MUMBAI, July 2: Corporates are increasingly taking advantage of the loopeholes and slack regulations in the preference share issues and private placements. The number of such offerings and the amount mobilised has shot up in the absence of a proper regulatory framework.In fact, activity has shifted from the equity market to private placement of debentures and bonds and issue of preference shares as there are no guidelines to govern these two new routes. This suits the interest of companies as the Securities and Exchange Board of India (SEBI) has not framed any guidelines for issues so far. The flood of such issues in the last six months and the massive fund diversion by the CRB group through private placement has raised fears of misuse by corporates.Companies had already raised around Rs 4,000 crore through private placement of debt during the first quarter of the current financial year.This is on top of over Rs 19,000 crore mobilised from the private placement market in the previous financial year. Currently, SEBI is not vetting private placements by companies.C R Bhansali had used the private placement route several times to collect funds from investors. Two months before the CRB scam broke out, CRB Capital had issued bonds on a private placement basis and collected around Rs 20 crore. Even though SEBI chairman D R Mehta had indicated that SEBI would take steps to regulate private placements, it has not announced any step so far.In the meantime, companies are merrily making such bond/debenture issues.Similarly, companies have started going in for preference shares after the Finance Minister removed the double taxation on dividend in the last Union Budget.Preference shares, quasi-equity in nature, offer dividend benefits to the investors. At the same time, the risk to the investors is minimised as the rate of dividend remains fixed irrespective of the performance of the company.Over a dozen companies, including Atco Industries, Indian Seamless and Rallis, had raised money through preference shares in the last three months.``Issue of preference shares and private placement of bonds/debentures remain two grey areas.The market regulator has not yet come out with policy guideline on these two areas. With no rules and regulations for these two routes, it's free-for-all in these two routes. If things go like this another scam will break out soon,'' said a market source.If a company which issued preference shares fails to declare a dividend for two years, such shares will carry voting rights like ordinary shares. If this happens, it can lead to vital changes in the equity structure and management pattern.Now the situation is that anybody can come and float preference shares and private placement. Even though credit rating is mandatory for debt offerings, many investors have lost faith in rating after the CRB scam. CRB Capital Market which mobilised around Rs 180 crore from investors was given top rating by agencies.Till the scam broke out, CRB was considered as a top ranked firm. In the case of private placements, rating is not mandatory also.On the other hand, SEBI has stipulated hundreds of rules and regulations for equity offering by companies. The fact is that no company is coming forward to mobilise funds through the equity route.It is now almost two months since the CRB scam broke out, but the market regulator is yet to announce its policies on the matter.
