MUMBAI, June 15: The fund-raising exercise through premium/par issues by finance companies in the last two years has turned out to be a bigger scam than the CRB Capital Markets affair with investors losing thousands of crores in dud issues of such companies.

Even though the Sensex has now crossed the 4,000 level, finance company shares are going abegging. Investors who put money in finance companies in the last two years have lost heavily with most of these shares quoting below the face value. In 1995 and 1996, as many as 869 finance companies launched public issues, collecting nearly Rs 12,000 crore. ``Not a single finance company is quoting above the issue price. Most of them (over 40 per cent of finance firms) are traded between Rs 1 and Rs 5. Even top finance companies which floated high premium issues are quoting much below the issue price. Millions of investors are quietly suffering in the new issue scam involving finance companies,'' said an analyst.

Significantly, in 1996 alone 418 issues were made by finance companies, accounting for 35 per cent of the total number of issues. These companies raised Rs 6228 crore from the public, accounting for 55 per cent of the total amount, according to a study by Prime Database. With many of these finance companies closing down their operations, there is no way their shares will recover on the bourses.

Estimates by leading brokers have it that investors had lost nearly 70 per cent of the amount -- roughly Rs 8,000 crore -- they invested in 1995 and 1996. As a matter of fact, investors have seen their investment depreciating steeply in every finance company which came out with public issues. This includes leading finance companies like Reliance Capital, Khandwala Securities, Kotak Mahindra, Prime Securities and Escorts Financial.

Reliance Capital, for example, came out with an issue at a price of Rs 140 per share. However, this scrip is now quoting at Rs 49.75. Escorts Financial, another leading company, floated an issue at a price of Rs 60 per share. But this scrip is now quoted at Rs 29.95. Times Guaranty issued shares at a price of Rs 70 per share. This has now fallen to Rs 5.95.

If this is the case with leading finance companies, one can imagine the plight of investors in hundreds of small finance companies. As a broker put it, ``it is doubtful whether investors can recover their investment in finance companies. Many such companies have disappeared after collecting money. Hundreds of finance companies are quoting at Rs 1 and Rs 2. Even if the stock market booms, shares of only some reputed finance companies will appreciate. Others will remain like this as they are not doing business.''

A study on finance companies has revealed that not even half of 869 companies which floated public issues in the last two years are quoted on the stock exchange on a daily basis. A good number of them have not been traded on the Bombay Stock Exchange in the last six months. For example, companies like Brilliant Finance, Credential Finance, SSL Finance, Shematic Finance, SI Capital & Financial Services, Rose Investment, IMF Finance, Jumbo Finance, Choice Financial Services and Analysis Finance were not even traded once in the last six months.

This being the case investors cannot hope to get any dividend from such companies. A section of merchant bankers demand that SEBI should investigate the whereabouts of finance companies which floated issues in the last two years. Stock exchanges like BSE can also chip in by taking action against such firms which have not finalised the annual accounts.

Finance companies are expected to take further beating on the stock exchanges in the wake of the CRB Capital Markets scam. Not only finance companies are finding it difficult to mop up money through fixed deposits, the depression in the primary market has affected their merchant banking business. Of the total 1162 merchant bankers under different categories, as many as 720 did not handle any assignment in 1996-97. Huge amounts of finance companies are locked up in inter-corporate deposit (ICD) market and bought-out deals.

Similarly, the underwriting business -- taking up under-subscribed portion of public issues -- of finance companies was also affected severely. The underwriting business which was Rs 9,086 crore in 1994-95 failed to cross the Rs 1,000 crore marke last year. According to SEBI chairman D R Mehta, as many as 130 merchant bankers (finance companies) are facing SEBI action following their failure to meet underwriting commitments.

A section of merchant bankers blame SEBI for the liberal new issue norms for the entry of hundreds of weak finance company issues. In a bid to prevent fly-by-night operators (mainly finance companies), Securities and Exchange Board of India tightened the norms for floating public issues in early 1996. Had the SEBI introduced these norms one year earlier, the number of issues by finance companies would have fallen from 493 to only 59 in the financial year 1995-96. Now a shakeout is expected in the financial services sector following the RBI's insistance that finance companies should register with RBI. It is to be seen how many of the companies listed on the bourses will register with RBI.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.