SEBI action on merchant bankers, a bit too late?
Moneylife Digital Team 12 January 2012

The market regulator asked seven merchant bankers to disclose track record of the performance of the IPOs managed by them. Surprisingly the SEBI seems to have overlooked the ‘not-so-clean’ history of these merchant bankers

The Securities and Exchange Board of India (SEBI) has to be congratulated for the tough action against seven companies who made initial public offerings (IPOs) and their lead managers. SEBI has banned five merchant bankers who had managed seven of these IPOs. Surprisingly, in the case of Tijaria Polypipes, there was no order against the merchant banker—Hem Securities, the firm which has been pulled up for price manipulation in the past. Atherstone Capital, Almondz Global, D&A Financial services, Chartered Capital and PNB Investment Services are the other merchant bankers who have been barred from the primary market.

Moneylife looked at the track record of these merchant bankers and SEBI followed same course by sending a circular to merchant bankers. It has been decided by SEBI that the merchant bankers shall disclose the track record of the performance of the public issues managed by them. However, the regulator has failed to ask them to disclose any regulatory action taken against them in the past.

Why is this important? Hem Securities, lead manager to the IPO of Tijaria Polypipes, has been charged by SEBI a number of times in the past. The current investigation also revealed that 1,409 retail allottees had got the subscription to the IPO through Hem Securities, and, 1,303 of them had sold the shares on the first day of trading at a premium to the issue price. Tijaria Polypipes, which got listed on 14th October, with an issue price of Rs60, got listed at Rs62. It barely reached its all-time high of Rs67.80 on listing day, when its downfall began. It closed 70% down on listing day and is now trading more than 85% below its listing price. Surprisingly, this has not led to any action being taken against Hem Securities which has been pulled up for price manipulation a couple of times before in the past.

In December 2002, Hem Securities was charged for indulging in price manipulation in scrip of Global Trust Bank. It was accused of indulging in creation of an artificial market in scrip of Global Trust Bank and for parking shares to circumvent SEBI Takeover Code, 1997. It was just barred from trading at that time.  In January 2006, the regulatory charges faced by Hem Securities was that it did not issue contract notes, it dealt with un-registered sub-brokers and for illegal and unauthorized grant of trading terminal to client. Here SEBI let it off with a warning.

Four years later in January 2010, Hem Securities charged with alleged indulgence in irregular transactions in scrips of Lupin Laboratories, Aftek Infosys, Shonkh Technologies International, Global Trust Bank, Adani Exports, Himachal Futuristic Communications and Global Telesystems. In this case, it reached a settlement with SEBI through a consent order where the firm had to pay Rs90 lakh as settlement charges. This has not hampered it though as we can see in the current case. This just shows SEBI’s consent orders is a big sham and there should be stricter punishments. Hem Securities had transactions in the IPO of RDB Rasayans and was the syndicate lead manager for PG Electroplast and Onelife Capital, as well.

Moneylife contacted SEBI as to why there was no action against Hem Securities, but no reply was received.

Almondz Global Securities, a merchant banker to two of the seven IPOs—PG Electroplast and Bharatiya Global Infomedia—had lead managed eight other IPOs in the past.

One of these was Empee Distilleries, which was listed in November 2007. The issue price was Rs400 and it hit its all-time high of Rs489 on the listing day. The price started declining almost immediately thereafter and was down 86% at the end of the year.

A few months later Almondz was merchant banker to Tulsi Extrusions. The scrip hit an all-time high of Rs132 on listing day, up 55% from its issue price. A year later it was trading 85% below its issue price. Same was the case with First Winner; the stock was down 86% from its listing price. Texmo Pipes which was launched in March last year and is now 82% down. All the seven IPOs managed by Almondz in the past three years are down 80% from their launch till date. It is clearly worth asking why these price movements were never investigated, especially since Almondz has been pulled up in the past for some procedural violations in 2008 and 2009.

Out of total issue proceeds of approximately Rs120.64 crore, Rs113.35 crore was received in the bank account of PG Electroplast, Rs7.07 crore to Almondz and Rs0.22 crore to Hem Securities, the syndicate member of the IPO.

It is the lead manager who signs the ‘due diligence’ certificate which vouches for every fact in the prospectus or offer document. In the recent cases, the documents have been riddled with inadequate disclosures or outright falsehoods.

D&A Financial Services Pvt Ltd, which was the lead manager for Brooks Laboratories, was pulled up for non-disclosures, for failing to make proper disclosures by mis-statements in the IPO prospectus. The merchant banker has been the lead manager for two other public offers, both of which need to be investigated as well. In the case of Shilpi Cable Technologies which was launched in April, the stock fell 31% on listing day from its issue price of Rs69. The scrip has been on a decline ever since and is now trading at 86% below the issue price.

D&A Financial Services also happened to be the investment banker for M&B Switchgear, the IPO in which we have suspected manipulation since day one. (Read: IPO manipulation is back with a bang ) The IPO went up 70% on day one and is currently 68% down from its issue price of Rs186.

Chartered Capital and Investment, which was the lead manager for the IPO of RDB Rasayans, was barred for mis-statement in the prospectus relating to related party transactions and interim utilization of IPO proceeds and failing to exercise due diligence. The firm has been charged by BSE in the past for procedural violations.

SEBI also barred PNB Investment Services for failure to carry due diligence with respect to non-disclosure of repayment of Inter Corporate Deposit (ICD) to different entities in the IPO of Taksheel Solutions and Atherstone Capital Markets for inadequate documentation and failure to exercise due diligence in the IPO of Onelife Capital Advisors. Midfield Industries, another IPO managed by Atherstone Capital Markets, launched in August 2010, went up by 23% on the listing day. In the next three months it went up 200% from its issue price of Rs133 to around Rs400, and then soon after the decline started in the beginning of December 2010. By the end of December the stock was trading at Rs90 down 32% from its issue price and down 78% from its price a month back. Apparently this was also overlooked by the regulator, as well.

SC Katyal
1 decade ago
I have some comments on the forthcoming IPOs at BSESME which I have since sent to respective compnaies and in one case even to BSESME. Neither of them have responded back to give clarifications sought. I want to send it to you also so that investing public is made aware of the same. Please inform as to how should I send it.
1 decade ago
PNB Investment services earlier got a warning letter from SEBI for improper due diligence in another IPO for a jewellery company which was later withdrawn (never made it to the market).
K Mohan
1 decade ago
Excellent investigative research done on Hem Securities and others. Tell me how can I as an individual investor help to put pressure on SEBI so that if several people like me complain SEBI will be forced to look into it. Can we write to the Government, or other SEBI directors.
Jason Monteiro
Replied to K Mohan comment 1 decade ago
Thank you for your comment... You could write to the SEBI chairman, [email protected] and to ministers or parliamentary standing committee members.
Free Helpline
Legal Credit