SEBI, for reasons, best known to it, allowed the promoters of the Companies to bring the Initial Public Offers (IPOs) in place of Public Issues. These IPOs are generally made at a hefty and unreasonable premium for which SEBI assumes no responsibility. Though the promoters are required to give a justification in the Offer Document for the hefty premium proposed, the justification itself remains highly unsatisfactory most of the times.
Neither SEBI nor Stock Exchanges, where the shares of these companies are listed, have any effective control on the working of these companies after these companies are allowed to charge a hefty and unreasonable premium from the investors, with the result that some of the companies indulge in misappropriation and diversion of amount invested by the public and investors are feeling cheated with no recourse available to them to recover their hard earned money.
We will try to illustrate how retail investors are being cheated with the help of an example. In the year 2006 the Deccan Aviation Limited promoted by Captain G.R. Gopinath came out with an IPO at a hefty price of Rs.148 per share. After few months in 2007, Captain Gopinath sold the controlling stake of this Comapany to Vijay Mallaya who was running an unlisted Company Kingfisher Airlines Limited.
Eventually the company promoted by Captain Gopinath lost its existence within a period of one year and got merged into the Kingfisher Airlines Limited. What happened thereafter, is a sad history for retail investors. Kingfisher has already stopped its operations long time back and the share price of the company is just Rs. 3 as against Rs.148 invested by the public 8 years ago.
Retail investors who invested Rs. 14800 in 2006 have been left with just Rs. 300 in their hands in 2014 and they have no recourse available with them to recover their lost money. Unfortunately, this is not the isolated case. We may find thousands of such cases, if we have the time to dig into the records of wrongdoings of the companies. What SEBI has done to stop such malpractices or what SEBI will do in future after Finance Minister has asked it to bring more retail investors, is a million dollar question.
If SEBI really wants to play a positive role to protect the interests of the retail investors and to regulate the Companies in an effective manner, first thing will be to ensure that the promoters should not be allowed to come with Initial Public Offers at such hefty and unreasonable premiums, which have no justification or explanation at all.
There has to be some transparent mechanism in place where the share premiums are calculated before they are forced on the public. Under the present set up, this aspect is altogether missing and only SEBI can answer why it has been allowing the companies to fix the hefty premiums in the arbitrary manner.
Second thing will be to play the role of a regulator in an effective manner. Stock Exchange Listing Agreement and the Companies Act,2013 both require that all listed Companies should appoint a certain number of Independent Directors on their Board. The intention behind this requirement is that apart from the promoters, there should be some independent experts on the Boards of the listed Companies so that they could ensure that the money invested by the public is neither misappropriated or diverted.
SEBI has no control mechanism in place to ensure that the so called "Independent Directors" appointed by the promoters of the listed companies are really independent. Presently, the promoters of the listed companies themselves are appointing Independent Directors.
Invariably the persons known and associated with the promoters as friends and associates are being appointed as Independent Directors and both Stock Exchange and SEBI are happy with this compliance without realising how a person appointed by promoters themselves could act in an independent manner on the Boards of their companies.
Any such "independent" person, at best, can look after the interests of the person who has appointed him or her whereas he or she is supposed to look after the interests of the public who has invested their hard earned money into the company. Had this practice of appointing the Independent Directors had been followed, in the true spirit of the law, the cases like Kingfisher Airline will be minimised to a great extent.
It is time that either SEBI or Ministrty of Corporate Affairs set up an Independent Authority who could look into the appointment independent directors on the Boards of all entities listed on the stock exchange. This Authority could empanel the subject experts and from the data base can appoint the Independent Directors on the Boards of the listed entities.
Only if SEBI or Finance Ministry is willing to initiate such steps, there will be real transparency and only then the retail investor will come to the stock market. Unless this is done, stock market will remain a playground for manipulators, day traders, strategic investors and the financial experts. The level of Sensex or Nifty is immaterial and it does not reflect the confidence of the retail investor into the stock market.
The recent arrest of the Chairman and Managing Director of Syndicate Bank, a listed entity on the stock market, further strengthen the case for appointment of independent directors in a transparent manner so that the decision making process at the Board level does not remain in the hands of few individuals, who could misappropriate the money belonging to the public to serve their own interests as was being done in the Syndicate Bank case.