Primary market: Games companies play

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SEBI has discovered that the money raised through IPOs flowed mostly into accounts of stock market intermediaries, through many layered transactions. Two of the companies, RDB Rasayans and Onelife Capital resorted to applying for their own offers through ‘benami' or fictitious applications in the retail category.

It is no secret that the Indian primary market is a murky place. Investors have rarely made money from initial public offerings (IPO) in the recent past. The reasons are many, ranging from promoters charging high value for the issue, to fly-by-night operators tapping the market only to disappear without a trace.

Investors are not devoid of blame since many buy shares in the primary market with the sole intention of flipping after pocketing listing gains. This has led to yet another malaise — rampant price manipulation in the period following listing.

The market regulator, SEBI, has finally decided to roll up its sleeves and get down to cleaning up this space. The order issued against seven companies that had made IPOs in 2011 and three merchant bankers involved with the issues was the first step in this direction. 

We outline some of the malpractices revealed by the orders, as they could hold lessons for investors.

MISUSE OF IPO PROCEEDS

A common transgression that all seven companies (see accompanying table) are guilty of is siphoning of IPO proceeds for purposes other than that stated in the prospectus. SEBI has discovered that the money from IPO mostly flowed through many layered transactions into accounts of stock market intermediaries.

These outflows were camouflaged as inter corporate deposits (ICDs) or payment to fictitious vendors. These intermediaries, in turn, used the funds to manipulate the stock price in the period after listing.

Some companies such as Bharatiya Global International transferred IPO proceeds through inter corporate deposits and related party transactions (such as assets purchased from directors or their relatives) to directors and their family members. The company has even suppressed the name of the wife of one of its Directors, Richa Mittal, so that the fact that the company was entering into related party transaction remains hidden.   Scrutiny of the trading in Tijaria Polypipes on listing day reveals that the intermediaries funded by IPO proceeds put in circular deals (both buy and sell trades at higher price) so that three large institutional buyers, Sparrow, CREDO and IPRO could exit with profit immediately after listing.

‘BENAMI' APPLICATIONS

Two of the companies, RDB Rasayans and Onelife Capital resorted to applying for their own offers through ‘benami' or fictitious applications in the retail category, probably to meet the requirement of minimum retail participation in the issue.

The Bombay Stock Exchange has disclosed that 57 of the retail allottees in RDB Rasayans issue had a common address. The bank account that paid these subscriptions received money from Alfa Fiscal Services and ANS Private Ltd, a Rajkot-based share broker.  

Alfa Fiscal was among the larger allottees in RDB Rasayans and ANS and Alfa share a common director, Bhavesh Natvarlal Sheth. It, therefore, appears that Alfa and ANS who are associated to the company, used fictitious accounts to subscribe to the retail portion of the issue. All the 57 investors exited the share on the day of listing through ANS.

The same names, ANS Private Ltd, Bhavesh Natvarlal Sheth and Alfa Fiscal crop up in Onelife Capital order as well. It therefore comes as no surprise that the modus operandi of submitting benami applications and allotting to fictitious retail investors is similar to the RDB Rasayans issue; 80 applications in the retail category had a common address, that of Alfa Fiscal Services. Some of the other benami applications carried the address of ANS Private Ltd.

MISLEADING DISCLOSURES

Making misleading or even false disclosures and suppressing vital information about the business is also common to all seven companies.

Taksheel Solutions had stated in its offer document that its operations in other countries such as the US and Europe would depend upon its employees obtaining work permits and visas. But investigation revealed that all 64 of TSL employees worked out of Hyderabad and Warangal.

When SEBI asked TSL to provide a list of vendors and clients, the company provided a list of 16 clients and four vendors. The web sites of eight of these entities were registered on May 8, 2011, by Taksheel Solutions. The web site contents and links of all the eight entities were uncannily similar. These web sites also did not contain necessary information such as address, phone numbers, email IDs and so on. Another 6 entities had their web sites registered on November 26, two days after SEBI asked for details, by Taksheel, through a vendor called Virtu Tech Solutions. 

In case of Onelife Capital, a large part of the IPO proceeds was diverted to Precise Consulting and Fincare Financial. This was purported to be for payments relating to rent and licence fee for clients. But according to MCA filings, both, Precise Consulting and Fincare Financial, are shell companies listed as dormant/defaulter. The money routed to these companies has once again found its way to stock market intermediaries who, in turn, manipulated the stocks on listing. 

The prospectus of Bharatiya Global International suppressed the fact that Mr Rakesh Bhatia, Chairman of the company, had earlier promoted SRG Financial and Management Consultants that had made a public issue at a premium of Rs 10. There is currently no trace of this company. The BSE had suspended trading in the shares of this company in 2001 for non-payment of listing fee.