Stray straws in the wind
The India growth story never looked better. With the capital markets testing record highs and strong fund flows continuing, there seems little reason for the cheer to end. However, that seems to be exactly why the Ministry of Corporate Affairs is getting a little edgy. In a bid to make sure that the good times don't end bitterly, the Ministry has launched a broad inquiry into the end-use of huge sums of funds raised by several companies in their IPOs in the last couple of years.
"The inquiry is a routine affair. There is no company which is being targeted particularly. Our only concern is there should be a healthy market," Corporate Affairs Minister Prem Chand Gupta told BT. However, Ministry officials confirmed that wind power company Suzlon Energy is under the scanner, but it is not the only one.
The end-use of funds falls in a grey zone as far as regulations go. At present, the use or misuse of the proceeds of an IPO is not under any regulator scrutiny. Even the market regulator, SEBI, does not look into how public issue proceeds are used. It seems that the Ministry is now stepping in to fill this gap. The proceedings are being termed "an inquiry" as against a more serious "investigation." The trigger is certainly not the expectation of a scam, according to Gupta.
Apparently, it is the fear of a repeat of the vanishing companies of the early 90s. "Though there is virtually no chance of that sort of thing (companies vanishing) happening again as the market structure has changed, yet this sort of an inquiry is a good idea. Such a hygiene check should provide a sense of comfort to the investors," says Prithvi Haldea of Prime Database, a Delhi-based IPO tracker.
As for Suzlon, the company raised some Rs 1,300 crore from its IPO, of which around Rs 650 crore was extended as loans to subsidiaries. Moreover, the company has accumulated a debt of over Rs 1,600 crore despite having a business model where cash comes in before the turbines are delivered. The ministry's concern is whether funds are being diverted.
A Suzlon spokesperson says a categorical no. He shrugs off the size of the debt, given the fact that Suzlon has been raising funds for takeovers and acquisitions. On the Rs 650-crore figure, the spokesperson says that there could be some advances paid to vendors. "In the wind energy industry components are in short supply, therefore, we have to block manufacturing capacities (by paying advances) to component manufacturers to ensure a smooth flow of our supply chain. This is where the advances are largely utilised."
Will the ministry be satisfied? It remains to be seen. However, as Haldea points out, it would be difficult to pin down misuse of funds as most companies would be legally compliant. Perhaps another strand that needs to be followed is the veracity and the adequacy of disclosures made in the IPO prospectus.
(With Anusha Subramanian)
