Thursday, January 11, 2018

Excerpts from the book Bulls, Bears and Other Beasts: MS Shoes Scandal

This is an excerpt from the fascinating book 'Bull, Bears and Other Beasts' written by Santosh Nair.

I remember reading about, and not understanding anything, about MS Shoes Scandal that effectively started the stock market correction of 1995. From the book....

---Meanwhile (in 1994) the party in the the primary market continued. Junk companies and their dubious promoters were having a free run, with the underlying strength in the economy giving investors the confidence that the best was yet to come. Then in February 1995, investors got their first reality check as to the quality of companies and promoters that were raising money from the market. The botched MS Shoes public issue revealed how easy it was for promoters and merchant bankers to hoodwink the regulator. Worse still, the episode also exposed the lax oversight by SEBI in this particular case, and the corruption within its ranks.

The Pawan Sachdeva-promoted company wanted to raise Rs.700 crore to fund a hotel project and a yarn project. It decided to make a composite public issue-cum-rights share offering. The public issue was for fully convertible debentures - bonds that could be converted to equity later on. 

MS Shoes was already listed, and the promoter, in collusion with associate brokers, ramped up the stock price to charge a hefty premium for the issue. Shares of MS Shoes climbed from Rs.268 in July 1994 to a record high of Rs 505 by January 1995, thanks to rampant manipulation by brokers backed by Sachdeva. When the stock price of MS Shoes collapsed, the brokers who were buying on behalf of the company could not meet their pay-in obligation to the stock exchange. The BSE had to be closed for three days as the exchange officials sorted out the mess caused by defaulting brokers. Sachdeva was raided by the taxmen, and soon after arrested by the CBI. FIRs were filed against two officials of SBI Caps, the merchant banker to the issue and three senior SEBI officials.

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