Games issuers and bankers play with public money

Distorted disclosure one of several examples of fraudulent and unfair trade practices listed by Sebi

An issuer company did not utilise a major part of the IPO (initial public offering) proceeds for the purpose of the objects stated in the prospectus and diverted the funds to various entities through group companies and other entities. The statutory auditor of the company issued an utilisation certificate, which was also included in its annual report. It was found that the certificate was false. 

This case of misleading and distorted disclosure was one of the several examples of fraudulent and unfair trade practices listed in the latest annual report of the Securities and Exchange Board of India (Sebi) released last week. Most of these were cases of misuse of public issue proceeds, while there were instances of market manipulation too. One common thread was the collusion between various agencies such as merchant bankers, auditors, and other intermediaries, who were acting to the detriment of the public shareholders, whose interests they are supposed to protect.

Here are the other cases highlighted by Sebi for investors to read and watch out for:

False certificate: An issuer in collusion with a merchant banker siphoned off the IPO proceeds. Further, the issuer, contradicting its statements/disclosures in the prospectus, used the IPO proceeds to fund net buyers who supported the demand (buy). The issuer also made mis-statements and non-disclosures in its prospectus. The IPO proceeds were not utilised in accordance with the issue objects disclosed in the prospectus. In addition, the merchant banker provided a wrong due-diligence certificate to Sebi.

Jacking up prices: A group of connected entities bought a majority of the shares at a price higher than the last traded price of the scrip. The buy orders placed by these entities, although done after the sell orders, were repeatedly at a price higher than the available sell order price and for quantity lower than the available sell order quantity. Thus, the orders placed by the group of connected entities exhibited a manipulative intent, many of which also resulted in an increase in the scrip price.

Spreading rumours: A telemarketer circulated bulk SMSes containing false news pertaining to a listed company on behalf of its alleged client. The telemarketer did not do due diligence in KYC verification of its alleged client while admitting the request and accepted cash for rendering services. Hence, the telemarketer facilitated circulation of false news, thereby engaging in deceitful activity.

GDR circle: Several Indian companies that claimed to have successfully issued global depository receipts (GDRs) had issued them in a fraudulent manner. Investors who subscribed to the GDRs did so by availing of loans from foreign banks and these loans were secured against GDR proceeds to be received by issuer companies. Thereafter, only post repayment loans were taken by the GDR subscribers and the issuer companies were able to utilise the GDR proceeds to the extent of loan repayment. Thereby, the issuer companies did not have the GDR proceeds available unless the loans were repaid by subscribers.

Float not free: A set of entities took over a listed company and manipulated the price of the scrip by controlling the supply of shares, that is, the entire free float shares in the market. They kept selling shares in minimum lots and increased the price. They then defaulted on the delivery of the shares. Thus, they effectively increased the price of the scrip without increasing the free float in the market. 

While the regulator seems to have caught these cases red-handed, it did not give the names or action taken though it talked about “taking punitive steps to punish the manipulators”. Such steps should be exemplary and hard enough to deter aspiring ‘players’.