Equity markets-1 1 Vanishing Companies

INTRODUCTION
Vanishing companies are companies that had raised funds from the public and got listed but stopped operations and are not traceable at their registered offices. At most of these companies, the managing director or any of the whole- time directors also could not be traced. These companies have also stopped filing their half-yearly and quarterly returns with the stock exchanges or Registrar of Companies (RoC).

As per the definition stipulated by SEBI, any listed company, which raised money through initial public offer and, thereafter, stopped operations, did not file returns either with the RoC or SEBI and did not exist on the registered premises was termed as vanishing.

There are provisions under Companies Act under which companies are termed vanishing companies on satisfying certain conditions. it is provided a company would be deemed to be a vanishing company, if it satisfies all the conditions given below : a) Failed to file returns with Registrar of Companies (ROC) for a period of two years; b) Failed to file returns with Stock Exchange (SE) for a period of two years (if it continues to be a listed company); c) It is not maintaining its registered office of the company at the address notified with the Registrar of Companies/ Stock Exchange; and d) None of its Directors are traceable. The conditions mentioned at (a), (c) & (d) would suffice to declare a company as vanishing if such company has been de-listed from the Stock Exchange.

Equity markets-1 2 Vanishing Companies

An Era OF Boom and Fall down OF Capital Markets in India

1991-The year which changed the face of the capital markets in India. In 1991 P.V. Narasimha Rao the then Prime Minister of India introduced the Economic Policies of 1991which included Liberalization, Globalization and Privatization. The major achievement is generally considered to be the liberalization of the Indian economy. The reforms were adapted to avert impending international default in 1991.The reforms progressed furthest in the areas of opening upto foreign investment, reforming capital markets, deregulating domestic business, and reforming the trade regime. Rao's government's goals were reducing the fiscal deficit, Privatization of the public sector, and increasing investment in infrastructure. Trade reforms and changes in the regulation of foreign direct investment were introduced to open India to foreign trade while stabilizing external loans. Abolishing in 1992 the Controller of Capital Issues which decided the prices and number of shares that firms could issue. Introducing the SEBI Act of 1992 and the Security Laws (Amendment) which gave SEBI the legal authority to register and regulate all security market intermediaries.Opening up in 1992 of India's equity markets to investment by foreign institutional investors and permitting Indian firms to raise capital on international markets by issuing Global Depository Receipts (GDRs). The New Economic Policy includes reduction in government expenditure, opening of the economy to trade and foreign investment, adjustment of the exchange rate from fixed exchange rate system to flexible exchange rate system, deregulation in most markets and the removal of restrictions on entry, on exit, on capacity and on pricing.

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The Fall Down

The IPO bubble: The entry of Foreign Institutional investors led to a massive bull run, which saw the secondary market recover from the scam even though badla was banned. Soon thereafter, the Control over Capital Issues was abolished with a one-line order and it opened the floodgates for a massive scam in the primary market (or Initial public offerings). This scam had two parts the first was perpetrated by existing companies which ramped up their prices in order to raise money at hugely inflated premia to fund greenfield projects and mindless diversifications, most of which have either failed to take off or are languishing. The other half of the scam had a multitude of small traders, chartered accountants and businessmen, who teamed up with bankers and investment bankers to float new companies and raise public funds. The IPO bubble which lasted three years from 1993 to 96 finally burst when prices of listed companies began to crash.

In its eagerness to "liberalize" the market, the Indian government in 1992 abolished the office of the Controller of Capital Issues and asked the Securities and Exchanges Board of India (SEBI) to monitor the capital market instead. Many promoters took advantage of the prevailing flux and raised money from the public at fancy premiums. The result: between April 1992 and March 1996, more than 4,000 companies raised over Rs540 billion (US$1.2 billion) from investors through public and hybrid issues, while another 1,500 raised over Rs340 billion through rights issues at high premium. With practically no supervision from either the SEBI, the stock exchanges or the Department of Company Affairs (DCA), many of them then simply vanished.

