Disclosure -- SEBI's shady secrets

Disclosure -- SEBI's shady secrets
Sunil Jain

For several years now, analysts have been criticising SEBI chief D.R. Mehta for failing to make the capital markets a safer place for investors. Mehta's stock reply is that stock markets are inherently a risky place, and that as the country's regulator, he is forcing companies to tell investors all the risks associated with their project -- `full disclosure' is the method used by regulators the world over to make stock markets safer.

Problem is, the system Mehta's presiding over has, consciously or unconsciously, allowed promoters to make a complete mockery of these disclosure norms. As a result of which investors are as uneducated as they were before about the real risks involved, and so keep getting burnt.

How do you hide relevant risks? Simple: snow people under all manner of `disclosures', so when it comes to the relevant ones, they'll be fast asleep! You can laugh, as I did when Prithvi Haldea who runs the stock market database Prime, regaled me with examples of trivial disclosures, but that's because I haven't invested in any of these companies.

* Netripples.com (Public issue of Rs 3 crore on Aug 7): One of the risk factors associated with the project is that the company does not own any of the premises it operates from.

* Vikram Software (Public issue of Rs 1.5 crore on Aug 22): One of the risk factors is that the company has yet to place orders for the furniture in its office.

* Suchinfotech Limited (Public issue of Rs 1.4 crore on Aug 18): One of the risk factors is that the company is depending on a single supplier for its hardware and software supplies.

Yes, this is the trivia that companies file in the name of `disclosure'. And then they justify why these are not risks at all! Netripples, for instance, says it has a 15-year lease on the property it is operating from, and therefore sees no real problem! Vikram says it is ordering the furniture, and Suchinfotech says the supplier is a reliable one. Other standard `disclosures', to be seen are (a) the project is being run by a first-generation entrepreneur and has all risks associated with first-generation projects, (b) the project will be affected by delays in implementation, and the fluctuation of the rupee.

Do the real risk factors ever get properly displayed? SEBI's Mehta probably knows, but here are some gems from Subhash Ghai's Mukta Arts which came out with a Rs 100-crore public issue last month. Like the others, Mukta too begins with the `first generation entrepreneur risk' story, and promptly assures investors there's no problem since Ghai's been in business for 25 years -- then why clutter the `risk' factors, unless of course the very idea is to clutter. Skip over five other trivial risk factors, and you come to the big one -- the income tax department, Mukta tells us, has made `certain additions' to its income statements for various years. That means Mukta has been accused of hiding income, and Mukta has appealed againt this.

How big are the `additions', and to which years do they pertain? Only Ghai and Mehta know, though the list of income tax defaulters read out in Parliament could give you some idea since Ghai figures in that in either his individual or corporate capacity. Mukta's tax assessments have also just been done just till the financial year 1996-97, or close to three years ago.

Okay, forget disclosures for the moment. What are Mukta's prospects? It's a bit convoluted, since SEBI has put in some funny restrictions. It doesn't allow promoters to give projections unless these have been made by financial institutions or bankers -- obviously SEBI feels FIs have a great track record despite the fact that they've accumulated bad loans of Rs 50,000 crore precisely because of their great track record. But let's get back to Mukta.

Mukta cites newspaper reports, from òf40óThe Times of India and òf40óThe Economic Times to tell investors that the industry which took 50 years to grow to Rs 6,215 crore in 1999 will jump to Rs 33,984 crore by 2005, exports from Rs 665 crore to Rs 14,692 crore, television software from Rs 1,200 crore to Rs 9,000 crore, and so on. Now, it is evident that the ToI and ET reports are based on the Arthur Andersen-FICCI study on the entertainment industry, but Mukta doesn't say so. Being a journalist myself, I do know that journalists usually get such projections by talking to people like Ghai himself!

A year ago, even prior to Mehta's extension, I would have cited all these as reasons why SEBI needed a new chief. But Prime's Haldea tells me it doesn't matter any more. You see, the primary market or the public issue market is dead. In 1995-96, a total of Rs 18,341 crore was raised from the primary markets -- in the form of both debt and equity -- and Rs 10,035 was raised from the private-placement market, by selling this debt and equity to just a few big institutional investors. Last year, Rs 9,233 crore was raised in the primary market against around Rs 75,000 crore in the private-placement market! The stock markets are dead. Long live SEBI.

Blurb:

Letting firms make a mockery of disclosure norms is why the primary market is near-dead