Sunday, August 5, 2012

IPO Scam in India

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This scam refers to the many companies that were floated and which raised public funds through initial public offernings only to later disappear without a trace taking with them, the investors capital. The root of this menace can perhaps be traced to 1 when, in the name of `liberalisation, the government abolished the office of the Controller of Capital Issues (CCI) with a one-line order and asked the Securities and Exchanges Board of India to monitor the capital market. Many promoters took advantage of the prevailing situation, which allowed them to raise money from the public at fancy premiums, with the role of SEBI reduced to merely vetting Initial Public Offers prospectuses.

Between April 1 and March 16 more than 4,000 companies raised more than Rs 54,000 crore from investors through public and hybrid issues. Another 1,500 companies raised over Rs 4,000 crore through rights issues at very high premia. With practically no supervision from either the SEBI, the stock exchanges in which these companies got themselves รข€˜listed, or the Department of Company Affairs acting through the various Registrars of Companies (RoCs), most companies simply vanished in thin air in no time, leaving investors high and dry. Officials of the SEBI and DCA did not react for several years and only in the late 10s did investors see some action being taken.

Thousands of companies raised several thousand crores of rupees of public money and simply vanished, leading to a four year collapse of the primary market. None of the promoters of these companies have been caught, punished or prosecuted as yet. Initially, SEBI and the Department of Company Affairs (DCA) blamed each other for inaction, later when the Midas Touch Investors Association and the Investor Grievances Forum filed litigation, they set up a co-ordination committee and five task forces which were conducting a leisurely inquiry. They even assured the courts that DCA-SEBI co-ordination would lead to concrete action against vanished companies. Not only did this fail to happen, but SEBI even ended up wanting the entire business handed over to the police for action under the criminal procedure code.

So far, SEBI has sent show-cause notices to the directors of 80 companies identified by it as having vanished. The names of these directors were not disclosed even on SEBIs website, so there was no way of knowing who they are and if they are associated with any other companies. Top SEBI officials have claimed in internal meetings that none of these 80 companies have any false statements in their prospectus. This is rather strange, because so many investors who have lost money in vanished companies can reel of details of the personal wealth amassed by promoters after the public issues. SEBIs declaration that economic offences should be tried under the IPC after five years is too late for investors. It also does not provide for investors getting back their money.

If SEBI wants to transfer responsibility of vanishing companies, then its investigation department would have to be scaled down and the economic offences cell of the police strengthened dramatically. This is absurd when there is already an established market regulator in place. SEBI simply cannot be allowed to shirk responsibility. Investor protection begins to make sense only if the money misappropriated by industrialists is confiscated and returned to investors and penalties imposed on wrong-doers include cost and damages to investors. This is not the job of the police, it has to be done by the capital market regulator.

In fact, rivalry between the DCA and SEBI took a huge toll on the investigations. The DCA while doing nothing significant in booking the guilty, worked towards curtailing the powers of a fellow regulator such as SEBI. For instance, the DCA demanded that the Securities Appellate Tribunal, which handles appeals from companies against SEBIs orders, be scrapped and the appeals should instead be filed with the Company Law Board for disposal. The lack of coordination and the animosity between fellow regulators have led to such a pass that even after ten years after the scam, nobody has a conclusive idea as of the kind of money that has been siphoned off by fly-by-night companies that tapped the markets - perhaps running into several thousands of crores of rupees. In fact, against thousands of companies which have disappeared, gobbling up thousands of crores of rupees from investors, the High Level Committee set up in this regard lists only companies as `vanishing companies with the amount involved shown as only Rs 800 crore.

The need of the hour is a co-ordinated action plan involving regulatory bodies such as SEBI, the DCA and the stock exchanges to ensure that the small investors confidence in the market, to some extent, is restored. While it may be too late for Indias regulatory authorities to pin down thousands of companies and their promoters who raised money from the public and have since vanished, it would definitely make sense to at least go after the companies that cause greater damage to investor sentiments.

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