Business Week Online has some negative comments on the East India Company Acquisition filing:
JUNE 26, 2006
Investing
By Pallavi Gogoi
East India's Iffy IPO
"Blank check" public offerings are always risky. This one could be even more so
At first blush, East India Company Acquisition, which filed for its initial public offering on June 13, sounds like it could make a promising investment. After all, in its filing with the Securities & Exchange Commission, the company says it will identify and invest in business opportunities in India.
Investors have been lining up to bet on the country's deep, low-cost labor pool, which has helped fueled the Indian economy to red-hot 9% growth in 2006. "We believe that the future potential of the Indian economy and current market conditions present favorable opportunities for acquisitions of Indian companies," the company said in the SEC filing.
The deal is what is known as a "blank check" IPO. These are offerings in which a company with few or no assets tries to raise money from public investors so that it can buy its way into some promising field. Although considered quite risky, such offerings have become extremely popular (see BusinessWeek.com, 3/23/06, "Are Blank Checks Bouncing Back?"). In March, Steve Wozniak, co-founder of Apple Computer (AAPL ), and several other executivess raised $142 million for their blank-check company, Acquicor Technology (AQR ).
10 HOURS A WEEK. East India is looking to raise $36 million from investors. Shares are being offered at $6 and are being underwritten by New York investment bank and brokerage firm EarlyBirdCapital, a leader in the business. A date hasn't been set for the IPO.
But this is a blank check that may give some investors pause. The company's prospectus filed with the SEC reveals a number of factors that could give potential purchasers cause for concern. Among them: The top executives, Chairman Dipak Nandi and CEO Kary Shankar, say they won't be spending any more than 10 hours a week on the venture. Nandi will use investors' money to pay $7,500 in rent per month for two years (for a total of $180,000) to one of his own affiliated companies. And while shareholders are supposed to buy the stock at $6, Nandi's father was able to buy 900,000 shares just three months ago, as did CEO Shankar and a few other top executives, for a mere 1.67 cents each.
What may be of even more concern is what East India has not included in its SEC filing. In 2001, Nandi was sued for fraud by three major insurers: Allstate (ALL ), Encompass, and Progressive (PGR ). The $36 million lawsuit charged that Nandi, a physician, and three others had established a network of 26 doctors, dentists, chiropractors, acupuncturists, and other health-care professionals to stage accidents, overbill, bill for services that were not provided, and perform unnecessary treatments.
IS IT MATERIAL? Nandi was never found guilty of any wrongdoing and he denied the charges. The following year, he countersued the companies for defamation of character. And a year after that, Nandi and the insurers reached a settlement, ending both the defamation and fraud suits. The exact terms of the settlement were not disclosed. Numerous calls to Nandi's office for the physician's version of the events were not returned.
The securities laws give certain guidelines for what needs to be disclosed in such filings. The SEC requires that officers and directors of the company reveal legal involvement if, in the past five years, they have had a criminal conviction, conducted securities fraud, or have filed for bankruptcy.
However, the SEC also states that the officer or director that might have had a legal proceeding outside of these three areas can omit it only if they determine that such a disclosure is not material to the filing. "The question is whether the issuer thought that this prior litigation is material to investors in the new deal or not," says Raymond Check, partner at Cleary Gottlieb Steen & Hamilton", a leading law firm that advises securities underwriters and issuers.
SMOOTHIES AND STARS. Blank check IPOs are conducted by companies that basically come into existence only once they raise their cash. More often than not, they are a bet on the individuals who back the company. Acquicor, for instance, was a wager on Wozniak and the other execs involved, including former Apple CEO Gilbert Amelio.
Services Acquisition Corp. International (SVI ), which raised $128 million last year and cut a deal this March to acquire smoothie chain Jamba Juice, was able to raise the money in part because of its chief executive, Steven Berrard, co-founder of automotive retailer AutoNation (AN ). "In a blank check company there's less to disclose about the operations, which leaves more emphasis on individuals," says Check of Cleary Gottlieb. "But it's important to analyze what is material in this context, because it's not practical or helpful to investors to put every traffic ticket that one's got in a prospectus."
Steve Aiello, a spokeman for underwriter EarlyBirdCapital, says he can't answer any questions related to the filing because EarlyBird is bound by the IPO quiet period mandated by the SEC. Michael Allison, CEO of Princeton (N.J.)-based International Business Research, which conducts background checks on filers for EarlyBirdCapital, says: "Underwriters are guided by laws and get guidance from legal counsels when [anything] falls in a gray area."
GOOD CONNECTIONS. Some independent legal experts say East India's decision not to disclose isn't a problem. "We have to assume that people are innocent until proven guilty," says Stephen Graham, head of worldwide corporate at Orrick, Herrington & Sutcliffe, a law firm that specializes in corporate and financial transactions. "And if this person hasn't been convicted of fraud, no disclosure is required."
Nandi does have some prominent political connections. East India has retained as its legal adviser Nalini Chidambaram, the wife of Indian Finance Minister Palaniappan Chidambaram. Nandi has also made several contributions to members of the Democratic party, including New York Senators Hillary Rodham Clinton and Charles Schumer.
Of course, whether East India is a good investment is another question. Neither Nandi nor Shankar have been involved in any similar investments before. They say in the prospectus that they will have competitors who "have extensive experience in identifying and effecting business combinations" and also "possess greater technical, human, and other resources."
Massachusetts investment strategist Peter Cohan says he would be hesitant to invest in any blank check IPOs and that unless the people backing it have a spectacular investment record he would stay away. "In this case, I would just say: 'Buyer beware,' " says Cohan.
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