Transgene GDR case: Sebi must rope in taxmen to check round tripping angle

The Sebi on Friday barred promoters and directors of Transgene Biotek from dealing in securities of any kind till further notice, on charge of defrauding shareholders. The 3 promoters-K Koteshwar Rao, Nirmala Rao and K Srinivas-and three directors-PK Ghosh, SS Marthi and NM Pentyala-have been slapped with Fraudulent and Unfair Trade Practices (FUTP) violations. The Sebi on Friday barred promoters and directors of Transgene Biotek from dealing in securities of any kind till further notice, on charge of defrauding shareholders. The 3 promoters-K Koteshwar Rao, Nirmala Rao and K Srinivas-and three directors-PK Ghosh, SS Marthi and NM Pentyala-have been slapped with Fraudulent and Unfair Trade Practices (FUTP) violations. Sebi's main charge against the six is that they hid material and price sensitive information from shareholders, causing huge loss to them (shareholders) when the stock price fell subsequently. But it may not be a case of inadequate disclosure by the promoters and directors; rather it could well be about round tripping of funds and calls for a deeper probe by the tax authorities. In 2011, Transgene had raised $40.5 million abroad by issuing Global Depository Receipts (GDRs) in two tranches-first in February and then in September. By December, the company had transferred $38.4 million of those funds to three entities--Asia First Technologies(AFTL), Symetric Sciences and Sristek. The company said the payments were under the terms of the agreement signed with the firms for technology transfer, personnel training, and consultancy services. But Transgene's balance sheet made no mention of technology transfer or other services. From April 2012, the stock price started sliding as the investors who had subscribed to the GDR issue converted the GDRs into shares and started offloading them in the Indian market. By November 2012, the stock was down to Rs 5 from a high of Rs 60 a year ago. When asked by Sebi, Transgene Chairman Koteswara Rao admitted that the company had not received the technology or services, but said the fund transfers were not authorized by him. The regulator refused to buy this argument. Over the last 4-5 years, many mid-cap companies are said to have been using the GDR route for making a quick buck or even laundering their black money stashed abroad. In 2011, Sebi had pulled up a few companies and foreign institutional investors for abusing the GDR route. The orders against some of the FIIs involved in those dubious deals were later revoked. There are a couple of ways in which promoters rip off their shareholders through sham GDRs. When the aim is solely to make a quick buck, the promoters try up with NRI market operators, usually based out Dubai. These operators have some dummy FII accounts which are shown to have subscribed to the GDR issue. At times, these operators can get some FIIs, who are willing to 'lend' their name for the GDR issue. The issue is priced at a premium to the share price in the Indian market so as to create excitement among local investors. The 'on-hire' FIIs invest for a brief period. The issue proceeds go into the company, from where it is returned to those investors through a chain of transactions, along with an interest payment. The GDRs held by the FII are then sold to entities controlled by the promoter/operator. The entities convert the GDRs into shares and start offloading them on unsuspecting investors in India. The profits from the sale are split between the operator and the promoter. The promoters can also launder their undisclosed money abroad, through the GDR route. Say, the promoters want to convert $50 million of black money abroad into white. In this case, the FIIs investing in the GDR will be fronts for the promoters. The $50 million will come into the company's books and become legitimate. A few months after the issue, the 'investors' will write to the company saying they want to convert the GDRs into shares. The shares are then sold in India and be an additional source of profit for the promoters. In the Transgene order, Sebi whole time member Rajeev Agarwal has made a few observations, though it may need the help of other Indian regulators and investigative agencies to pursue the matter further Excerpts from the Sebi report "Considering the foregoing facts and circumstances of the matter, I, prima facie, find that the other entities involved in the transfer and receipt of funds are in complicity with Transgene and its promoters/directors in the design to defraud the investors. There is a need for a detailed investigation in the entire GDR issues of Transgene till the end utilization of the funds, including the role, if any, of allottees of the GDRs, role, if any, of FIIs /Sub Accounts in cancellation of GDRs and subsequent selling thereof along with the role of AFTL, SyMetric, Sristek and Allshore Fiduciary Services." Sebi could start with details about the FIIs who had subscribed to the GDR issue and check for links with some of the other companies and promoters Sebi has hauled up in the past for a similar violation.