in September 2015 alone, Sebi initiated final proceedings in the case of illegal fund raising from investors by 29 companies and their directors through redeemable preference shares (RPS). (Reuters)
On October 19, the Securities and Exchange Board of India (Sebi) ordered Newland Agro Industries Ltd not to, directly or indirectly, access the capital market by issuing prospectus, offer document or advertisement soliciting money from the public and prohibited the company from buying, selling or otherwise dealing in the securities market for four years.
The company had issued redeemable preference shares (RPS) to about 48,886 investors and had mobilised funds amounting to about Rs 37.64 crore during 2009-13 period without complying with the ‘public issue’ norms stipulated under the Companies Act, 1956.
Last week, Infinity Realcon Ltd (IRL) of Kolkata was banned from the capital market for four years issuing redeemable preference shares to 24,718 investors and mobilising funds amounting to approximately Rs 19.32 crore.
At a time when the interest income on fixed deposit is on a decline and gains from equity markets are not very encouraging, it is easy for investors to get attracted to investment instruments that offer high returns. However, investors need to verify the credentials of the issuer and the legitimacy of the investment instrument before investing.
Take the case of trading in Kamalakshi Finance Corp (KFCL) where 33 entities were found making illegal gains of over Rs 1,800 crore. Sebi had earlier this year banned 24 entities from the capital market and nine others were restrained from trading in the shares of Kamalakshi Finance. Sebi found that the entities used the preferential share route through Kamalakshi and their trades resulted into artificial increase in its price. The modus operandi involves preferential allotment of shares to entities wanting to launder black money. Later, the share prices of the companies, in which allotment is made, are artificially inflated and the preferential allotees are provided an exit whereby making fictitious long-term capital gains (LTCG), which doesn’t attract tax.
Sebi chairman UK Sinha had gone on record saying that 900 entities have been banned from capital markets by the regulator and these cases have been referred to the Income Tax Department for further investigations for tax evasion. The tax avoidance that has happened in these cases is likely to be more than Rs 5,000-6,000 crore. In short, manipulators in the market have been using the stock markets as a black money laundering platform.
On the other hand, in September 2015 alone, Sebi initiated final proceedings in the case of illegal fund raising from investors by 29 companies and their directors through redeemable preference shares (RPS). While most of the orders against illegal public issues were in West Bengal, Uttar Pradesh, Madhya Pradesh and Odisha, CIS (collective investment scheme) activities were from Tamil Nadu, Madhya Pradesh, Maharashtra, Uttar Pradesh and West Bengal. Under the Securities Laws (Amendment) Act, which was notified by the government in August 2014, Sebi is empowered to pass orders for attachment of properties, arrest of defaulters and to access call data records. In October, Sebi issued orders against 11 companies for illegally raising funds from the public.
There’s no dearth of manipulative exercises by fraudsters in spite of “stringent regulations” in the market. In fiscal 2014, the regulator took action in 1,436 cases, including 619 adjudication orders and 537 warnings. Regulatory actions in fiscal 2013 were 1,024. If market sources are to be believed, the focus has shifted now from chit funds and multi-level marketing (MLM) frauds to fund raising through illegal means like issue of redeemable preference shares and manipulation to convert black money using LTCG, which do not attract taxes. Small investors are getting sucked in when fraudsters rig up prices. Many burnt their fingers when Kamalakshi scrip rose from Rs 10.20 to Rs 489, an increase of 4,694 per cent, and later trading was suspended.
Tread carefully
The thumb rule for any investor is that they should be circumspect if a company launches a scheme or an issue without proper approvals from the regulators. Schemes or issues which are not rated or which carry poor credit rating should raise alarm bells. They should be concerned if the interest rates or rates of return on investments offered are higher than those offered by others in the market place. Unless the entity accepting funds is able to earn more than what it promises, the entity will not be able to repay the investor as promised. For earning higher returns, the entity will have to take higher risks on the investments it makes. Higher risk could mean undertaking speculative activities and on such activities, there can be no assured return. The likelihood of losing money in schemes that offer high rates of interest is more.
The money collected through illegal means in the market could turn out to be much higher than the legal route. Pearls Agrotech Corporation Limited (PACL) illegally collected a huge amount from investors. In the guise of selling agricultural land, it collected Rs 49,100 crore from 5.85 crore customers over a period of 15 years by promising them that the investments in the schemes of the company are highly profitable. The PACL mobilisation is twice that collected by the Sahara Group, which allegedly mobilised Rs 24,000 crore through the optionally fully convertible debenetures (OFCDs) without Sebi approval.
The mushrooming of unregistered schemes and illegal issues by paper companies, collective investment schemes (CIS), chit funds and multi-level marketing companies have nothing to do with financial inclusion. It is greed, gullibility of investors and lack of effective monitoring at all levels which is to be blamed for the free run of fly-by-night operators. According to bankers, 80 per cent of the people behind the financial scams use the banking services. “I have definite understanding and evidence… They come to the bank and use the bank services to remit the money. They (investors) have drawn cheques to such firms. It’s not that they are not without bank accounts. They have gone for such schemes as they promise high returns. These schemes offer 25-30 per cent returns. There’s also high-incentive selling pressure. This happens because of greed and gullibility,” said a former chairman of State Bank of India.
The solution lies in improving investment in productive assets. It means getting the banking, insurance and mutual fund sectors to reach out to all segments of society.
| Subscribe To Our Free Newsletter |
