Business Today

Issues of misuse

In the boom times, promoters had to just say a price, merchant bankers nodded, and investors blindly lapped up those initial public offerings. Today, however, much of those thousands of crores is either still lying unused or being deployed in areas not indicated in the issue prospectus.

twitter-logoAnand Adhikari | Print Edition: April 5, 2009

In end-December 2007, M.R. Jaishankar was a man who could do no wrong. The promoter of Bangalore-based real estate firm Brigade Enterprises had just raised Rs 745 crore via an initial public offering (IPO) when the stock market indices were ensconced in near-peak territory. A month or two later, and Jaishankar wouldn’t have been so lucky, what with the markets entering a free fall after peaking in January. The mood on Dalal Street quickly turned sombre, but Jaishankar was still cock-a-hoop. At the company’s annual general meeting at the Brigade Millennium Campus in J.P. Nagar last June, the 55-year-old Jaishankar regaled shareholders with stories about his brushes with analysts at the pre-IPO road-shows. The analyst community wasn’t comfortable with Brigade Enterprises’ strategy of not possessing a large land bank; the company had just 400 acres, as against peers like DLF, Unitech and Sobha Developers, who had land banks that stretched over many thousands of acres.

Jaishankar’s justification was that Brigade’s was a quality land bank, which would be enough to keep the company busy for the next 5-7 years. The company’s IPO “object clause” was also a testimony to the promoter’s vision—with a meagre Rs 47.96 crore of the funds to be raised earmarked for purchasing land. A staggering Rs 512.03 crore was to be kept aside for construction & development. But even as Jaishankar mesmerised shareholders at the AGM, this science graduate also slipped in a proposal to “alter” the IPO’s object clause. Little did they know that Jaishankar would embark on a land acquisition spree—exactly the opposite of what he was preaching at the AGM! In the six months that followed, Jaishankar went on a buying binge, signing up land deals worth Rs 254.57 crore—more than five times the amount specified in the offer document for buying land.

For the record, Jaishankar’s gambit went spectacularly wrong as land prices crashed immediately after the acquisition splurge. Small wonder that Brigade’s stock price has slumped almost 90 per cent to a paltry Rs 30 from its offer price of Rs 390 per share. Brigade Enterprises, for its part, has its bases covered. A terse e-mail reply by Chief Financial Officer Anil Kumar goes thus: “The shareholders at the AGM have authorised the board to make such amendments as they deem fit in the use of IPO proceeds.”

Brigade Enterprises can take refuge in the flimsy cloak of a changed clause at an AGM, but it is not an isolated case of promoters veering off the IPO’s object clause and using public money for unstated purposes within a year of raising it. In the past five years, some 300 companies have raised a whopping Rs 1,49,545 crore from the IPO market. At least 15-20 per cent of these firms would be guilty in some way or the other of changing the end use of the IPO funds garnered or parking the unused funds in mutual funds and banks. The Registrar of Companies (RoC) has begun probing fund utilisation in IPOs to find out if there has been any diversion of funds. A study by Business Today reveals many cases of IPO funds being used by promoters for purposes other than what was specified in the offer document.


 Brigade Enterprises Ltd.
 BGR Energy Systems Ltd.
History: Bangalore-headquartered, in real estate, with a focus on south India

IPO In: December 2007

Funds raised: Rs 745-crore offering to part-finance real estate projects, acquisition of land, and construction and development costs

Status of utilisation of funds: Amount specified in the IPO document was Rs 47 crore for buying land but actually spent Rs 254 crore. Rs 85 crore remains unutilised, parked in MF schemes

Explanation for change in fund utilisation: Says it has endeavoured to make the best available use of funds by taking advantage of business opportunities
History: This 25-year-old company has been an engineering, procurement and construction (EPC) player in the power, oil & gas, refining and petrochemicals sectors

IPO In: December 2007

Funds raised: Rs 336.96 crore for setting up additional manufacturing facilities in India, China and West Asia

Status of utilisation of funds: Yet to deploy almost 90 per cent of the IPO proceeds, amounting to Rs 319 crore out of Rs 336 crore

Explanation for change in fund utilisation: The company has postponed its expansion due to a slowdown in global economy and parked the entire proceeds in bank deposits


Take for example the Chennaiheadquartered BGR Energy Systems, which is yet to deploy the proceeds of its IPO 15 months after the issue. BGR’s explanation? Blame the delay in expansion on—of course— the slowdown. “We have cancelled our proposed foray into the international markets,” says B.G. Raghupathi, Chairman & Managing Director, BGR Energy.

One promoter who claims to have spotted the early signs of a slowdown, back in June 2007, is Sanjeev Bikhchandani, CEO and Cofounder of Internet portal company Info Edge (India). The company had IPOed in October 2006, and planned to use the money for acquisitions and development of portals.

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