Yash Birla Banned From The Securities Market, Twice
Yashovardhan Birla, once heir to a business empire and now a wilful defaulter, has been banned from the securities markets twice in one month.
For most, that would be a rare occurrence; for Birla, these punitive measures are among several he has faced or faces as his family business crumbles around him. At last count Birla and several companies promoted by him were being investigated by the Serious Fraud Investigation Office, the Enforcement Directorate, the Economic Offences Wing of the Mumbai Police, the income tax department and the Securities and Exchange Board of India.
In just the last month, India’s securities regulator issued two separate orders against him, and several of his colleagues, for fraudulent and unfair trade practices in Birla Cotsyn’s GDR issue in 2009-10, as well as for inaccurate and deficient disclosures in the Birla Pacific Medspa IPO prospectus.
SEBI orders can be appealed at the tribunal or the Supreme Court, so the last word on these cases may yet be said.
But the modus operandi in both matters are worth noting. As is the impunity with which investors were misled. Allegedly.
The Self-Subscribing GDR Issue
Case 1: On Sept. 29, 2020 a SEBI order directed that Yashovardhan Birla, promoter and non-executive chairman of Birla Cotsyn (India) Ltd., cannot access the securities market, buy or sell any securities including mutual fund units, for a period of two years. His existing holding of securities, including MF units, will remain frozen for that time.
Three other directors of the firm face the same strictures—PVR Murthy for three years and YP Trivedi and Mohandas Adige for one year each.
In its investigation, SEBI found that the company facilitated subscription to its own Global Depository Receipts by pledging the receipts from the sale of GDRs as collateral to a loan taken by Vintage FZE, the only entity to subscribe to all 9.69 million GDRs.
In brief, here’s what happened as detailed in the SEBI order...
In October 2009, the Birla Cotsyn board of directors approves raising of funds via GDRs.
On Dec. 21, 2009 the board approves that a bank account be opened with Austria-based EURAM Bank for receiving GDR subscription money.
The board also authorises Murthy, a director, and another official to use the funds deposited in the bank account as security towards loans, enter any escrow agreement etc...
On Feb. 23, 2010, a Dubai-based company, Vintage FZE, signs a loan agreement with EURAM Bank to raise $24.99 million to subscribe to the GDRs.
On the same day, Birla Cotsyn enters a pledge agreement with EURAM Bank to provide security for the loan taken by Vintage.
On March 12, 2010, Birla Cotsyn’s account with EURAM Bank receives entire GDR proceeds of $24.99 million from one entity—Vintage.
On March 15, the board approves allotment 96,89,00,000 equity shares of Re 1 each underlying 96,89,000 lakh (9.69 million) GDRs.
I note that BCIL had pledged the GDR proceeds with EURAM Bank before issuance of the GDRs to secure the rights of EURAM Bank against the loan given by EURAM Bank to Vintage for subscription of GDR issue of BCIL.SEBI Order
The regulator found these facts were not disclosed by the company to its shareholders. Instead, the the company’s announcement regarding a successful GDR placement misled Indian investors to believe there was demand for the company’s shares among foreign investors. And that the capital raised via the GDR issue would be utilised for growth. This amounted to fraud.
SEBI rejected the argument that the case was filed more than a decade later, citing that getting financial information from overseas authorities was time consuming.
The regulator found that Birla, promoter and chairman; and Adige, a member of the audit committee; had approved the use of GDR proceeds as security against loans, contrary to their claim of being unaware about it.
The clincher: As this table in the SEBI order shows, Vintage repaid the loan bit by bit and the GDR proceeds were transferred to Birla Cotsyn’s accounts in the same bit.
The Shortest-Lived IPO Purpose
Case 2: In the Birla Pacfic Medspa Ltd. case, Yash Birla, the company and eight others, mostly directors and signatories to the IPO prospectus, have been restrained from accessing the securities market, directly or indirectly, for a period of two years. Another person has been barred for six months.
SEBI, in an order on Oct. 23, found that instead of using the IPO proceeds to set up Evolve healthcare centres, the company diverted around 50% as inter-corporate deposits to other Birla Group companies. Most of that money was never returned. A case of deliberately untrue and materially inadequate disclosures in the IPO prospectus.
In brief, here’s what happened as detailed in the SEBI order...
In June 2011, Birla Pacific raised Rs 65 crore via an initial public offering of 6.51 crore shares at Rs 10 apiece.
Birla Pacific had five Evolve healthcare centres then. As per its prospectus, it intended to use Rs 55 crore of the IPO money to set up some 50 more centres by 2013-14.
But, 12 days after signing the prospectus and four days after listing, the company’s board decided the business environment had turned adverse, the healthcare centres delayed. It then authorised the IPO proceeds to be transferred to group companies as inter corporate deposits or even offered as guarantee.
This even though the prospectus was clear—pending utilisation, the IPO money could only be invested in interest or dividend bearing liquid instruments.
In fact, in the Risk Factors section of the prospectus, Birla Pacific had assured investors it didn’t intend on providing any loans to group companies.
Of the Rs 31.54 crore handed out as inter-corporate deposits, only Rs 13.1 crore was eventually returned. Another Rs 6.32 crore of interest remained unpaid.
I note that had the possibility of deployment of IPO proceeds in ICDs of group companies of BPML in 5 days from receipt of funds from IPO, been disclosed in the Prospectus or even expressed as a possibility in the Prospectus, the IPO of BPML would have elicited a different response from the securities market. I note that the investors of BPML were misled because of the untrue and materially inadequate disclosures in the Prospectus.SEBI Order
But that’s just the main offence.
The SEBI order also notes allegations around strange listing day trades, doubling of share price and unsubstantiated advances paid out of IPO proceeds, the prosecution of which is separately ongoing.
In the IPO, shares were allocated to 2,976 entities—of which 2,966 were retail investors allocated 45.65% of the shares, five were qualified institutional buyers and five were high net worth individuals.
On the listing day itself, 2,205 of the 2,966 retail allottees sold their shares. As did all five HNI shareholders and two of the five QIBs.
The Birla Pacific share price rose 154% that day.
SEBI’s investigation alleges that Rs 14 crore of the IPO proceeds were diverted to fund purchases of Birla Pacific’s shares on listing day.
Also, Birla Pacific transferred over Rs 30 crore to several entities that it claimed were paid advance for interior design work or equipment, none of which checked out as per SEBI’s investigation. None of it was returned.
SEBI rejected the argument of a six-year delay in pursing the case, saying that the law allowed it. While Birla again claimed that he was unaware of details since he was a non-executive director, the regulator found that he and the other directors had approved financial statements on utilisation of IPO proceeds even though they themselves had deferred the setting up of clinics. And, the independent directors were in fact tasked with monitoring the use of IPO proceeds.
Well, at least that’s what the prospectus promised.