The curious ways of BSE SME exchange (IANS Insight)
By Arun Kejriwal
Mumbai is the financial capital of the country and rightly so. On the one hand it has many corporate headquarters and on the other all the three stock exchanges -- the NSE, the BSE and the MCX - are based out of here. The Reserve Bank of India (RBI) has its headquarters in Mumbai as well. The glamour quotient is made up by the presence of our own 'Bollywood here.
Last week, we had a bizarre incident here that combined the financial and Bollywood world. A promoter of a listed entity - Rajnish Surendra Pratap Singh, promoter and managing director of Rajnish Wellness Limited - was arrested for running a sex racket.
The accused was offering through his company, which is into the sale of personal care and wellness products, a service known as spa at home. He had two spas under his company and ran the sex racket.
The company was listed as recently as July 2018.
The merchant banker of the issue was Navigant Corporate Advisors Limited, a company listed on the BSE SME in December 2015. The promoter and Managing Director & Chief Financial Officer is Sarthak Vijlani.
The share is infrequently traded. As per the shareholding pattern on March 31, 2019, the promoter group held 23,02,750 equity shares, 73.04 per cent of the equity capital of 31,52,750 shares. Since this disclosure, the promoter has sold 6.70 lakh shares on three occasions -- 3 lakh shares on June 17, 3.50 lakh shares on June 25, and 20,000 shares on July 2. This reduces his shareholding to 16,32,750 equity shares, which is 51.78 per cent of the issued capital.
The red herring prospectus (RHP) makes no mention of the fact that the company or its promoter is running two spas. The police complaint specifically mentions the two names -- Thai Rich Spa in Oshiwara, Andheri, and Spa Castle in Thakur Complex in Kandivli. These spas were earlier raided in 2015 and 2016.
There is, therefore, no question of there being a mention that he is a history-sheeter with the Mumbai police. One wonders what's the role of a merchant banker with regard to due diligence. This is not an isolated case. There are many more concerning the SME exchange, which have become a place where investors who are unaware get lured, caught and lose their shirt.
Take the case of NSE-listed Five Core Electronics Limited, which is based out of the NCR region. The company went public in May 2018 and trading was suspended a year later in May 2019. The company was into the business of public address systems, electronics and electrical products. Amarjit Singh Kalra is the Managing Director of the company. The merchant bankers were Indian Overseas Bank and Sarthi Capital Advisors Private Limited.
Sometime in February 2019, the promoter and his immediate family left for the USA and then there were issues with the business back in India. The Directorate of Revenue Intelligence (DRI) raided the company, there were no employees at its factory thereafter, and no one to answer what? happening. A spate of resignations took place and all the KMPs of the company resigned. There is a complaint filed with the Serious Fraud Investigation Office (SFIO) and various other government agencies. The point is will this help the poor investor.
Let us come to another issue that rocked the two SME platforms. On the main board there is a rule that says a company that goes public and has an issue size of less than Rs 250 crore would trade for 10 consecutive days in the 'trade to trade' segment and have a daily circuit filter of 5 per cent. The issue size on SME is significantly lower than this number and, therefore, it would automatically trade in this segment.
Unfortunately, a few big SME merchant bankers with the help of conniving and obliging exchange officials changed the norms without notice and there being nothing in writing and allowed shares to list under normal trading rules.
What was the impact? Issues on the SME platform were subscribed many times over. 100, 200, 500 times became a norm. Even non-banking financial companies (NBFCs) began financing SME issues and high net worth individuals (HNIs) who were averse to SME jumped in.
What had changed? Simple the rule now followed was 20 per cent circuit and on the third day, the price theoretically could be at Rs 172 against an issue price of Rs 100. (Rs 100 plus 20 per cent = 100+20 = 120. Second day, 120+24 = 144 and third day, Rs 144+28.80 = 172.80). At this price everybody got an exit and the information being touted was that SME had come of age. It was a massive scam right under the nose of the regulator and the exchange officials and perpetrated by all the merchant bankers put together.
This was rectified sometime in June 2018 when the first issue to list under the revised guidelines was Tasty Dairy on the BSE SME platform. Subscription and listing have never been the same thereafter, clearly indicating the amount of malpractice indulged into by merchant bankers and officials by turning a blind eye.
Due diligence in SME issues is literally a joke as can be seen from the above glaring example of Rajnish Wellness where a history-sheeter is not even mentioned in the risk factors.
In the greater interest of investors and protecting the fledgling SME exchange, tighter monitoring is the need of the hour. It makes no sense in just registering merchant banks dime a dozen and allowing them to raise capital without actually doing any diligence.
Exchanges, merchant bankers and the Securities and Exchange Board of India (SEBI) awake. It's now or never. Any laxity now will leave yet another initiative in the doldrums sooner than later.
(Arun Kejriwal is founder of Kejriwal Research and Investment Series. The views expressed are personal.)