but the relationship was falsely concealed.  

* A bigger problem, from the investors’ perspective is the concealment of significant borrowings.  BGIL’s borrowing through inter-corporate deposits (ICDs) amounted to around 60% to its total liabilities—of this, Rs7 crore was not revealed in the prospectus and amounted to a 100% jump on current liabilities. Instead, the prospectus brazenly lied and said: “Our company has not raised any bridge loan against the proceeds of the present issue”.

* During investigation, CMD Rakesh Bhatia claimed that money was paid to two vendors, but their names did not figure in the prospectus.

The regulator has asked BGIL to recall funds paid out of IPO proceeds to directors, relatives and dubious vendors. The amounts will have to be deposited in an interest-bearing escrow account with a scheduled commercial bank, till further orders.