Jewelry is displayed for a photograph at a Gitanjali Gems Ltd. Giantti store in Mumbai, India (Photographer: Dhiraj Singh/Bloomberg)

SEBI Approved Gitanjali Group Firm’s IPO Despite Probe Against Promoter Choksi 

India’s market regulator approved the initial public offering of a Gitanjali Gems Ltd.’s subsidiary despite an ongoing probe into alleged trading violations by promoter Mehul Choksi, now named in the Rs 13,000-crore Punjab National Bank fraud.

The Securities and Exchange Board of India gave the final observation in June last year, paving the way for the IPO of Nakshatra World Ltd. within three months of the application was filed, according to the regulator’s website. The approval came even when the regulator had not closed a five-year-old probe against Choksi and others for fraudulent and unfair trade practices and violation of takeover code, details of which were disclosed in IPO prospectus. The company didn’t launch the Rs 650-crore offer eventually.

The regulator should “ideally not” have approved the offer when investigation was underway against the promoter, said JN Gupta, managing director at investor advisory firm Stakeholders Empowerment Services Ltd. “But we are not living in an ideal world.”

Gupta clarified that final observations per se don’t mean the IPO is cleared as SEBI does not explicitly approve or reject an IPO. It gives its observations which are updated weekly. And a final observation is the last step before the offer. “The merchant bankers have to respond to all points raised by SEBI before the offer opens.

Choksi, and billionaire jeweller Nirav Modi and his firms are accused of allegedly obtaining loans on fraudulent guarantees issued through the Punjab National Bank’s system in connivance with some of the bank’s employees. Both have left India and the government has suspended their passports. It’s seeking help from overseas agencies in the probe even as Enforcement Directorate has frozen their assets.

The market regulator is normally cautious in approving IPOs, said Amit Tandon, co-founder and managing director at Institutional Investor Advisory Services. The National Stock Exchange and Vishwaraj Sugar Industries Ltd. bear testimony to it.

SEBI didn’t issue the final observation to the NSE pending policy and regulatory issues stemming from a probe into its co-location services. The regulator also held back the approval to Vishwaraj Sugar Industries Ltd., keeping it in abeyance “for examination of past violations”.

The status on SEBI website for Nakshatra’s IPO stays as “final observations”. BloombergQuint’s emailed queries to SEBI on the issue remained unanswered.

Nakshatra World, formerly known as Gitanjali Brands, filed its application on March 14, 2017 and the regulator issued the final observation on June 9, 2017, SEBI disclosed on its website. The regulator updates the status on a weekly basis.

The book running lead managers for the issue were IDBI Capital Markets & Securities Ltd. and Elara Capital (India) Private Ltd., while Shardul Amarchand Mangaldas was the Indian legal advisor and Ford, Rhodes, Parks & Co. LLP, a Mumbai-based firm, was the statutory auditor.

Emailed queries to the merchant bankers, the law firm and the auditor seeking clarity on due diligence remained unanswered.

SEBI’s Probe

In 2012, SEBI alleged that Choksi and others violated at least four provisions under the SEBI Act, Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market Regulations of 2003, Takeover Regulations of 1997 and the Takeover Regulations of 2011, according to Nakshatra’s draft red herring prospectus.

Choksi and 22 entities, the regulator alleged, also traded in the securities of Gitanjali Gems contributing to significant volumes and, in the process, breached the position limits in the derivatives segment.

Choksi also didn’t make a public announcement when he acquired a 5 percent stake in Gitanjali Gems. The takeover code mandates promoters to disclose if they acquire shares of their company from the open market.

Moreover, regulations restrict a promoter from buying more than 5 percent in a financial year. If the cap is breached, it becomes mandatory for the promoter to come out with an open offer to the minority shareholders.

SEBI issued a show-cause notice against Choksi and others on Oct. 26, 2012. And though Choksi responded in July 2016, the regulator is yet to complete the investigation.

The Offer

Nakshatra, 99.99 percent owned by listed Gitanjali Gems, planned to raise close to Rs 650 crore by issuing 1.8 crore fresh shares, valuing the company at close to Rs 2,230 crore. This according to media reports as the prospectus did not disclose issue size except to say 1.80 crore shares were to be on offer.

It planned to use Rs 300 crore from the proceeds to fund working capital requirement of the company and its subsidiaries like Nakshatra Brands and GILI India. The remaining amount was meant for general corporate purposes.

(Updates an earlier version after JN Gupta of Stakeholders Empowerment Services added to his statement. Also clarifies that information on issue size is based on media reports.)