Pavan Kumar Vijay, Managing Director of Corporate Professional Group, a Delhi company that advises companies on governance, says SEBI can step in when it detects an abnormal stock price movement.
In fact, this was how its investigation into the six IPO cases began - their stock prices plunged on the first day. This was the first time SEBI expanded an investigation to minutely study offer documents and verify disclosures.
Promoters get a free hand to play around with investors' money because there are many regulatory gaps in monitoring IPO proceeds. For example, after the IPO, a company is not required to update SEBI on how proceeds are being used. It only needs to file a quarterly status report with the stock exchange where it is listed (see box: System of Silos).
Take the case of Pradip Overseas, which raised Rs 116 crore from the public in March 2010 to set up a textile special economic zone (SEZ) in Gujarat and a factory in it. Two years on, the Ahmedabad company has used just Rs 5.15 crore of some Rs 100 crore earmarked for the project. "We have shelved the SEZ plan," says J.S. Negi, an independent director. Indeed, the IPO document contained hints: it said the company had acquired only around 85 hectares of the 100 required for the project. There was no certainty about acquiring the rest.
The document also said the company had yet to order some Rs 57 crore worth of plant and machinery, although production was to start in January 2011. Now Pradip Overseas blames the government for burdening SEZs with Minimum Alternate Tax. But those are issues that the company and merchant bankers should have highlighted for investors.
Soon after the IPO, Pradip Overseas changed the IPO object clause to use the proceeds as margin money for working capital. "The Registrar of Companies has more powers to regulate companies," says Kennis Group's Agrawal. But sometimes it does not act, and when it does, it is likely to be delayed.
Virendra Jain, investors' rights activist and founder member of Midas Touch Investors Association, says: "The Registrar of Companies will know only a year, or one and a half years, after reporting, because of annual filing of documents," he says. The registrar does not monitor companies as a matter of course, but may act if it comes across information that warrants an investigation.
The practice of promoters changing the IPO object clause after raising money from the public has become rampant. "The auditors' limited review records the change in the object clause, but doesn't go beyond it or probe the changes for malafide intentions," says a chartered accountant on condition of anonymity.
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