Sebi's investigation has revealed that the scamsters floated these firms, allotted fresh shares to themselves, distributed these to some front entities, sold these on IPO, funded the people who bought these on IPO , appropriated the IPO proceeds, and then funded the group of traders who were then hiking up the prices endlessly. All to convert unaccounted money into legitimate money that can be attributed a source: the stock exchange.
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The scam begins with nine entities, which initially funded the tainted companies. Sebi calls these the 'funding group'. Soon after the first SME platform on one of the exchanges went live in March 2012, this funding group began preparing the four companies namely, Eco Friendly Food Processing Park (Eco), Esteem Bio Organic Food Processing (Esteem), Channel Nine Entertainment (CNE) and HPC Biosciences (HPC). While CNE is into production of television serials and media, others are engaged in agriculture and allied activities. They were making meagre profits on mediocre revenues.
In May 2012, Goldline International Finvest, a funding group entity, was allotted fresh shares in ECO (worth Rs 20.25 lakh) and Esteem (Rs 30.26 lakh) on preferential basis. Goldline also received fresh shares in CNE in two tranches for about Rs 5 crore. Goldline was a substantial shareholder in these entities even before the allotment.
Similarly, HPC made preferential allotments to three funding group entities called Mayfair Infosolution, Alltime Buildtech and AMS Powertronic. Immediately after issuing shares on preferential basis, Eco, Esteem and CNE issued bonus shares in the ratio of 1:3 and HPC issued bonus shares in the ratio of 1:1. As a result, the share capital of these companies increased manifold.
As the four companies were ready to list, Goldline and others transferred the shares, which they held in physical form to hundreds of other entities. Sebi called these entities as pre-IPO transferees. "Thereafter, all the companies came out with IPOs and the entities belonging to Funding Group funded substantial portion of the IPOs. IPO proceeds of respective IPO were immediately routed back to the entities of the Funding Group by the concerned companies and thus they financed their own IPO and allotted shares without receipt of consideration to the extent they returned the subscription monies to the Funding Group from IPO proceeds," said the Sebi order.
The four companies collectively raised Rs 46.53 crore from the IPOs, out of which a total of Rs 30.06 crore (64.60 per cent of total IPO proceeds) were transferred back to entities belonging to Funding Group either directly or through layering, Sebi found.
The respective companies had actively concealed the deviation in utilisation of IPO proceeds as they deliberately did not make any disclosures as required under Clause 46 of SME Listing Agreement.
Here comes the role 27 entities with inter connections through family relations, common directors, etc.
Sebi calls these entities the trading group. Once the shares were listed at the exchange, Trading Group entities started pushing up the price of the scrip through manipulative trades and increased the prices of the scrips astronomically. Trading Group entities consistently placed 'buy' orders at higher prices than the last traded price in four fundamentally-weak, newly-listed companies.
After the expiry of the lock-in period, the Trading Group entities further purchased shares from preferential allottees and pre-IPO transferees at artificially increased prices. In the whole process, entities of the Trading Group provided a hugely profitable exit to the preferential allottees and pre-IPO transferees.
Consequently, all the preferential allottees and pre-IPO transferees have collectively made a profit of Rs 614 crore, the Sebi order said. Of these, 186 entities made a profit of Rs 1 crore or above. This was termed the 'short listed group' by Sebi.
Apart from the four companies, the funding group, the trading group and the shortlisted group, Sebi banned 13 individuals who were promoters and directors of the four firms taking the total number of banned entities to 239.