Capital markets around the world have turned volatile. The BSE Sensex is no longer hurtling towards 7000 and seems more in danger of going off in the opposite direction. Enthusiasm over the Initial Public Offerings (IPOs) is also fading fast after the aggressively priced issues have slipped below their offer prices.
It is not yet a repeat of the 1993-96 IPO mania when hundreds of dubious companies raised public money and vanished into thin air or scores of large, listed companies raised money they didn’t need and recklessly squandered it on promoters enrichment, real estate or injudicious green field projects. But some signs of that manic time are beginning to surface.
Every time investors get restive about the vanishing companies of 1990s, the government makes a feeble push to take the investigation into vanishing companies forward. Yet, a decade later, regulators have not managed to understand the core issues or successfully disgorge the wealth of a single industrialist picked up from banks or markets — even as another crop of companies are desperately seeking an opportunity to pick investors’ pockets.
In fact, investors are discovering that there is little they can do to bring shady promoters to book unless they change the laws that govern capital market related offences. The change ought to involve investigation and action under the Indian Penal Code without requiring investors be dragged through a long recovery process. And until courts hear class action suits and hand out exemplary punishments, the so-called action by government agencies is just a lot of noise with no results. But more about that later.
Let us first take a look at recent efforts to track vanishing companies. In early April, Finance Minister P. Chidambaram called a high-level meeting of government officials and those from the Securities and Exchange Board of India (Sebi) to review the situation. The Ministry of Company Affairs (MCA) also planned to refer large value cases to the Serious Fraud Office (however, hardly any high value companies really vanished, they are easily traceable if there is a will to do so).
The MCA and Sebi have initiated action against scores of companies — filing winding up petitions, or First Information Reports (FIRs) with the police and barring the promoters of vanished companies from accessing the capital market. None of this is of any relevance.
Barring untraceable promoters from accessing the capital market is meaningless and the action doesn’t even come close to disgorging ill-gotten wealth. Investors do realize that equity is risk capital and most of them are pragmatic enough to cancel out their bad investment against the ones that fetched spectacular returns.
That is why many of them think it is a waste of time to pursue vanished companies. But an entire primary market does not collapse and remain dead for a decade because a few companies failed to keep their promises or went belly up.
That happens only when investors are convinced that a large swathe of them, big and small — ambitious steel barons, flashy electronic companies or hundreds of fly-by-night operators — were all out to short-change them. And more so when they realise that the system makes no effort to investigate these cases of outright fraud.
These are not cases of leakage or padding project costs. These are examples where money raised for specific projects has gone to finance luxury apartments, cars, foreign holidays or other assets acquired by the promoter with no effort whatsoever to set up the project.
Yet, despite the lessons of 1992-96, Sebi continues with an internationally accepted disclosure-based system of clearing IPOs and other fund raising efforts by companies. This ends up with us adopting some US malpractices without the variety of cheques and balances: efficient courts, a stringent settlement mechanism (where the Securities Excange Commission can close cases after extracting hefty fines), class action suits that are quickly decided and often impose enormous penalties on those trying to cheat investors and a justice system that puts major fund managers, investment bankers and industry icons behind bars.
Sebi’s clearance to the high-profile Shopper’s Stop IPO is an example. The Indian Express has revealed that the company has defaults to the tune of Rs 46.2 crore to banks and financial institutions.
Clearly, these institutions are going to extract their own payments as soon as the fund-raising effort is complete. This is a repeat of the early 1990s where lending institutions actively encouraged companies to raise public money and immediately appropriated it towards their own loan repayment.
How can we have a one of the most powerful builder groups tapping public funds for a defaulter all in the name of a disclosure-based system?
Virendra Jain of Midas Touch Investors Association, whose Public Interest Litigation (PIL) in the Allahabad High Court first brought the vanishing company issue into the forefront says: ‘‘Considering the absence of any provisions... for attachment and disgorgement of properties/assets of vanishing companies and/or their directors and promoters, Midas Touch had moved a petition in the Allahabad High Court in their ongoing PIL praying for attachment directions by the HC for the companies identified by Sebi/Task Forces’’.
What is obvious to Midas was not obvious to the Joint Parliamentary Committee (JPC), which referred extensively on the vanishing company issue or to other arms of government.
In the last couple of months, the Ministry of Company Affairs (MCA) and Sebi have repeatedly publicised 111 prosecutions and 74 FIRs registered with various police departments.
But there is a catch. The Indian Penal Code requires the FIR to be filed by specific aggrieved individuals. They cannot be represented by the government or investor associations. This means that a person who has lost money (usually and average of Rs 10,000 to Rs 25,000 per issue) has to go to the police station to file the complaint, spare the time to cooperate during the investigations and be prepared to appear in court every time the case comes up for hearing. Since the law also mandates that an IPO has to be widely dispersed and sold at a maximum number of stock exchanges, the aggrieved investor may be far away from the registered office of the company and the police station where the complaint is filed. It is completely unrealistic to expect individuals to individually participate in such a tedious recovery effort.
The answer is to work with the Law Ministry, the Home Ministry, the MCA, Sebi and the Finance Ministry to draft a fresh set of laws for dealing with capital market crime and to allow cases to be registered and heard at large capital market centres and for investors to be collectively represented by investor associations. This must be accompanied by an effort to sensitise the judiciary on the issues involved and to hand out stringent deterrent punishments.