Sebi cracks down on GDR scam
Pulling the plug on a scam involving Global Depository Receipt (GDR) issues,the Securities and Exchange Board of India (Sebi) has barred seven companies Asahi Infrastructure,IKF Technologies,Avon Corp,K Sera Sera,CAT Tech,Maars Software and Cals Refineries from issuing any shares or convertible instruments or alter their capital structure in any manner till further directions after the regulator detected evidence of manipulation by these companies through GDR issues. In an order issued on Wednesday,the Sebi also asked ten entities India Focus Cardinal Fund, MAVI Investment,KII Limited (Sub-Account),Sophia Growth – (A share Class of Somerset India Fund,Sub-Account),European American Investment Bank Ag (FII),Basmati Securities Private Limited Oudh Finance and Investment Private Limited Alka India Limited SV Enterprises and JMP Securities Private Limited not to deal in securities till further orders. It also ordered that none of the intermediaries registered with Sebi should deal with Panasia and Arun Panchariya in any capacity in the Indian market. According to the Sebi,most of these companies had issued GDRs in 2009. The regulator received a complaint,in which it was alleged that a few Indian companies and investment bankers located overseas misused the GDR route for issuance of shares overseas. As inferred from the complaint,the modus operandi of the alleged misuse was to issue large sized GDR issues in overseas market and then gradually sell it in a structured manner to Indian clients already known to the FIIs. The trading pattern observed between sub-accounts and group also supports the allegations made in the said complaint, Sebi said. Probe revealed that FIIs like India Focus Cardinal Fund and Mavi Investment Fund,were converting the GDRs held by them into normal shares (known as cancelling GDRs) to sell in Indian markets. It was also observed that most cancellations were happening within a short period from the issue of the GDRs by the company. A few counterparties were repeatedly appearing among the top counterparties. Around 33% to 75% of the shares sold by these FIIs in various scrips were bought by these recurring clients. In view of such large scale selling by the FIIs and its matching with these clients,a detailed examination was carried out in these scrips, Sebi said. Asahi issued 299,100,000 shares under GDR when its total outstanding shares prior to GDR were only 37,196,000. Thus,the issue size of GDR was approximately 8 times of the total equity of the company prior to GDR issue. The market cap of the company was at only Rs 2.640000000 prior to GDR issue. In an extreme case,it was found that Cals issued GDRs nearly 13,133% of its existing equity base. Cals issued its GDR in December 2007. Further,Sebi observed that all the companies have such financials that may not readily attract investors to subscribe to such large sized issues. Therefore,successful subscription of these GDR even raises possible doubts about the genuineness of subscribing investors or the actual motives of the promoters or directors of companies issuing them, it said. According to the Sebi,between 17.75% and 78.49% of the GDR issued by the companies have been cancelled by converting it to normal equities in the domestic Indian market. In the case of Avon,33.83% of the GDR issued were cancelled by May 31,2010 within 1 year of the issue of GDR (date of GDR issue June 19,2009). Similarly in the case of Asahi,K Sera Sera and IKF,17.75%,46.56% and 55.38% of the GDR issued were cancelled by May 31,2010,respectively. In the case of Cals,which issued its GDRs in December 2007,44.90% of the GDRs have been cancelled by May 31,2010. This indicates that post GDR issue a large number of GDRs have been converted and sold in Indian Stock Markets. The number of GDRs cancelled becomes even more significant if we compare them with the pre GDR equity of the companies,since the floating stock of the company in the Indian Exchanges increased manifold, the Sebi order said. Sebis preliminary examination revealed that FIIs like India Focus Cardinal Fund and Mavi Investment Fund,were converting the GDRs held by them into normal shares (known as cancelling GDRs) to sell in Indian markets. It was also observed that most cancellations were happening within a short period from the issue of the GDRs by the company. The Sebi probe revealed prima facie evidence of a pre-arrangement between parties to transactions at various stages of this complex scheme.