Vanishing companies aren8217;t the issue

For one, despite the appeal of tracking down vanished8217; companies, the fact is that these companies raised just a few hundredcrore between them.

Investors, on the other hand, have lost thousands of crore in companies which have done very badly, either through mismanagement, or through asset stripping. Of the 4,000 public issues in which Rs 44,000 crore was raised in 1992-1996, around 3,000 are trading below par. The largest losses suffered by investors pertain to the equity they bought in well-known companies. The question, therefore, is whether the government will actually be able to punish those responsible for it. It is obvious that, in cases where scrips are trading below par, a large part of the fault lies with the promoters.

An equally large part of the blame, however, also rests with those merchant bankers who peddled these scrips without doing any proper evaluation, and with the banks/financial institutions that lent money to these companies. In most developed capital markets, for instance, investors typically tend to rely more on the judgment of merchant bankers who are supposed to evaluate companies, and expect thatthe banks and financial institutions who lend money to these companies will keep a strong check on them.

A study by The Economic Times last year for the period 1994-95, for example, found that investors suffered the largest losses in equity issues that were lead-managed by big merchant banks such as SBI Caps, IDBI, PNB Caps and J.M. Financial. Now it8217;s not as if one is saying that SBI Caps or IDBI should be held responsible for the losses investors suffered as a result of the market price of stocks falling.

The point, however, is that if these merchant bankers could get it so completely wrong, if they could recommend buying stock at exaggerated premia, then there8217;s clearly something wrong with the system. It also means that instead of evaluating the stocks they were selling, they were just concerned about collecting the fees they got.

Though the system for companies selling stock internationally is somewhat different from that in India, the fact is that if, for example, an issue sold by Goldman Sachsdid so badly, Sachs would probably conduct an inquiry into its systems to see how this could happen. Perhaps one solution would be to device a method by which merchant bankers themselves are rated. The prospectus for an equity issue which is rated by SBI Caps, for instance, could even state what SBI Caps track record has been in the last year or so.

Similarly, even if the government doesn8217;t manage to trace the 118 companies which have disappeared8217;, it would be interesting to question the banks and institutions that lent money to these companies/promoters. After all, what were they doing? If, for example, company X raised Rs 100 crore from the stock market, it stands to reason that it would have borrowed at least Rs 200 crore from various banks and financial institutions. What, if anything, did they do to ensure that their money is safe? The large amounts on non-performing assets on their books is a clear sign that not too much was being done.

While most loan agreements have convertibility clauses inthem, to allow banks/institutions to convert their loans to equity, for example, no institution has ever exercised this power to throw out a bad promoter.

And if this isn8217;t bad enough, others such as the stock exchanges and the registrars of companies RoCs are not even ensuring that these units filed their balance sheets and annual returns. When SEBI wrote to all RoCs in 1996, asking for data on companies who floated public issues in 1994-95, it found that only 52 of 137 companies in Ahmedabad had filed their returns.

Ninety-five out of 209 companies in Mumbai did this, and details for 125 companies registered with the Delhi RoC have yet to be received, nearly three years after SEBI first asked for this information!

SEBI, needless to say, hasn8217;t really bothered to take this up in any serious fashion, preferring instead to flaunt its nobody-listens-to-us story. In a recent meeting, following the PM8217;s directive on the matter, SEBI chief D.R. Mehta sought to hand over the problem of dealing withunscrupulous promoters to the Department of Company Affairs DCA on the grounds that SEBI8217;s powers allow only levying a maximum fine of Rs 1,000. The DCA, in turn, has been arguing that it has no powers of prosecution!

This lack-of-power argument is going to be one that the finance ministry will hear from every agency as it goes about its task. That, of course, is evading the issue since, as any businessman will tell you, there are enough laws in India to book anyone for anything, if you really want to. Until these institutions start doing their job, however, only the naive can expect a revival of investor confidence.