Sebi bars 7 companies for misuse of GDR window

Sebi has found that many companies are converting their global depository receipts into regular shares within a short span of time.

FP Editors September 21, 2011 20:33:54 IST
Sebi bars 7 companies for misuse of GDR window

The Securities and Exchange Board of India has barred seven companies from dealing with Indian equities or any instruments that can be converted into equities or change their capital structure in any manner until further notice. The seven companies are Asahi Infrastructure & Projects Ltd, IKF Technologies Ltd, Avon Corporation Ltd, K Sera Sera Ltd, CAT Technologies Ltd, Maars Software International Ltd and Cals Refineries Ltd.

It has barred Pan Asia Advisors and Arun Panchariya from rendering any services in connection with securities. No intermediary registered under Sebi can deal with theses entities.

Sebi bars 7 companies for misuse of GDR window

The Sebi logo. Image courtesy Sebi

It also named 10 entities that would not deal with the markets till further notice. These are: India Focus Cardinal Fund, Mavi Investment, KII Ltd, Sophia Growth, European American Investment Bank Ag, Basmati Securities Pvt Ltd, Oudh Finance & Investment Private Ltd, Alka India Ltd, SV Enterprises and JMP Securities Pvt Ltd.

The National Securities Depository Ltd and Central Depository Services has been asked to freeze the beneficial accounts of the owners or the entities concerned.

Sebi ruled against these companies for misuse of global depository receipts (GDRs). It was seen that several foreign institutional investors were converting GDRs into normal shares within a very short period of the issue of GDRs. Around 33 percent to 75 percent of the shares converted were bought by similar parties.

Sebi observes that the companies involved in this scam are classified in three parts.

First they could be ones who are established abroad and therefore deal in GDRs. Second, they could be FIIs or sub-accounts, who buy these receipts abroad and convert them into shares so that they can trade in Indian markets. And third, there are entities in the stock markets who act as counterparties to the FIIs or sub-accounts. These counterparties in return sell these to retail investors.

Sebi says the retail investor could have suffered in three ways.

One, the liquidity in the scrip is not sufficient for sale of a large quantity of shares without registering a steep price fall.Second, on a few occasions, shares are issued to GDR investors at a discount to the prevalent market price in the Indian stock exchanges. This also leads to a loss to investors. And last, as the volumes in the scrip are supported by the group, the price may drop once sub-accounts or FIIs are done with their selling in the scrip and there is no further need for the group members to sustain volume or price of the scrip.

Generally retail investors trust a stock that has FII holdings as they are supposed to be sophisticated investors. Even if the company does not have sound financial health, an FII holding means a possible turnaround opportunity for the lay investor. Sebi has passed these orders with these points in mind.

"The preliminary findings ... lead to the conclusion that there is a prima facie case for Sebi to intervene immediately to prevent grievous injury to shareholders. It is, therefore, necessary and essential to urgently issue orders to protect the interests of investors and to preserve the safety and integrity of the market. Accordingly, the following ad interim order is passed."

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