Great Indian IPO trick

Great Indian IPO trick
Comment E-mail Print Share
First Published: Thu, Feb 21 2008. 12 07 AM IST
Updated: Thu, Feb 21 2008. 12 07 AM IST
Who is the greatest magician? David Copperfield? P.C. Sorcar? There is a new extremely talented magician. In specific, he can (to use a term favoured by magicians) “vanish” the law and transform any amount of money as many times as necessary in four months. However, his little (or not-so-little) tricks are as susceptible to deconstruction as those of any other magician’s and can be broken down into sleight of hand (also called prestidigitation orléger de main), misdirection, deception, collusion with a member of the audience, apparatus with secret mechanisms, mirrors, and other tried and tested trickery. Subject to the caveat of a statutory warning (“This trick can be performed only by him or those who share the same surname and should not be attempted?by?others”).?Here’s?how?to do it:
Step 1: Float a shell company (i.e., a company that exists on paper, is a legal entity but does not have any economic activity). Name the shell company XYZ Ltd.?Paid-up capital Rs1 lakh only.
Step 2: Increase the share capital of the shell company from Rs1 lakh to Rs1,000 crore by passing a resolution.
Step 3: Another shell company of the magician, say ABC Ltd, and a listed associate, say PQR Ltd, each invest in the shell company XYZ Ltd. These are nothing but book entries, the financial equivalent of magic.
Step 4: Immediately apply to the court for the merger of XYZ with DEF. The reason for the merger as stated in the application “XYZ has put in considerable efforts in acquiring necessary technical and manpower skills, which are ancillary to the business of DEF which can take benefits of this specialized skill sets and?technology?available with XYZ to undertake mega power projects and implement them more efficiently and successfully.” This “expertise” has been acquired by the shell company within days of increasing the capital.
The real reason is to comply with regulatory guidelines supposedly designed to prevent fraudulent transactions, but which actually aid and abet them. This relates to recognizing the minimum capital brought in before a public issue as promoters’ contribution. The promoters’ contribution would have to be at many times the face value otherwise. A merger sanctioned by the court qualifies as promoter capital, which it would not have otherwise. The unsuspecting court allows the merger, since both the companies are private companies not knowing that there is no expertise involved except that of manipulating the market for a public offering of shares at a premium of 45 times within a period of four months. The merger is sanctioned.
Step 5: Millions of shares of PQR are allotted to the owners of the shell company, XYZ, and ABC called a Project. (The word ‘project’ could only refer to multiplying money many times in four months.)
Step 6: Engage top-notch intermediaries for a gigantic public issue. Select rumours and stock market manipulation push up the price of all shares in the same industry (there are not many) to dizzy heights to justify the premium and ensure subscription. Advertise aggressively and hijack the caller ring tone of captive telecom customers without their consent to play the advertisement.
Step 7: Engage a top-notch lawyer to obtain a blanket gag order from the highest court against various?petitions?in?various?courts.
Step 8: Get the issue subscribed and have it quoted at a further premium to the initial public offering (IPO) price in grey market operations.
Step 9: Say “Oops” and make pious statements of long-term returns when the market crashes.
And all this is within the “law”!!
Where are all the investor protector forums and champions?
T.R. Ramaswami is a former commercial and investment banker. Comments are welcome at otherviews@livemint.com
Comment E-mail Print Share
First Published: Thu, Feb 21 2008. 12 07 AM IST