PGEL in a bid to boost its share price on day one, had intentionally chosen select companies vis-a-vis ICDs and ordered them to divert the IPO money to entities who would eventually buy its shares in the open market on day of listing, and for the next few days, swindling investors in the process

The Securities Exchange Board of India (SEBI) recently, as part of its concerted efforts to curtail initial public offering (IPO) frauds, had prohibited PG Electroplast (PGEL) and select individuals & management personnel from participating in the securities market. It has also barred the merchant banker Almondz Global Securities (AGSL) from taking up any new assignments due to gross negligence in its duty as a merchant banker.

PGEL wanted to raise as much as Rs120 crore, through an IPO for the purpose of prepayment of a portion of its term loan (Rs24.10 crore), expansion of manufacturing facilities (Rs51.13 crore), long term working capital requirements (Rs15 crore) and general corporate purposes (Rs21.39 crore).

On the day of listing, 26 September 2011, the momentum in the PGEL scrip, provided by group of buyers, led to an increase in the price on the next day (27 September 2011) to Rs483.20. However, the price decreased sharply by 56%, to close at Rs212.30 on 5 October 2011.

SEBI had found out that roughly 31.6% of the issue size, or Rs42.50 crore, had been acquired by a few entities over the course of the period extending from 26 September 2011 till 5 October 2011. Thus, they decided to investigate into the matter.

One of the Qualified Institutional Buyer (QIB) based in London sold off its entire stake of 4,41,630 shares in PGEL mainly to two counter-parties namely Dave Chetan and Overall Financial Consultants (OFCL). The broker through which Mr Chetan transacted was Grishma Securities Pvt Ltd, the same stock broker who was part of the Tijaria Polypipes scam (http://www.moneylife.in/article/ipo-crackdown-3-tijaria-polypipes/22992.html), which happened just one day after the IPO (27 September 2011). Similarly, OFCL was involved in the Brooks Laboratories scam (http://www.moneylife.in/article/ipo-crackdown-2-brooks-laboratories/22951.html), which happened in August 2011. Strangely, both the counter-parties were not implicated in this scam despite evidence of such transgressions.

PGEL had blatantly lied in its prospectus that it “had not raised any bridge loan against the proceeds of the present issue.” The truth was that PGEL had taken Inter-Corporate Deposits (ICDs) aggregating roughly Rs52 crore, or 43% of the size of the IPO, out of which Rs46.40 crore was repaid from the proceeds of the IPO.

The company used ICDs as a guise for looting, diverting and transferring public money; what follows below is nothing but daylight robbery.

*PGEL had ICDs prior to the IPO and diverted approximately Rs12.95 crore to Wonder Vincom, which in turn had funded Rs94 lakh to the IPO allottee namely Chin Info and had also made payments of Rs3.99 crore to two other entities who were buyers of the shares of PGEL on the day of listing.

*PGEL had also routed Rs9.4 crore of the IPO proceeds to ETL Infrastructure Finance (ETL), through refund of ICDs. ETL had made payments of Rs1.5 crore to its broker Destiny Securities and had also made payments of a total of Rs1.2 crore to Paradise and Jasmine. Paradise and Jasmine had purchased 1 lakh shares and 50,000 shares of PGEL respectively on the date of listing.

*PGEL additionally diverted Rs8 crore to Saptrishi through Prraneta in the form of refund of ICDs which was routed further to several buyers of shares of PGEL on the day of listing. Prraneta Industries, a publicly listed company on BSE, was one of the beneficiaries of IPO siphoned off by Saptrishi. If one looks at Prraneta’s history, the company had failed to submit a corporate governance report back in 2008.

Thus we see a common theme here—PGEL in a bid to boost its share price on day one, had intentionally chosen select companies vis-a-vis ICDs and ordered them to divert the IPO money to entities who would eventually buy its shares in the open market on day of listing, and for the next few days, swindling investors in the process.

Not only did PGEL use ICDs to divert money, but it also resorted to questionable means to ‘acquire’ land, in order to add yet another layer of camouflage. Using ICDs as a guise, it merely transferred Rs10 crore to Saptrishi towards “advance for purchase of land”, with the aim of aiding and abetting Saptrishi. PGEL had also disguised the fact that the ICDs were of “high quality” since Saptrishi had incurred losses in 2010.

Shockingly, PGEL had merely plundered empty farmland as pretence for making sham monetary payments. Additionally, according to the Memorandum of Understanding (MoU) between PGEL and Saptrishi, the conversion of land, from agricultural to industrial, must be completed before making the payment. However, despite this, PGEL had paid Saptrishi Rs10 crore as though the land was converted. What seems to have happened was merely a monetary transaction between the two parties using land as a conduit.

Incidentally, Saptrishi transferred Rs25 lakh to an IPO allotee, MJ Commodities Pvt Ltd, which was allotted 1,17,047 shares in the NII category. Further, it transferred the money received from the IPO to Jaimini Trading Pvt Ltd and Cellworth Mercantile Pvt Ltd, all of whom collectively made purchases in PGEL on the opening day.

MJ Commodities Pvt Ltd shared the same address and directors with Agarwal Holdings (AHL), another benefactor of the IPO spoil and a public listed company on BSE. It was found out that AHL had failed to comply with shareholder disclosure norms laid out by BSE in 2009.

PGEL had brazenly siphoned off around Rs7.25 crore through Nimbus Industries (Nimbus) and Supreme Communication in the form of advance for purchase of ‘plastic granules’ from them. What seems like a glaring overlook is the fact that Nimbus had flouted BSE norms several times in the past. Nimbus, supposedly a supplier, was not mentioned in the prospectus. The money that passed through Nimbus finally reached Wonder Vincom who had purchased shares on the first day of the IPO.

We notice that some of the companies mentioned here are publicly listed ones and yet have managed to escape scrutiny despite past violations.

In a bid to recover public money, SEBI has ordered PGEL to call back Rs32 crore, which have been given as ICDs, and the same will be kept in a separate interest-bearing escrow account, until further notice. It can be safely assumed that the investors will not be getting their money back, thanks to AGSL’s shoddy and unprofessional job of neglecting to investigate thoroughly, certain material facts, which would have otherwise saved a lot investors’ money.