The game's afoot: Kolar Biotech's HQ at Mumbai's Dadar suburb

1994 Kolar Securities incorporated 1998 Name changed to Kolar Infotech; to focus on IT 2003 Name changed to Kolar Biotech; Rs 25 crore IPO planned

Initially, the company was incorporated as a finance company in 1994. Later on, from 7th September 1998 onwards, its name was changed to Kolar Information Technologies Limited and it started the business of information technologies. But again on 27th March 2003, the company has changed its name from Kolar Information Technologies Limited to Kolar Biotech Limited and focussed on an altogether new business of biotech products."

Excerpts from the IPO prospectus filed with Securities and Exchange Board of India by a Mumbai-based company, Kolar Biotech.

This is the remarkable story of a corporate chameleon. Last fortnight, Vinod Hingorani, Chairman of Kolar Biotech, could not be traced; his telephones went unanswered and attempts to contact him at his offices came to naught. After several attempts, BT managed to get an appointment with Kolar's Company Secretary. Winding our way through the dingy lanes of Hindu Colony, a residential area in Dadar, a Mumbai suburb, we finally found the office in a dilapidated, old building. We were led to the conference room in the second floor, where another group company, Adam Comsof, has its offices. Adam Comsof, incidentally, used to be a software company, which made an IPO in 1993, but now is a registrar and share transfer agent besides being Kolar's promoter.

We wondered about Kolar's unique business model: mercurial changes of not only a company's name but also its business activity. Amit Sohni, the 30-something Company Secretary, had a simple explanation: "We respond to the changing business climate; biotech is hot, so we decided to get into this emerging sector." Kolar wants to raise Rs 25 crore from the primary market and use the money to set up a research facility coming up in Navi Mumbai. This is the first biotech venture of the 10-year-old company whose promoters do not have the background or experience in the biotech sector. Nor has the company recruited any professionals for the project. Shorn of niceties, you could say Kolar is raising funds for a project that is still just on paper. And given its track record, don't rule out the possibility of yet another change in its business or even name. Kolar Nanotech, anyone?

Kolar's may be among the most audacious IPOs slated for the markets, but it certainly isn't alone. Of the 20-odd IPO offer documents currently awaiting approvals from the Securities and Exchange Board of India (SEBI), at least 18 are from small and virtually unknown companies (those raising Rs 25 crore or less). Their businesses range from rice milling, floriculture, cold storage, and road construction to infotech and pharma. Sample some bigger numbers. Out of the 600-odd companies that have announced intentions to go in for IPOs (to together raise an estimated Rs 50,000 crore), 80 per cent are small firms, says Prithvi Haldea, Managing Director, Prime Database, which tracks IPOs.

Lure Of The Market

Yes, there's a boom in the primary market and a host of companies are-and rightly so-taking this opportunity to raise money (See Hot Offers Of 2004 on Page 90). After all, that's what the capital market is for. But just how many of them could be of Kolar's ilk? For a basis to our paranoia, here's a flashback from not so long ago. Between 1994 and 1997, more than 3,000 public issues raised more than Rs 19,500 crore from the market. According to SEBI's own estimates, more than 100 of them have vanished with investors' money. But the Mumbai-based Investors Grievances Forum's secretary Vipul Modi says there could be more than 300 companies (or over 10 per cent of those who raised money) that may have diverted funds that they raised from the market.

The primary market's revival began with the Maruti issue in April 2003 being oversubscribed 13 times. Since then there have been at least six high quality IPOs, many of them-like Indraprastha Gas and TV Today Network-oversubscribed several times and debuting at a premium of 100 to 200 per cent. To be sure, all the major IPOs in the past year are traded at levels much higher than their issue prices. Then why the apprehensions?

For a simple reason. It's the rotten eggs that can spoil the fun. Take the ingenuous Kolar Biotech. While its credentials as a biotech company may be suspect, its promoters too don't have a clean enough track record. Just three years ago, SEBI had conducted investigations against the then chairman of Kolar (just to recap, it was still an infotech company then!), Rajkumar Basantani, for manipulating the shares of another company, Soundcraft Industries. SEBI also restrained him from trading in securities for three years. Although Basantani has now resigned from the board, insiders say he still has a 10 per cent stake in Kolar Biotech and 25 per cent in Adam Comsof, the software company, which is now a share registry and a promoter of Kolar. The connection gets murkier. When BT was trying to contact Kolar's current Chairman Vinod Hingorani, one of his contact numbers was traced to a Mrs. Basantani.

For the heck of it: The HQ of I-Power Solutions in Chennai's Adyar neighbourhood

When the market booms, investors often exhibit irrational exuberance. Thousands of kilometres away from Dadar's Hindu Colony, up north in Chandigarh, is the headquarters of Surya Pharmaceuticals, whose IPO to raise Rs 13.5 crore opened in December 2003, was oversubscribed 12 times. And that despite this blasé declaration in Surya's prospectus: "All the group companies have been running losses and there have been no operations carried out since inception in most of these group companies." But the IPO (at a price per share of Rs 45) was oversusbscribed and the share currently trades at Rs 50-levels on the National Stock Exchange (NSE). Then there is I-Power Solutions, which is already a listed company, but floated an offer for the sale of 1.1 lakh shares just to comply with the NSE requirement of reducing the high promoter stake, and is not bothered if it is subscribed or not. Says Kirit Somaiya, BJP MP and a long time investor activist, "Whenever there is a bull run, bogus companies come in and make a killing."

Protecting The Investor

A fool and his money are easily parted. If after reading its prospectus about Kolar's ever-changing identity, investors still want to put their money in its stock, good luck to them. After all, it is a free market. Yet, there are popular perceptions that the regulator, SEBI, is more pro-active in the secondary market than the primary. In fact, that is not really true. Instead of fixing the issue price and sitting in judgement on promoters and their credentials, SEBI says it has evolved systems to make sure that investors are taking informed decisions. For instance, if a company doesn't meet the stipulated conditions, it has to go through the book-building route, where prices are determined by the market.

The problem is every so often the investor is uninformed. Few retail investors study prospectuses in detail. And small, relatively unknown companies are unlikely to be tracked by equity analysts. While pre-issue analyst reports were available for IPOs of reputed companies like i-flex, IGL and TV Today Network, analysts don't track companies like Kolar or the Hyderabad-based Chakkilam Infotech, whose issue closed on January 23. "I haven't even heard of these companies," says a Mumbai-based equity analyst.

While some believe SEBI should subject IPOs to more scrutiny, merchant bankers also have a role to play. IPOs from obscure companies are usually managed by equally obscure merchant bankers. Kolar's lead manager is KJMC Global Market, a virtually unknown name. Says Ajay Sondhi, Vice Chairman and Managing Director, Kotak Mahindra Capital: "It's the responsibility of the merchant bankers to ensure that they are managing quality IPOs." Sondhi advises investors to not only look at the company's track record but also that of its merchant banker. IPO tracker Haldea's advice to small investors: "Stay away from all IPOs unless they are from a good PSU and at a reasonable price."

Still, not all small companies strike it lucky. Hyderabad's Weal Infotech floated its second public issue to raise Rs 13.9 crore in October 2003 but quickly pulled it back mid-way. According to company President Reddy Sai Babu, "The commitment schedules of US clients were not in tandem with the public issue schedule and this led to the withdrawal of the IPO," but market circles say this gobbledygook really means "under-subscription". For Babu, it may have been second time unlucky, but small investors meet such misfortune more often.

-with inputs from Shilpa Nayak, Nitya Varadarajan, and E. Kumar Sharma