International -- Finance: Regulation
India's IPOs: Now You See 'Em, Now You Don't
Indian investors have lost billions on vanished companies
The hunt for Fastrack Investment Services & Co. ends at the bolted doors of a dank, dark building in Bombay's crumbling inner city. Not even a signboard remains to show the company was ever there. And an investor looking for Enarai Finance, located in Bombay's swanky Nariman Point business district, would simply find a shuttered office, with a magistrate's court summons glued to the door.
Welcome to India's shadowy world of disappeared companies. They are the jetsam of the country's go-go years, when deregulation and boundless optimism drove a Wild West market in initial public offerings. In the four years through 1996, an astounding 3,900 companies went public, a furious pace of 20 per week. Anything and everything sold. Issues from a mushroom-growing company to a furniture-leasing outfit to pharmacies without phones were routinely oversubscribed 10 times or more.THIN AIR. But now the party is over, ended by a slumping economy, and investors are wondering what happened to the estimated $9 billion they lost in these stocks. Former Finance Minister P. Chidambaram figures a quarter of the hot IPOs launched have since either vanished into thin air or trade infrequently and at sharply eroded values. Many of the companies were outright scams, designed to fleece gullible investors and then disappear. The offerings were subject to little regulatory scrutiny. The ruling Bharatiya Janata Party is worried that big losses have driven small investors out of the market. Indeed, Prime Minister Atal Bihari Vajpayee ordered a probe into what went wrong and who's to blame.
Whatever the report, which is due out soon, says, it's clear that India's markets have suffered immense damage to their integrity. In India, equity shares are often hawked by roadside vendors at ramshackle wooden tables outside stock exchange buildings. Potential investors have only to pick up a share application form, take it to a designated bank, and later receive shares.
It's a system that invites abuse. Anil Khandelwal, 50, an auto-parts manufacturer from Agra, knows. In 1994 he invested $600 in a $9.4 million IPO by DSJ Communications Ltd., a TV and radio broadcasting outfit, floated by the owners of investment magazine Dalal Street Journal. Khandelwal looked forward to a stream of dividends and hefty capital gains. But in less than a year, the $5.75 stock had plummeted to 5 cents. It is now suspended, according to stock market officials. Promoter Pratap Padode told BUSINESS WEEK in a brief phone interview that DSJ Communications still exists "in a much subdued form." He refused to answer other questions.
Similar incidents happened with dozens of other companies into which Khandelwal bought at the same time. Computer-controls maker Ace Exports and cooking oil company Premier Vegetables both disappeared from sight. Despite his efforts to contact them, they were untraceable at their registered offices, nor had they filed any annual returns. They had vanished, leaving Khandelwal with losses of $30,000.
Khandelwal is likely to be as disappointed by the Prime Minister's probe as he was by his investments. India's lax enforcement culture, convoluted legislation, and crazy-quilt system of regulation ensure that it will be nigh impossible to pin the blame on any one ministry or organization--or to catch the con artists and bring them to justice. "Nobody knows, nobody cares. Government institutions are supposed to be the caretaker of investor interests, but all they do is pass on the buck," complains Kirit Somaiya, president of the Investor Grievances Forum.MINOR MIRACLE. To reassert control over the system, the government set up the Securities & Exchange Board of India (SEBI) as chief regulator. Yet despite over two years of efforts, it identified just 79 companies that were untraceable at their registered offices. Among them were three that had each raised over $1 million in 1994: Orissa Luminaries, Premier Aqua Farms, and K.P. Gelatine. But SEBI officials wash their hands of the matter, saying their responsibility ends when they grant permission for companies to begin trading on the stock exchanges. It is the exchanges, they say, that must ferret out absconding companies.
In December, the Bombay Stock Exchange, India's largest, did produce a list of 600 untraceable companies out of the 7,000 it has listed. But the country's 22 stock exchanges say the 20 Registrars of Companies, run by the federal government, are responsible for determining whether a company really exists. A visit to the Bombay registry suggests it's a minor miracle when they can. Inside a drab concrete building, bookshelves are piled high with dusty files, and there isn't a computer in sight. Registrar Probodh says his 120 staff members are overwhelmed by registering as many as 200 companies a day at peak times. But when officials such as Probodh can pinpoint apparent violators, their chances of mounting any prosecution, let alone a successful one, are slim.
These flaws made India's financial markets a happy hunting ground for legions of fraudsters and many self-styled investment bankers. Such shadowy figures were particularly active in the western state of Gujarat, which has three stock markets. There, say Western bankers, for a $65,000 fee, agents would float a shell company with a complete set of phony prospectuses, income tax returns, and profit statements. According to market gossip, even market officials have been implicated in such scams. SEBI has slashed the number of bankers from 1,300 in 1996 to 500 now. But, unlike the U.S. Securities & Exchange Commission, it cannot penalize companies for any infringements.
Little wonder that some shareholders are fighting back. The Luknow-based Midas Touch consumer organization has filed a suit against SEBI for failing to protect investors. Meanwhile, the Investor Grievances Forum has lobbied for investor protection and pushed the government into creating the country's first economic crimes unit in Bombay. Now, it wants the government to pass an investors' protection act to toughen penalties on financial fraud.
Prithvi Haldea, 48, founder of researchers Prime Database, wants an even more radical solution. He is lobbying to bar small investors from buying into IPOs directly. He thinks only mutual funds and other institutional investors should be allowed to buy these risky equities. Meanwhile, investors such as Khandelwal still wonder whether they will ever see their money again.By Manjeet Kripalani in BombayReturn to top