For most of last week, the slowdown in Foreign Institutional Investment (FII) caused more tremors than the earthquake that had sent Mumbaikars running for cover. Friday’s tiny corrective rise after a five-day slide may have brought some relief to investors, but there is no room for regulators or stock exchanges to get complacent. Every market malpractice that led to the creation of a stock bubble during previous bull markets is evident again without even the mesmerising presence of a big bull operator holding out dreams of mega riches.
Corporate India, big and small, is rushing to exploit revived investor interest to raise as much money as they can through preferential issues, Global Depository Receipts (GDR) and Foreign Currency Convertible Bonds (FCCB). Most of these instruments will allow shares to be listed overseas with far fewer disclosures and checks than are required by Initial Public Offerings (IPOs).
A few companies have a clear plan for utilising the money; but their ability or otherwise to earn any returns for investors will become evident only later when the bull phase may well have passed. The media has joined the frenzy by blindly reproducing corporate claims without checking their veracity. Such reports are often picked up by websites across the globe these days. The regulators — Sebi, the ministry of company affairs (MCA) and the bourses — who ought to be watching developments with a hawk eye are sleeping again. The MCA is headed by Prem Chand Gupta, a member of the Joint Parliamentary Committee (JPC) that has investigated the stock scam of 2000. Gupta would recall several companies that borrowed money and passed it on to Ketan Parekh in back-to-back deals. The JPC had asked Sebi and the DCA to investigate these companies and their dubious links with the broker. Has Gupta checked if his ministry has followed the JPC instructions? Was any action initiated against the companies? He may want to know that many of those companies have announced fresh plans to raise money or their shares are trading at surprising highs that don’t reflect their finances.
Among the companies mentioned in the JPC report (page 27) as having funded Ketan Parekh are Himachal Futuristic Communications Ltd (HFCL), the Adani Group and Kopran. Of these HFCL’s shares have jumped from around Rs 7 to Rs 22, although it is one of the biggest bad loans in the books of Oriental Bank of Commerce (OBC). Kopran has announced plans to raise fresh capital and it is fairly certain that it hasn’t recovered all its money from Ketan Parekh. This company has borrowed from UTI and lent Rs 50 crore to the discredited bull operator. In a different category, the Videocon Group won an appeal before the Securities Appellate Tribunal (SAT) after a long battle over allegations that it was in league with the late Harshad Mehta for ramping up its shares in 1997-98. On Friday, the board of Videocon Leasing and Industrial Finance (now Videocon Industries) approved plans to raise a whopping Rs 2,000 crore through GDRs and/or equity shares, private placement on preferential allotment.
Now let’s look at the smaller companies. Internet message boards are very agitated about JK Synthetics, which spun off its cement division into a separate company called JK Cement. It fixed December 16, 2004 as the record date and told shareholders that they would get one cement share for every 10 of JK Synthetics. The announcement sent the stock soaring up, but three months later there is no sign of the allotment. Investors who called the company have also drawn a blank. Will the regulator ask questions?
Somani Cement, a little known Godhra-based company, featured on scores of international websites recently after PTI reported that it had bagged a Rs 32.2 crore export order from Iraq. Another business newspaper reported its plans to set up a Rs 150 crore cement plant at Mahuva, Gujarat with a capacity of 1,000 TPD in technical collaboration with ACC. Managing Director Bimlesh Kumar Mishra was quoted saying that his company was ‘‘set to acquire Madhya Pradesh-based Apex Cement Company in a Rs 9 crore deal’’ to enhance capacity by over 300 tonnes per day. Yet, the company has a cumulative loss of Rs 20 crore. BSE sources also reported several changes in its office address.
This newspaper called Kirtikant Sony, a director who claims that he has quit the board after just 15 days due to differences with the management.
Sony also has a company called Narmada Flyash, listed in Bombay Stock Exchange and despite his short stint on the board, he had allowed Somani Cement to claim his Narmada Flyash office address as its registered office. The BSE was informed about his resignation as director and the change in Somani Cement’s office address last week. Managing Director Bimlesh Mishra’s mobile number and office was unreachable.
Why doesn’t a company with big growth plans have a proper registered office address? Will the regulator investigate? Vijay Textiles is another BSE little company that attracted investors’ attention when it turned into a big advertiser on new business television channel and made a spate of bullish corporate announcements. Starting January 2005, the BSE website lists the following announcements: a split in the face value from Rs 10 to Re 1 per share, an export order of $4.6 million, bonus issue, a $200 million export order, new retail show room and an interim dividend.
Interestingly, during the precise period when the company seemed to be on a high, the promoter group was busy dumping its shares. As BSE sources and BSE bulletins confirm, the promoters, who held a 63 per cent in the company have sold 40 per cent of their shares. Will someone explain to the shareholders what is going on? Are company funds being used to ramp up prices and give the promoters a profitable exit? May be the bourse and the regulator will ask a few questions.
These are just a few of the strange goings-on that we have verified. There are probably dozens of others that are luring investors by making fake claims through a gullible media. The RBI also needs to check if banks are once again inducing companies to raise public money through fake claims in order to repay their debts.