Vaswani IPO Scam

Vaswani Industries Limited’s IPO

Arpit Jain | Kirti Gehlot | Rishi Kashyap | Sonu Yadav | Soubhic Saha |

Group 7 | Management of Financial Services | PGP 24

 Vaswani Industries Limited - Background

Incorporation Decline in Revenue and Profit

Vaswani Industries Limited (VIL), established in During the FY 2010, the revenue of the company
Raipur, Chhattisgarh, India, was incorporated on July declined to Rs. 985.15 million from 1509.25 million
22, 2003. Vaswani Group of Industries was parent c in the FY 2009 and PAT fell to Rs. 36.82 million in
the FY 2010 from Rs. 40.89 million in the FY 2009.

Core Businesses Expansion in Capacity

VIL engaged in the integrated business of The company expanded its sponge iron production
manufacturing Sponge Iron, Steel Billets & Ingots, line capacity to 90000 metric tonnes (MT) in 2010
and captive power generation. from 60000 MT.

Underutilization increase in Loan Burden

The company could not achieve its full production The company’s secured loan burden grew to Rs.
capacity of sponge iron and steel billets since 2008 520.39 million from 399.48 million in 2009.
to 2010.
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VIL Strengths
● India is the largest producer in the world
with a total production of 20.96 million
tons as of 2009.
● VIL expanded into Madhya Pradesh,
Maharashtra, Chhattisgarh, and
Uttaranchal in sponge iron and steel
billets & ingots. The company could
become market leader in the long term.
● Management maintained a good
relationship with employees and the
company did not face any strikes, lock-
outs, or any labor protest since its
inception till 2011.
Bad Rating
● ICRA gave a rating of Grade 2 for VIL’s
IPO issue, which indicated that the
company’s fundamentals were below
average.
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IPO Facts
Plan to Raise Funds
Book Building Process
● VIL planned to raise funds to
disburse the loan amount of Rs.
● April 29, 2011, VIL came up with an IPO
243.75 million and required Rs.
for 10 million equity shares with a face
174.7 million for Long Term Working
value of Rs. 10, in the price band of Rs.
Capital Requirements.
45 to Rs. 49.
● VIL planned to raise funds of Rs.
● The issue was made through a 100%
450 to 490 million through an IPO
Book Building Process.
from the primary market.
● the IPO was subscribed by 4.16 times.
● BRLM) arrived at an issue price of Rs 49
per share and securities were issued to
Fundamental Analysts eligible investors by May 10, 2011
Recommendations
● MLR Securities has recommended
avoiding the issue, citing small size
of operations, weak fundamentals
and expensive valuations
● the company is asking for a P/E of
23-25 times its FY11 which is very
expensive compared to peers like
Godawari Power and MSP Steel &
Power.
 Mechanism of Scam

Creating False Demand:

On first day, Subscription was recorded 0.95 times

On second day, IPO was subscribed by 1.26 times
On next day, IPO was subscribed by 4.16 times

Then the IPO’s demand was inflated by non-institutional bidder category(Eight sub syndicate member), then it
was subscribed by 11.29 times
The order was cancelled before the allotment process just after that the subscription of isse dropped from
4.16 to 1.28 times. False demand of IPO was created in the market.
The huge demand was misinterpreted by the retail investors and they participated in IPO. They got shocked
when they were allotted more shares.

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 Actions taken by SEBI

SEBI’s Investigations & Actions:

SEBI banned all the sub-syndicate members of issues who used several methods to inflate the demand
by misleading investors
SEBI took decision to stop listing of shares on BSE and NSE and did proper investigation and it was
found that sub-syndicate members didn’t submit the cheques relating to the shares they applied for. The
amount was 63.92% of total issue, i.e. Rs.313,209,960.
The major role played to inflate the IPO demand by Karvy Stock Broking Limited and Rikhav Securities
Limited, they inflated demand by placing bulky orders afterwards the order was canceled and withdrew..
Nine companies of the Bajaj Consultants Private Limited groupe made for 42.86% of total IPO size and
the supporting cheques could not encashed as they have given the instructions to Banks. They inflated
demand by 10%.
SEBI instructed the bankers to deposit the collected IPO amount in their accounts.
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 Vaswani’s Management Moves to
Securities Appellate Tribunal

May 18, 2011,

Sebi issued notices to exchanges to withhold the listing of Vaswani’s IPO till
further instructions. Sebi received several complaints from investors regarding
irregularities in the subscriptions and it decided to inquire into the matter.

July 12, 2011,

On Sebi instructed the merchant banker of the IPO to offer a limited exit option to
retail and other non-institutional investors
July 22, 2011
,Vaswani Industries Limited filed two cases with SAT, Mumbai, against SEBI’s
order. The promoters of the company denied their involvement in the subscriptions
and requested that SEBI’s order to the company to give the withdrawal option to
HNI and retail subscribers of the IPO be vacated immediately as it violated the
provisions of the Companies Act 1956.

August 23, 2011

On August 23, 2011, Vaswani Industries agreed to give withdrawal options to RIIs
up to a maximum of 1.519 million shares.
October 24, 2011
Vaswani Industries drops 74% on Day 1. the scrip opened at Rs 33.7 a share which
was also the highest price of the day. It touched a low of Rs 14 and closed at Rs
6 17.8 to a share. The issue price of the stock was Rs 49 a share
 Key Learning from the Vaswani IPO Scam

How can these scams be avoided in nowadays?

Stringent Regulators & Thorough Investigation

Implementation of Justice Wadhwa Committee : SEBI unearthed & Investigated several Irregularities in
IPOs from 2005 and to prevent these irregularities in future.

Applications Supported by Blocked Amount (ASBA):- is a process developed by SEBI for applying to
IPO,Rights issue, FPS etc

To rein in misuse of the initial public offering (IPO) proceeds, the capital markets regulator Securities
and Exchange Board of India (Sebi) has set to have a separate specialised department, which will detect
possible irregularities in the utilisation of net proceeds and even do forensic accounting of such firms.

In the interest of attracting more investors to the stock market, SEBI ensures that companies do not use
IPOs as a one-time, fund-raising exercise with a plan to avoid accountability and compliance through the
7 best available delisting opportunity.
THANK YOU !