Issues of misuse
In end-December 2007, M.R. Jaishankar was a man who could do no wrong. The promoter of Bangalore-based real estate firm Brigade Enterprises had just raised Rs 745 crore via an initial public offering (IPO) when the stock market indices were ensconced in near-peak territory. A month or two later, and Jaishankar wouldn’t have been so lucky, what with the markets entering a free fall after peaking in January. The mood on Dalal Street quickly turned sombre, but Jaishankar was still cock-a-hoop. At the company’s annual general meeting at the Brigade Millennium Campus in J.P. Nagar last June, the 55-year-old Jaishankar regaled shareholders with stories about his brushes with analysts at the pre-IPO road-shows. The analyst community wasn’t comfortable with Brigade Enterprises’ strategy of not possessing a large land bank; the company had just 400 acres, as against peers like DLF, Unitech and Sobha Developers, who had land banks that stretched over many thousands of acres.
Jaishankar’s justification was that Brigade’s was a quality land bank, which would be enough to keep the company busy for the next 5-7 years. The company’s IPO “object clause” was also a testimony to the promoter’s vision—with a meagre Rs 47.96 crore of the funds to be raised earmarked for purchasing land. A staggering Rs 512.03 crore was to be kept aside for construction & development. But even as Jaishankar mesmerised shareholders at the AGM, this science graduate also slipped in a proposal to “alter” the IPO’s object clause. Little did they know that Jaishankar would embark on a land acquisition spree—exactly the opposite of what he was preaching at the AGM! In the six months that followed, Jaishankar went on a buying binge, signing up land deals worth Rs 254.57 crore—more than five times the amount specified in the offer document for buying land.
For the record, Jaishankar’s gambit went spectacularly wrong as land prices crashed immediately after the acquisition splurge. Small wonder that Brigade’s stock price has slumped almost 90 per cent to a paltry Rs 30 from its offer price of Rs 390 per share. Brigade Enterprises, for its part, has its bases covered. A terse e-mail reply by Chief Financial Officer Anil Kumar goes thus: “The shareholders at the AGM have authorised the board to make such amendments as they deem fit in the use of IPO proceeds.”
Brigade Enterprises can take refuge in the flimsy cloak of a changed clause at an AGM, but it is not an isolated case of promoters veering off the IPO’s object clause and using public money for unstated purposes within a year of raising it. In the past five years, some 300 companies have raised a whopping Rs 1,49,545 crore from the IPO market. At least 15-20 per cent of these firms would be guilty in some way or the other of changing the end use of the IPO funds garnered or parking the unused funds in mutual funds and banks. The Registrar of Companies (RoC) has begun probing fund utilisation in IPOs to find out if there has been any diversion of funds. A study by Business Today reveals many cases of IPO funds being used by promoters for purposes other than what was specified in the offer document.
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| Brigade Enterprises Ltd. | BGR Energy Systems Ltd. |
| History: Bangalore-headquartered, in real estate, with a focus on south India IPO In: December 2007 Funds raised: Rs 745-crore offering to part-finance real estate projects, acquisition of land, and construction and development costs Status of utilisation of funds: Amount specified in the IPO document was Rs 47 crore for buying land but actually spent Rs 254 crore. Rs 85 crore remains unutilised, parked in MF schemes Explanation for change in fund utilisation: Says it has endeavoured to make the best available use of funds by taking advantage of business opportunities | History: This 25-year-old company has been an engineering, procurement and construction (EPC) player in the power, oil & gas, refining and petrochemicals sectors IPO In: December 2007 Funds raised: Rs 336.96 crore for setting up additional manufacturing facilities in India, China and West Asia Status of utilisation of funds: Yet to deploy almost 90 per cent of the IPO proceeds, amounting to Rs 319 crore out of Rs 336 crore Explanation for change in fund utilisation: The company has postponed its expansion due to a slowdown in global economy and parked the entire proceeds in bank deposits |
Take for example the Chennaiheadquartered BGR Energy Systems, which is yet to deploy the proceeds of its IPO 15 months after the issue. BGR’s explanation? Blame the delay in expansion on—of course— the slowdown. “We have cancelled our proposed foray into the international markets,” says B.G. Raghupathi, Chairman & Managing Director, BGR Energy.
One promoter who claims to have spotted the early signs of a slowdown, back in June 2007, is Sanjeev Bikhchandani, CEO and Cofounder of Internet portal company Info Edge (India). The company had IPOed in October 2006, and planned to use the money for acquisitions and development of portals. But the slowdown has, well, slowed down investments. On the acquisition front, for which Rs 30 crore was earmarked, Info Edge took the call that it did not want to acquire companies at expensive valuations in 2008 and figured out that it should wait for better valuations. “We are now assessing acquisition targets. We believe this is a more prudent way to deploy money that shareholders have entrusted us with,” says Bikhchandani.
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House Of Pearl Fashions |
History: Gurgaon-based ready-to-wear apparel manufacturer; offers supply chain solutions for the fashion industry globally |
In addition, the company had allocated Rs 25 crore for development of 99acres.com and Jeevansathi.com in its offer document. But a large part of this money has gone to other new online ventures like allcheckdeals. com, Shiksha.com, Firstnaukri.com and Brijj.com. Bikhchandani reasons: “The profits from Naukri.com (the flagship recruitment portal) have been more than we anticipated over the last two years, leading to a lower need to fund these businesses from IPO proceeds.”
Like Brigade Enterprises, another company that found an escape hatch at an AGM, where it duly changed the “utilisation of funds” objective through a postal ballot last June, is House of Pearl Fashions, which had tapped the primary markets two years ago. A subsidiary company, Pearl Global, had raised money from the public in the ’90s.
Now, it turns out that a part of the proceeds of the House of Pearl IPO have been used up by another subsidiary (name not disclosed) to help it repay working capital loans—the company is perfectly within its rights to do that, but the only problem is that it didn’t mention this objective in its IPO prospectus. That’s not all. The Rs 54.5 crore allocation for setting up a domestic branded apparel retail business has been reduced to Rs 25.2 crore. The weaving facility that was scheduled to start commercial production in March 2009 (as per prospectus) is now targeted to start by March 2010. Company officials were not available for comment. Over a third of the IPO proceeds are lying in bank fixed deposits and debt mutual funds.
That perhaps is still safer than deploying IPO money in inter-corporate deposits, as Banaglore-based apparel maker Indus Fila has chosen to do. Needless to say, such an objective can’t be found in its IPO object clause. In addition, the company is using a bulk of the IPO money for meeting its working capital requirements. Omnitech Solutions, an IT solutions company, is yet another case of revision of the IPO allocation without citing any reasons. The company has now set new timelines to achieve the same.
IPO guidelines have enough loopholes that help promoters sidestep full disclosure of end-use of IPO funds. For instance, many companies have deployed unutilised funds in mutual funds without disclosing the details of the schemes and also the kind of returns they are earning. Who knows, there could even be cases of companies investing in mutual funds’ equity schemes, which could well result in their IPO proceeds ending up in their very own shares! Over to the RoC.
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Indus Fila Ltd. | Info Edge (India ) Ltd. |
History: Bangalore-based apparel maker | History: Websites in recruitment, matrimonial & real estate classifieds. Popular sites are naukri.com, jeevansathi.com and 99acres.com |
