SEBI has asked Brooks to call back the ICDs advanced by it to certain entities and together with all the IPO proceeds deposit it in an interest-bearing escrow account. Investors are not getting back their money yet; but the curious fact is that investors to these dubious IPOs don’t seem to be demanding a refund of their application money either

(This is the second part of a series of articles on SEBI’s regulatory action)

Brookes Laboratories’ (Brooks) chairman Atul Ranchal, managing director Rajesh Mahajan and six others, including the merchant banker D&A Financial Services (DAFS) have been barred from the capital market by the Securities & Exchange Board of India (SEBI) as part of its crackdown on seven companies.

Brooks, a Himachal Pradesh-based pharmaceutical contract research and manufacturing services (CRAMS) company is among those whose initial public offering (IPO) came under the regulatory scanner due to price manipulation and other irregularities.

On 16 August 2011, Brooks launched an IPO to raise Rs63 crore at Rs100 per share. The primary objective of the issue was to set up a manufacturing unit at JB SEZ Pvt Ltd, Panoli, Gujarat, for manufacturing of various pharmaceuticals formulations and to meet long-term working capital requirements, some of these which included paying off “questionable” inter-corporate deposits (ICDs).

The discovery that an entity called Overall Financial Consultants Pvt Ltd (OFCL) had bought and sold 6,65,000 shares raised a red flag and triggered SEBI’s investigation which exposed a conspiracy between Brooks and other entities to siphon off public money.

1) SEBI investigations showed that as many as 12 entities were involved in routing and masking the transfer of IPO funds from Brooks to OFCL. They used ICDs to transfer Rs2.5 crore to OFCL, which had run up losses of Rs2.13 crore by trading in the Brooks scrip.

The brazen manner at which the IPO monies were routed is described below:

A firm called Shardaraj Tradefin received Rs50 lakh from Brooks as repayment of ICDs, of which Rs25 lakh each was transferred to two entities namely Makesworth Projects & Developers Pvt Ltd and Shridhan Jewellers Pvt Ltd. These entities then transferred Rs25 lakh each to OFCL.

Similarly, another entity, Konark, received Rs5.50 crore of the IPO monies towards repayment of ICDs from Brooks. Konark then transferred the entire amount to Mangalmayee Hirise Pvt Ltd. Thereafter, Mangalmayee transferred Rs25 lakh to OFCL, and a further sum of Rs1.50 crore to Khusboo Complex Pvt Ltd, Rs50 lakh each to Growfast Realties Pvt Ltd, Jaganath Consultants Pvt Ltd, Silicon Hotel Pvt Ltd, and Neelkamal Dealcom Pvt Ltd, and Rs25 lakh each to Alishan Estates Pvt Ltd and Pushpanjali Hirise Pvt Ltd. These entities then in turn transferred Rs25 lakh each to OFCL.

The graph below illustrates the above transactions: (Source: SEBI)

2) Brooks never disclosed one telling fact—the relationship between the entities—and chose to hide it from the public at large. Out of the 13 companies which had ICDs with Brooks, seven of them had common directors. Even the entities involved in diverting the IPO funds had common directors between them. For example, three companies namely Shardaraj, Makesworth and Shirdhan all had common directors. Some of them even shared the same addresses. This is also case of shoddy due diligence or collusion by the merchant banker.

3) Brooks engaged itself in improper business practices with a supplier. It transacted with a Dubai-based supplier, Neo Power, for the purpose of acquiring machinery, using pro-forma invoices received through e-mail instead of properly signed papers. What is stark was that Brooks overstated the price of the machinery in its prospectus. Instead of Rs19 crore, as mentioned in the prospectus, the price of the machinery transacted turned out to be Rs14 crore. The company had, in fact, already paid 50% of the cost of machinery and had neither mentioned the supplier’s name nor this payment in the prospectus. In a sinister twist to this transaction, even after five months since Brooks placed the ‘order’, the machinery is yet to be delivered. Simply put, Rs5 crore had been siphoned off by merely mis-stating just one item in the prospectus.

4) Parag Dinesh Doshi, the signatory of the faux proforma and CEO of Neo Power, is also the director of Hillston Advisors, one of the 13 companies that lent funds through ICDs to Brooks. Apparently, Mr Parag’s relative, Dinesh Doshi is also a director of 10 different companies that are currently under SEBI scanner. In order to escape SEBI’s radar, Dinesh Doshi resigned from Hillston Advisors on 27 October 2010.

5) Brooks had lied in its prospectus that it intended to set up a factory in JB SEZ in Gujarat. What happened was that Brooks paid for plant and machinery and also for civil work contract even though the acquisition of land has still not been completed.  Despite lack of infrastructure, Brooks proceeded to place orders for machinery from Neo Power.

6) Apart from using ICDs for routing and diverting investors’ money, it also abused ICDs in a clever way. The funds raised from ICDs were paid to related entities from whom the ICDs were originally received in the form of advances for equipment, project management fees, etc, while at the same time paying the original ICD providers also from the issue proceeds.

So far, SEBI has asked Brooks to call back the ICDs advanced by it to certain entities and together with all the IPO proceeds deposit it in an interest-bearing escrow account with a scheduled commercial bank. Investors are not getting back their money yet; but the curious fact is that investors to these dubious IPOs don’t seem to be demanding a refund of their application money either.