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The Regulatory Authorities: Almost Non-Active

So far SEBI has done precious little to check the menace of vanishing companies. In fact, the definition that SEBI has for a "vanishing" company is itself faulty. As per SEBI's December 13, 2000 communication to investor associations, companies are classified "vanishing" if they have not complied with listing/filing requirements of stock exchanges/RoCs for two years. Two years is a long time and considering that listed companies are required to submit quarterly reports to the stock exchanges they are listed on, any default in filing or furnishing information to the stock exchanges for more than two successive quarters should set off alarm bells. What prevents SEBI from setting up a system to collate the required information and putting up details of companies and promoters who have not complied with stock exchange requirements for two successive quarters on its website is anybody's guess.

The problem has been exacerbated by the lack of coordination between SEBI and DCA. Animosity between fellow regulators has led to such a pass that even more than a decade after the 1992 stock scam in India, neither has a conclusive idea of the extent of the cash siphoned off by the fly-by-night companies that tapped the markets. Though thousands of companies have disappeared, taking with them hundreds of billions of rupees from investors, the high-level committee set up to deal with the problem lists only 229 companies as "vanishing", with the amount involved shown as only Rs8 billion. As Oscar Wilde said, "The thief is an artist and the policeman is only a critic."

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Vanishing Companies: The Case So Far

The government has identified 121 vanishing companies and filed cases in 110 cases, Prosecutions have been filed in 110 cases for violations of various provisions of the Companies Act, 1956. A Coordination

Monitoring Committee (CMC), co-chaired by MCA Secretary and Securities and Exchange Board of India Chairman, is looking into the issue of vanishing companies, their promoters and monitoring the progress of action taken against them. Out of the companies that went public during 1992-2001, a total of 238 firms were identified as vanishing companies. However, 117 companies have been traced out leaving the number of vanishing companies to 121, he said. FIRs have been filed in 112 cases under the Indian Penal Code (IPC). SEBI has debarred 100 companies and 378 directors under section 11B of the SEBI Act from entering capital market for a period of five years.

What is quite gratifying to note is that finally, these vanishing companies have once again come onto the radar of SEBI and Ministry of Corporate Affairs (MCA). As per the new rule from MCA, an entity cannot be identified as vanishing company if any of its directors, executive or non-executive, can be traced. This is better than the earlier rule which said that if the managing director or any of the whole-time directors could not be traced, the company was termed as vanishing. The RoC of States has been directed to identify such companies and start legal proceedings against them. There were reports that the Union ministry of corporate affairs (MCA) is trying to expand the scope of exit for these companies, in the event of any of their non-executive directors being traced.

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Conclusion
Such a massive fraud over such a long period could not have been feasible without the connivance of various unscrupulous investment bankers who took these "vanishing" companies public in the first place. Even the auditors were at fault as they toed the management line for pecuniary gains. Many a time, corporate frauds are perpetrated by insiders. This brings us to the issue of corporate governance. As Naresh Chandra, chairman of the Committee on Corporate Audit & Governance constituted by the DCA, said, "Indian companies still have some ground to cover in terms of following corporate governance best practices in substance."

Every vanishing company, such as CRB Corporation, has had chartered accountants who got away unpunished, thanks to the notorious reluctance of the Institute of Chartered Accountants of India to punish dubious members. The number of vanishing companies and those whose securities are hardly, if at all, traded on the bourses is alarmingly high. So are the cases where companies have defaulted on their compliance of listing agreement requirements. In the Indian context, the need for corporate governance has been highlighted because the scams have become almost an annual feature ever since the liberalization process began in 1991 - the Harshad Mehta Scam, Ketan Parikh Scam, UTI Scam, vanishing company Scam, Bhansali Scam
...

Most of these companies were floated by fly-by-night operators during 1994-96, who then went on to raise funds through public issues in their or benami names and later vanished from the scene. To avoid the recurrence of such problems, it was later made mandatory for companies to file the photographs of their promoters with the Securities and Exchange Board of India before floating public offerings.

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