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After SEBI's red mark
September, 26th 2009

For a good part of Thursday and Friday, thousands of investors in one of the latest initial public offerings Pipavav Shipyard were blissfully unaware of backstage developments which would have had a major impact on their investments in the company.

On Friday evening, the Securities and Exchange Board of India, or Sebi, withdrew a letter directing Pipavav Shipyard, which had just completed its initial public offering (IPO) last week, to provide investors an exit option. The Sebi letter had cited the alleged involvement of three former employees of SKIL Infrastructure the promoter of Pipapav Shipyard in a case of insider trading.

The move came after the Securities Appellate Tribunal, or SAT, earlier on Friday stayed Sebis directive to the Gujarat-based company to provide investors, who had applied for shares in the just-concluded IPO, the option to withdraw their application, if they so desire.

But these legal manoeuvrings followed two days of drama, which were largely obscured from the outside world.
The Rs 495-crore initial public offering of Pipavav Shipyard which closed last week was a successful one being oversubscribed close to ten times and drawing in several institutional investors, including the storied California Public Employees Retirement System (CALPERs) and Commonwealth Equity Fund which signed up as anchor investors.

But major problems cropped up on Thursday, September 24, when securities market watchdog Sebi issued a directive to the lead manager to the issue, JM Financial, to provide investors an option to withdraw their subscription well before the allotment and the listing of those shares.

The regulators action against the company was in the context of an earlier order issued by it on September 22 which said three former employees of SKIL Infrastructure had indulged in insider trading.

According to this earlier SEBI order, three employeesHemant R Patil, Praveen Mohnot and N Ravichandran were allegedly involved in using unpublished price sensitive information at the time of acquisition of KLG Capital, which is tantamount as insider trading. The Sebi order fixed the disgorgement amount of close to Rs 5.3 crore on them or their employees.

After the order was issued on September 22, the regulator took the view that this amounted to a material change in the status of the case because of which investors ought to be given the option to withdraw their application if they wished to.

On Thursday the regulator told the company to issue an advertisement and to provide a ten day window, from the date of the advertisement, for investors to withdraw. The company was told that investors should be made aware of the material changes and given the option to withdraw, said an official on condition of anonymity.

Acting on the Sebi letter would have seriously jeopardised the issue - considering that investors might have well exited. The company then quickly approached the Securities Appellate Tribunal a quasi judicial body to which
companies and market players can appeal to against orders and directives is-sued by Sebi.

On Friday, SAT directed the counsel of Sebi to ensure that the regulator does not take any further steps to implement the directions in its letter to the lead manager on the public offering, said three people with knowledge of these developments. Further, the company was allowed to go ahead with the allotment process as scheduled.

Within hours of the SAT hearing, Sebi issued instructions to the lead manager - JM Financial not to act on its earlier directive - of offering investors an exit option in the next few days.

The company is now on track to complete the offer process. We undertook the IPO with the express intent to allot the shares to investors and we will do so as soon as we can said J P Rai,CEO,Pipavav Shipyard

When contacted Nikhil Gandhi, chairman of Pipavav Shipyard said that the company had received a communication from SEBI but declined to divulge any details as the matter is subjudice.

Senior executives of investment banks JM Financial, Citigroup and Enam who are handling this IPO confirmed the development. The SAT has already stayed the order, said one of the bankers. Once the SAT order is delivered to SEBI, the regulator needs to give a fresh instruction allowing us to go ahead with the allotment of shares and refund before October 1. We are hopeful of concluding the process by October 1, said the banker.

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