IPO proceeds - SEBI uncovers a labyrinth of lies
1/13/2012 12:01 PM Friday
Plagued by an array of global and domestic macro economic concerns, ranging from a near recessionary scenario in the western world to inflationary pressures in the emerging markets, Indian equities saw a massive amount of wealth erosion and turned out to be among the worst performing markets globally. Broad market indices which indicate the health of the market are down by almost 25 per cent. It wasn’t just the macro concerns of inflation and interest rates, but an array of scams and scandals, ranging from the infamous 2G scam to the unearthing of illegal mining activities in Karnataka that led to this sharp decline and loss of investor wealth in India.
The IPO market, which usually intends to provide retail investors with champagne stock opportunities, unfortunately turned out to be one of the foremost wealth guzzlers last year. Out of the 38 IPOs that hit the markets in 2011, only 10 have been able to keep their heads high and create some wealth for shareholders. In fact on a closer scrutiny it has emerged that a majority of the IPOs have lost more than 50 per cent of their value, making it a daunting task for investors to recoup losses and turn profitable. Around Rs 3,500 crore worth of investor money has been lost in 2011 through IPOs.
In wake of this massive investor wealth erosion, market watchdog SEBI, based on investor grievances received on various fronts, initiated a probe into the recent IPOs and investigated the alleged activities regarding price rigging on the bourses, siphoning off funds raised through public issues, misleading statements made in the prospectus, etc. The findings of the investigations have been quite shocking. The SEBI has named seven companies who have allegedly committed malpractices during their respective IPO processes. As per SEBI’s initial observations, there is a common pattern that has been visible in the IPOs of these seven companies.
Inter-corporate deposits (ICDs) or short-term borrowings were key instruments used to route and divert funds into and from the IPOs in most of the instances, with the exception of RDB Rasayans. In the specific case of RDB Rasayans, the company management was accused of diverting IPO proceeds to one of its group companies without informing shareholders. It was also observed that RDB was involved in the routing of funds to OneLife Capital, which is also a co-accused in the SEBI investigations
Moving on, in certain cases, such as that of PG Electroplast, it was seen that the company, in tandem with another entity, massively over-inflated the value of a piece of land and siphoned off public funds, the intricate details of which are given ahead. There are few other land deals too which these companies have entered into and which seem to be questionable. It emerged that certain companies either carried out civil work on pieces of land which weren’t owned by them or didn’t make proper disclosures of land ownerships, resulting into strong violations of the SEBI guidelines.
Further, the SEBI has observed that in some cases there were also instances of price rigging and artificial volume creation done on the bourses on the date of the listing of these IPOs. While PG Electroplast and OneLife were the only scrips that appreciated on listing, others tanked heavily, thus resulting into huge losses for gullible investors. Certain brokers and day traders were also involved in disturbing the market equilibrium of trading. Finally, there have been some startling revelations about misleading statements and suppression of material facts in the prospectus of the IPOs by the companies and their merchant bankers in relation to objects of the issue, utilisation of the proceeds, financial information, related party transactions, etc.
What emerges from the above SEBI findings is that these seven companies along with various other entities have shown complete disregard to the regulations, acts and guidelines laid down by the SEBI and the exchanges. They have blatantly indulged in unethical and dubious activities with a clear intention to take investors for a ride and defy the law of the land. As always, we at DSIJ have worked towards safeguarding and protecting the interest of our readers and the investor community at large. In our new issue analysis we had analysed five out of these seven companies and strongly tagged an ‘avoid’ on them. This was further reiterated in the post-issue analysis. We continue to keep these companies under an ‘avoid’ rating.
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