BOMBAY, 7 October — Consider this. A petty robber operating in the crowded streets of Bombay gets imprisoned for having picked a pocket. He had robbed just Rs.175 and some loose change.

On the other hand, scores of promoters have robbed the Indian investors of millions of rupees and that too right under the nose of the authorities and have managed to go scot free! In both the cases, there is no doubt that robbing is the common factor and whatever be the amount, it is an offense. But then isn’t it unfair that some get caught for the pettiest while others, committing a greater sin are leading a luxurious life? Yes, the great Indian vanishing act has robbed investors off their hard earned monies and the offenders have not even been reprimanded, forget punitive actions. This trick, of vanishing companies is touted to be even better than embezzlement, forgery or manipulation of books.

Welcome to the myriad world of Indian capital markets where a company can tap the market for funds and vaporize into thin air! This happens right under the nose of the great “watchdog of India”, 7 October — the Securities Exchange Board of India (SEBI), that exist with the noble intention of “protecting the interests of the investors” and the Department of Company Affairs (DCA) that is supposed to lay down a framework of legal norms for proper functioning of India Inc.

SEBI identifies such companies as vanishing companies if they have not complied with specific provisions of the listing agreement and regulations of the stock exchanges, and are not physically traceable at the registered address mentioned in the offer document according to SEBI, as many as 175 companies listed their shares in bourses but vanished after a short span of time. Earlier, DCA had identified over 270 such vanishing companies last fiscal. While SEBI is dealing with listed companies, the DCA is looking at unlisted companies which had also mopped up resources through public deposits and other ways. Most of the companies in the DCA list were non-banking finance companies which mopped up deposits by alluring investors with high interest rates.

And what is SEBI doing about these “vanishing companies”? It has slapped notices on at least 88 dubious promoters of these companies, barring the promoters to access the capital market for the next five years. SEBI is also in touch with the Department of Company Affairs to take action against more than 60 vanishing companies.

One of the most industrialized states of the country, Gujarat, tops the list of states with companies that vanished after collecting money from the public. After collecting funds through public issues, these listed companies, most of them either finance-related or manufacturing companies, are not available now at their registered offices.

Delhi takes the second place in the list. Andhra Pradesh and Tamil Nadu follow. And unlike what others might tend to think, surprisingly, Maharashtra and West Bengal trail behind in this dubious distinction. According to March 2002 data, Delhi registered 319 companies, Tamil Nadu 193, Andhra Pradesh 135, West Bengal 117, Karnataka 115 and Gujarat 62. These seven states together accounted for 79 percent of the total number of companies registered during the month. Of the 1,651 companies, registered in March 2002, 504 were manufacturing companies, 454 financing, insurance, real estate and business services, 344 wholesale and retail trade, restaurants and hotels, 110 construction companies and 107 community, social/personal companies among others.

Vanishing companies have their own modus operandi. They spring up in times of boom and vanish when conditions turn hot. What is more disappointing is that such companies hit a peak in the boom and later bite the dust with huge market cap erosion. This has impacted investor confidence and impaired investment process. If one may recollect, the first set of conmen appeared in the boom of April 1992 and March 1996. During this period, Rs.891.20 billion was raised through 5,571 issues (including equity, rights and hybrid issues). The phase saw the boom of ‘NBFCs’, ‘nidhis’ and ‘plantation companies’ offering the moon to the investors. Most of these companies have now vanished from the face of this earth.

But investors did not learn their lesson well. They got duped once again in the boom of tech-led IPOs in 1999-2000. Once again, the modus operandi was same, the investors were the same, only the promoters had changed. Many fly-by-night operators changed the names of their companies with a prefix or suffix of software and raised money from the primary market. Some finance companies that had disappeared earlier resurfaced as software companies through reverse-mergers. And investors continued to get conned and the authorities continued to merely gnash their teeth and allow the robbers to rob. So what is the moral of the story ? You can be conned only if you allow yourself to be conned! Yes, that is true. Experience which is the best teacher, has taught us time and again that investors who get lured in by the prospect of getting rich fast, will always lose money. Follow the maxim of investment, — invest in sound companies with promoters who have a proven trackrecord, keeping a medium to long term prospect in mind. This way, you may not emerge millionaire overnight but at the same time, you do not run the risk of losing your entire capital and will continue to see the investment grow gradually.

And last but not the least, always remember — “Caveat Emptor” — meaning, buyers beware!