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S. Sivakumar

THE phenomenon of `vanishing companies' is perhaps unique to India in terms of the number of such companies (or perhaps, those which `existed') duping investors off thousands of crores of rupees, and for the alarming regularity with which this phenomenon has occurred.

The root of this menace can perhaps be traced to 1992 when, in the name of `liberalisation', the government abolished the office of the Controller of Capital Issues (CCI) and asked the Securities and Exchanges Board of India to monitor the capital market.

Many promoters took advantage of the prevailing situation, which allowed them to raise money from the public at fancy premiums, with the role of SEBI reduced to merely vetting Initial Public Offers prospectuses.

No wonder then that between April 1992 and March 1996 more than 4,000 companies raised more than Rs 54,000 crore from investors through public and hybrid issues. Another 1,500 companies raised over Rs 34,000 crore through rights issues at very high premia. With practically no supervision from either the SEBI, the stock exchanges in which these companies got themselves `listed', or the Department of Company Affairs acting through the various Registrars of Companies (RoCs), most companies simply vanished, in thin air in no time, leaving investors high and dry. In typical fashion, officials of the SEBI and DCA did not react for several years and only in the late 1990s did investors see some action being taken — but that was too little and too late.

SEBI's functioning as an effective watchdog has been greatly hampered by the lack of adequate powers, which does not explain why it cannot do a better job even with limited powers. The definition that SEBI has for a `vanishing' company appears faulty.

As per SEBI's December 13, 2000, communication to various investor associations, companies that have not complied with listing/filing requirements of stock exchanges/RoCs for two years have been classified as `vanishing' companies.

Two years is a long time and considering that listed companies are required to submit quarterly unaudited and other particulars to the stock exchanges they are listed on, any default in filing or furnishing information to the stock exchanges for more than two successive quarters should set off the alarm bells.

What prevents SEBI from setting up a system to collate the required information and putting up details of companies and promoters who have not complied with stock exchange requirements for two successive quarters on its Web site is anybody's guess.

If SEBI is hampered by the lack of powers to go after fraudulent companies and their promoters, how can SEBI's inaction in taking to task the hundreds of merchant and investment bankers (over whom SEBI has adequate control), who took all these `vanishing' companies public in the first place, be explained.

For reasons best known to itself, SEBI has always assumed that its job was over so long as there were adequate disclosures in the IPO documents.

It would also appear that SEBI had all along been trying to abdicate its own responsibility by inserting more disclaimers in IPO documents, undermining the whole financial system. Surely, to instil confidence in the system, SEBI could have gone after some investment bankers, who are supposed to be responsible for `due diligence'. Sadly for the Indian investor, most of these investment bankers who took these vanishing companies public are merchant banking divisions of the leading public sector banks.

If SEBI's actions as a market regulator have been far from satisfactory in tackling stock market scams and vanishing companies, how has the Department of Company Affairs, acting through various RoCs and having adequate powers in prosecuting erring promoters and companies, performed over the years? The less said the better. Apart from issuing periodic statements to the effect that it is taking action against these companies, the DCA seems to have done nothing significant in booking the guilty.

Worse, it would seem that the DCA has been working towards curtailing the powers of a fellow regulator such as SEBI.

For instance, the DCA has been demanding that the Securities Appellate Tribunal, which handles appeals from companies against SEBI's orders, should be scrapped and the appeals should instead be filed with the Company Law Board for disposal. The lack of coordination and the animosity between fellow regulators have led to such a pass that even after eight-ten years after the 1992 scam, nobody has a conclusive idea as of the kind of money that has been siphoned off by fly-by-night companies that tapped the markets — perhaps running into several thousands of crores of rupees. Consider the fact that as against thousands of companies which have disappeared, gobbling up thousands of crores of rupees from investors, the High Level Committee set up in this regard lists only 229 companies as `vanishing companies' with the amount involved shown as only Rs 800 crore.

The need of the hour is a co-ordinated action plan involving regulatory bodies such as SEBI, the DCA and the stock exchanges to ensure that the small investor's confidence in the market, to some extent, is restored. While it may be too late for India's regulatory authorities to pin down thousands of companies and their promoters who raised money from the public and have since vanished, it would definitely make sense to go after the big fish, say, companies that raised more than Rs 100 crore.

(To be concluded)

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