Be wary of private placement offers in little-known firms

Sebi has taken action against several of these and warned investors recently

Retail investors always complain about unpredictability of the stock markets and cite it as the reason for staying away. However, they consistently invest in dubious schemes that promise high fixed returns. Now, some private companies are issuing instruments such as non-convertible debentures and non-convertible preference shares – a fact that is bothering market regulator Securities and Exchange Board of India (Sebi). It issued a warning to investors recently. In the past five months, it has also issued orders against as many as 50 such companies.

Marketed as deposit schemes, these firms promise investor returns of 18-25 per cent in a year. The businesses of these firms usually include timeshare hotels, real estate, equity and currency investments, orchards, and farms. Since January 2013, Sebi has taken action against 112 such entities. “Investors are also cautioned not to subscribe to such issues. Investors are advised to see whether any such entity has filed offer document or filed application with stock exchange for listing,” a Sebi notification said recently.

“These are small unlisted entities, which explore regulatory loopholes. But the government filling up the gaps with the new reforms,” says a member of Investors’ Grievances Forum, a Sebi-recognised investor association. Some of these measures include introduction of tighter norms for mobilising funds in recently-introduced Companies (Amendment) Bill and also giving more powers to the market regulator by the Securities Laws (Amendment) Bill.

Now, if a firm offers securities to 50 or more people, it is construed as a public offer and not a private placement. The latter is only made to selected persons whose names are recorded by the company prior to the invitation to subscribe. Such companies cannot even advertise or use agents to inform investors about the offer. And, only 200 investors can be part of such placements in a year.

“There are still loopholes in the law and investors can get short-changed in many ways,” says Shriram Subramanian, founder and managing director, InGovern Research Services. That’s why investors need to be very careful when investing in such offers. According to experts, the now-only registered Collective Investment Management Company is eligible to raise funds from the public. Such schemes have to be compulsorily credit rated as well as appraised by an agency. The schemes also have to be approved by the Trustee and contain disclosures, which would enable the investors to make informed decision.  The process is similar to going for an initial public offering or a new mutual fund scheme. The firm, which wishes to raise money from the public, needs to provide an offer document to investors. To give investors liquidity, the unit certificates are required to be listed on stock exchanges. And also send balance sheet and profit and loss account statement to the investors at least once a year.

“If an investor comes across such a scheme, he or she needs to look at whether the company has fulfilled all these regulations. If they are not able to get the details, it’s always better to look for established company deposits that can give higher than bank deposits and are well-regulated,” said the Investors’ Grievances Forum member.