Be wary of private placement offers in little-known firms

It's a new modus operandi of scamsters to dupe investors, warns Sebi

Retail investors, who are wary of stock market volatility and find fixed deposit returns low, have been falling for dubious schemes that promise high fixed guaranteed returns.

A recent trick by scamsters is to issue securities such as non-convertible debentures and non-convertible preference shares in the garb of private placement. Marketed as deposit schemes, these companies promise investors returns of 18-25 per cent a year. In return, they issue debentures or preference shares.

Another trick is that the company shows it has hotel properties across geographies. An investor can either take the high interest rate offer or stay in one of the properties. Gullible investors obviously choose the former.

The stock market regulator is coming down heavily on such firms. So far in 2015 itself, Securities and Exchange Board of India (Sebi) has passed orders against more than 50 companies in such cases. Some of them include Polaris Agro Industries, Mangalam Agro Products Ltd, Mega Mould India Ltd, Alchemist Holdings Ltd and PAFL Industries Ltd. Since January 2013, there have been actions against 112 such entities.

Surprised at the numbers, the regulator itself issued a warning: “Investors are also cautioned not to subscribe to such issues. Investors are advised to see whether any such entity has filed offer document or filed application with Stock Exchange for listing.”

According to the Companies Act, if a firm offers securities to 50 or more people, it is construed as a public offer and not a private placement. The latter is only made to selected persons whose names are recorded by the company prior to the invitation to subscribe. Such companies cannot even advertise or use agents to inform investors about the offer. And only 200 investors can be part of such placements in a year.

Experts said that as there’s little awareness about how these instruments work, the operators take advantage. However, there's little regulators can do about these companies until they default. These firms come under the regulation of ministry of corporate affairs (MCA) and registrar of companies (RoC).

"As long as they comply with MCA's guidelines, the regulator cannot initiate action," said a market expert. It's only after they default and investors complain that the probe starts. Sebi comes into the picture when these organisations raise money using instruments that comes under its purview. If you come across a preference share scheme, the first thing to do is look at the rate of dividends. Always avoid companies that promise assured returns that are too good to be true. No one can give 18 per cent and 24 per cent fixed annual returns.