A number of small companies that raise public funds promising huge returns have propped up in Uttar Pradesh, West Bengal and Bihar. These companies concentrate on semi-urban and rural areas, where the lack of banking and other financial products has created a fertile catchment area.
These companies are usually registered under the Companies Act, 1956, with the ministry of corporate affairs (MCA) and sell these debentures to the public in the garb of private placements. According to Sebi rules, any entity raising money from 50 or more people will have to seek its approval and list on the stock exchanges. These firms have done neither.
“We will come down heavily on such companies,” a senior Sebi official said, confirming that measures against some have been initiated already. A Sebi official did not share the names of companies against which action is being initiated.
Business Standard has reviewed publicity materials of at least five such companies. While a majority are real estate companies, a couple belong to agriculture and consumer durables sectors.
One real estate company, based in Birbhum district of West Bengal, solicited investments in what it called “private placement of secured redeemable debentures”.
According to the company’s brochure, the debentures were available in five different terms, ranging between three years and 14 years. It offered annualised yields ranging from 14.5 per cent for the shorter terms to 17.9 per cent on the long-term debenture.
Another company, which manufactures construction equipment, including ingot moulds, said it wanted to raise Rs 200 crore by issuing secured non-convertible redeemable debentures. This company said it was endorsed by some leading film stars, sportspersons and offered six variants of the debenture for terms ranging between 364 days and 12 years.
The debentures offered interest rate of up to 20 per cent per annum.
Such entities have so proliferated in semi-urban and rural areas in recent years that it prompted Trinamool Congress MP Somen Mitra to write to the Prime Minister, demanding investigation and action against such entities.
In the letter reported by Business Standard last month, Mitra named eleven entities including Rose Valley, Tower, MPS and I Core. While these entities are referred to as “chit funds” by Mitra, the brochures show some of these are registered under the Companies Act and raise money through debentures. Sebi had passed an interim order against a Rose Valley Real Estate and Construction company in January.
After the crackdown on chit funds by many state administrations in the 1980s and 90s and the notification of Sebi Collective Investment Schemes rules, mass fund raising activity has moved to the jurisdiction of MCA, says an agent from West Bengal. “Agriculture yields a lot of income here. Since banking activity is less, people trust individual agents, based on their antecedents. Often, they don't even check which company the agent is putting their money into,” the agent said over phone.