How a company’s ‘lackadaisical’, ‘illegal’ manner lost 80 percent of funds raised through preferential issue

The objective had been presented as strengthening the equity base of the company and meeting the enhanced working capital requirements of the company, among other things.

How far is going too far to “improve business relation (sic)”?

An investigation by the market regulator has found that Alps Motor Finance gave Rs 36 lakh, from funds raised through preferential allotment of shares, as interest-free loans to Pioneer Buildstates. According to the Securities and Exchange Board of India (Sebi), this was against the stated intent of the preferential issue and the market regulator penalised the company and directors for it.

The company was fined Rs 6 lakhs in total; its wholetime director Brij Kishore Sabharwal Rs 20 lakhs; and non-executive and non-independent director Himanshu Agarwal, Rs 15 lakhs.

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According to Sebi’s investigating officer, loans “were given in a suspicious manner” and cost the company’s shareholders 80 percent of the funds raised through the issue.

The “business relation” loan was the smaller amounts that the company seems to have given away as interest-free loans. It also gave Rs 1 crore to an individual Chander Bhusan and Rs 4 crore to Dream Procon in a similar fashion “for the opening of showroom and vehicle finance”, from the total of Rs 7.01 crore raised through the issue between June 2013 and August 13.

The entire amount was used to issue loans to six entities who then forwarded the loan to other third-party entities. While 76 percent of the funds from the preferential issue were distributed as interest-free loans, the remaining was given with interest but without proper documentation. All of this has resulted in Rs 5.64 crore not being repaid.

The Sebi order stated, “even though the loans were given out of investor’s money, and the said objective was not mentioned in the objects of the preferential issue, Noticee No. 1 (Alps) did not carry out the required due diligence to ensure that the loans would be recovered.”

Lies and more lies?

In 2018, BSE sent a notice to a few companies including Alps for ‘misutilisation of preferential proceeds’ and the company accepted that the proceeds were utilised for purposes that were different from the objective initially given at the shareholders meeting.

Also read: Sebi proposes amendment to insider-trading regulations. Is it necessary?

The objective had been presented as strengthening the equity base of the company, arranging funds required for meeting the enhanced working capital requirements of the company, meeting certain capital expenditure and meeting expenditure for general corporate purposes.

In response to the exchange’s notice, the company had the deviation ratified (approved) by the shareholders in another shareholder’s meeting held that year. But even here, the Sebi investigator pointed out, that the company was misleading the shareholders.

The company stated it had utilised the funds for loans, repayment of loans, general corporate purpose and working capital requirement when all of it was only used to extend loans, pointed out Sebi’s order.

“In summary, I note that the lackadaisical and illegal manner in which the loans had been disbursed to the 6 entities cannot be considered as ratified,” stated the market regulator’s order.