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As toothless tiger SEBI watches, fraudulent companies vanish with billions

Gautam Chakravarty and M P Joshi in Bombay

Encouraged by the Securities and Exchange Board of India's lack of adequate regulatory powers, promoters of dubious companies have defrauded the public of their hard-earned money amounting to a few billion rupees in the last five years.

Besides, poor supervision and inspections by the licensing authorities like the Department of Company Affairs and Registrar of Companies has helped these fake companies, say experts.

SEBI sources said about 80 companies, which raised more than Rs 7 billion from the capital market during 1992-95, have now vanished. There is no clue to their addresses or promoters.

As many as seven companies, which mobilised Rs 232.5 million from the market during 1997-98, are untraceable now.

Besides, there are several non-banking finance companies and plantation firms, which raised huge amounts from investors through various deposit schemes and are now either missing or unable to repay their debts.

A study by a private research firm found that out of 3,872 public issues offered in the market from 1992 to 1996, only 562 were traded above the issue price, while 205 were not traded at all on the exchanges. And promoters of 118 public offerings have disappeared without a trace.

The modus operandi of these companies is to offer lucrative collective investment schemes, attractive high-return fixed deposits, and initial public offers, sometimes at premium, to mobilise huge funds from the public disproportionate to the promoters' own equity or finances.

They then divert these funds from the productive segment of the economy to various speculative activities like real-estate purchases, stock-market dealings, and trading.

SEBI officials say they cannot do anything to these promoters as the market regulatory authority does not have adequate statutory powers.

SEBI gained statutory recognition in January 1992. The main objective of the SEBI Act was to protect the interests of investors in securities and promote and regulate the securities market.

Except for partial powers under section 11 of the Companies Act to regulate brokers and the stock markets through listing norms, SEBI has not been given any statutory powers to carry out search and seizure of assets of erring companies or their promoters.

It has neither the power to attach property nor specific powers to disgorge ill-gotten profits.

SEBI is only permitted to impose a small penalty on companies violating listing agreements in limited circumstances.

In the recent past, several actions of SEBI to protect the interests of investors were challenged by companies, intermediaries, stock exchanges and brokers, including the notorious 'big bull' Harshad Mehta.

SEBI Executive Director Pratip Kar said the board should be empowered with several provisions under the Companies Act as suggested by the D R Dhanuka Committee to bring back confidence in the market, which not only consists of investors but also issuers, intermediaries and other operators.

At present, the SEBI Act gives limited powers like prosecution, suspension, or cancellation of registration and a monetary penalty of a measly Rs 500,000, he said.

In fact, the capital market in India is guided by regulations of several multiple agencies such as the Central Bureau of Investigations, the Monopolies and Restrictive Trade Practices Commission, the DCA, Reserve Bank of India, Unit Trust Act, and various consumer fora.

On the recent failure of plantation companies to meet their commitments to investors, SEBI sources said these companies were registered with the Registrar of Companies and other local authorities, which should be held accountable, particularly when the companies have made off with millions in public money.

Sensing a public outcry on the issue, the government last year brought various schemes of the plantation companies under SEBI's regulation even though these companies are registered under different authorities.

The promoters of collective investment schemes mainly from the plantation sector challenged this, stating that instruments are not notified as securities in the Securities Regulation Act. Cases were filed against SEBI in the high courts of Allahabad, Jabalpur, Hyderabad, Bombay and Delhi and the civil court in Srinagar.

Experts say the Company Law Board should dilute its powers related to securities in favour of regulatory authorities like SEBI to bring discipline into the market. Special courts should be set up to deal with matters relating to securities law. There should be one authority to investigate and regulate the capital market.

In fact, they suggested that the Company Law Board act promptly to find the vanishing promoters with the help of the police and by filing cases under sections 63 and 209(A) of the Companies Act.

Unless such actions are taken, investor confidence will not improve in spite of several incentives given by the government, they say.

UNI

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