Raising capital made easy

Are you a first-time entrepreneur who needs Rs 100 crore to fund a new business idea? Sorry, none of the legitimate routes of capital-raising may be open to you today.

The primary market is all but dead to you, given how skittish even institutional investors are about funding an untested business. Banks, still weighed down by earlier bad loans, will think twice before betting on an unknown entity. Private equity investors may prove reluctant too, given that they are yet to make a respectable return on their earlier bets.

But if you aren’t overly scrupulous and are willing to exploit loopholes in law, there is a tried-and-tested model to capital-raising, distilled from the recent scams. Unorganised financial firms such as the Saradha group and Sahara group have shown just how easy it is to raise prodigious amounts of retail ‘capital’, at minimal cost to the promoter. That too, without bothering about financial statements, offer documents or pesky questions from regulators.

Who am I?

The first step to raising public money, without attracting unwanted attention from the numerous regulators, is to keep your identity delightfully vague. Make sure that you are not a listed company, a mutual fund, an insurance company, a finance company or even a chit fund. Holding yourself out as any of these would require you to register under the relevant authority, bringing with it the many rules and regulations that govern lawful capital-raising.

Instead, call yourself Tulip Valley, MK Greenery, Satya Realty, or XYZ ‘group’. Then, the onus will immediately shift to the regulators to prove that you do fall under their jurisdiction. That is likely to take a long, long time at the Indian courts.

While taking on the Sahara group, SEBI had to fight a legal battle all the way to the Supreme Court just to establish that it did have powers to regulate unlisted entities raising public money. The same drama is now playing out with the Saradha group, which appears to be neither a chit fund nor a finance company.

It's Complex

Ensure that the instrument through which you raise money is neither a share, nor a bond, nor a deposit, but a hybrid that defies any of these descriptions. The trick is to assert that it is not a ‘security’ at all, so that the onerous securities market laws about public offers or disclosures simply cannot apply to it.

The Sahara firms collected upwards of Rs 19,000 crore through the issue of ‘Optionally Fully Convertible Debentures’ which could be converted into shares in unlisted group firms. Saradha Realty collected monthly ‘advances’ from its investors against promises to allot land or apartments in a span of one to 10 years. Earlier, financial scams have seen willing buyers shell out similar ‘advances’ in the hope of fabulous returns from potato fields, orchards and emu farms.

SEBI has been trying to regulate such fund-raisers as ‘collective investment schemes’, essentially those which are managed by a third-party on behalf of retail investors who pool their money. But though this sweeping definition seems to cover all sorts of money-making ideas, SEBI has been fighting an unsuccessful battle, since 1999, to prove that the scores of plantation, teak, emu and realty schemes in operation, are indeed collective investment schemes!

Celebrity endorsements

You may have a business idea, but what about the track record or financials to back up your ambitious plans? Don’t fret. When it comes to assuring gullible investors of your credentials, celebrity endorsements work much better than 400-page offer documents, with all those disclaimers.

Want to gain overnight respectability? Sign up the entire Indian cricket team to endorse your brand. Millions of viewers must see it proudly displayed every time a ball is bowled. If the national teams prove too expensive, you can always get a local club or an IPL team to use your logo.

Once you are rolling in money, you can supplement this with full-page advertisements outlining all the social causes that you support. Or, better still, buy a strategic stake in an entire media outfit, to blow your trumpet.

Don’t skimp on incentives

Once your business plan is ready, your fund-raiser is all set to hit the roads. But where do you get the distribution network to reach out to those multitudes?

Well, avoid formal distribution channels, particularly in the cities, and head for the rural hinterland instead. Your first step is to identify the ‘target’ markets, preferably small towns and villages, with minimal literacy levels and no banking facilities.

Then, recruit a large field force of local agents who are willing to verbally market your scheme to unsuspecting locals.

Setting up this ‘distribution network’ need not cost you anything, as the agents can have their cut out of the monies collected.

Only ensure that you don’t skimp on those commissions; they can be as high as 25-30 per cent of the collection. Leave wafer-thin commissions of 0.5 per cent or 1 per cent to the mutual funds and small savings schemes.

While collecting that money, do remember to go easy on the paperwork. After all, everyone knows that rural folk don’t have PAN cards or even a permanent address. Addresses aren’t all that critical anyway, given that you don’t plan to return the money.

Once you have raised enough retail money to fund your business aspirations, it may be useful to get some political patronage, just as a sort of insurance.

Why not supplement your purely retail business, with a money-laundering operation for a few big politicos? That may deter the local police or other regulators from asking uncomfortable questions.

Following this ‘business model’ should ensure that your business survives and even thrives for many years. With a diversified business empire, a large cash hoard and political favour on your side, unravelling this empire may prove a Herculean task even for the most pugnacious of regulators.

It will require truckloads of evidence and a legal battle fought all the way to the country’s apex court. Even if someone proves so persevering, you can still hire a good lawyer and stall the proceedings throughout your lifetime.