CAG has questioned how Axis Bank gave a guarantee of Rs252.50 crore to Infotel Broadband, which had a net-worth of Rs2.5 crore, without any margin money. Will RBI show some interest now?
The Comptroller & Auditor General (CAG) has recommended cancellation of the 4G licence and spectrum allocation, alleging wrongdoing in fixing the eligibility criteria in the bidding process. Interestingly, in its draft report (a copy of which is with Moneylife), the CAG has also questioned the role played by Axis Bank in facilitating money transactions. This includes the bank guarantee (BG) to Infotel Broadband Services Pvt Ltd (now Reliance Jio Infocomm) without any margin money or security, provided for paying the license fee at the broadband wireless access (BWA) auction.
Infotel Broadband, along with its application for the BWA auction, submitted earnest money deposit (EMD) in the form of a bank guarantee (from Axis Bank) worth Rs252.50 crore to the Department of Telecom (DoT) on 19 March 2010. In this regard, the draft CAG report said, "Audit, however, found that there was no disclosure regarding the margin money paid by Infotel Broadband against this guarantee of Rs252.50 crore in their annual accounts for 2009-10. Incidentally, the company along with its promoter company (Infotel Digicomm Pvt Ltd) had paid 100% margin money for getting the BG of a much smaller amount of Rs10 lakh and Rs25 lakh, respectively, as per disclosures made in their audited annual accounts."
According to the CAG, "It was thus not clear as to how the BG of Rs252.50 crore was obtained by Infotel Broadband with a net-worth of just Rs2.5 crore, from a premium private bank (Axis Bank) without payment of any margin money by the company. Further BG issued by the Axis Bank had a major alteration at the place of the name of the beneficiary (Infotel Broadband). The name of the beneficiary – Infotel Broadband – was hand-written in ink on the body of the BG after erasing the name of the beneficiary written earlier.”
"It was therefore apparent that the bidder had either been acting as front company on behalf of a hidden bidder or had taken assistance of a third party in obtaining the BG for the auction, which went against the sanctity and transparency of the auction process. Incidentally, the annual report of RIL, which subsequently bought a 95% stake in Infotel Broadband, showed significant transactions (investment of Rs2,250 crore purchased and sold) with Axis Bank during 2010-11," the report from CAG says.
Further, according to documents seized by CAG, Axis Bank's Corporate Banking Branch at Worli in Mumbai, stood security for $500 million which originated from the Royal Bank of Scotland (RBS), Singapore Branch. This money was used to pay the fee for the BWA spectrum on 16 June 2010.
When asked about so many irregularities, Axis Bank insisted that it was a straightforward transaction. "The Bank does not normally discuss individual client transactions but can confirm that all credit decisions have been taken after due appraisal, keeping in mind all aspects, including that of security," an official spokesperson of Axis Bank said in an email reply. It did not clarify why Infotel Broadband’s name would be handwritten after erasing the name of another entity.
There is a lot of mystery surrounding the security for the $500 million which originated from Royal Bank of Scotland's (RBS) Singapore Branch too. What made Axis Bank confident enough to provide security? Both these shady transactions call for an investigation by the Reserve Bank of India. But will it happen?
Infotel Broadband (promoted by the controversial Himachal Futuristic Communications group) had won a pan-India 4G licence by bidding 5,000 times its net worth and was acquired by Reliance Industries Ltd (RIL) within hours of winning the bid, leading to obvious conclusions. It has been renamed Reliance Jio and the CAG’s draft report says that the vitiation of the auction process gave the company a windfall of Rs22,842-crore. RIL has strongly denied CAG’s contentions.
CAG, in its report says, “...a non-participant company Reliance Industries Ltd (RIL) exploited the loophole left by the Department of Telecom (DoT) in the eligibility criterion, lock in period etc, for obtaining BWA spectrum, by acquiring a winning company Infotel Broadband within hours of closure of the auction process, through collusion and sharing the confidential information in the course of audit process in violation of Auction Conditions/Rules. The DoT failed to rigging of the auction right from the beginning, when the auction documents and the Earnest Money Deposit (EMD) of Rs252.50 crore was paid by a small ISP through the covert and overt assistance of a third party/ private bank. This small ISP (Infotel) ended up bidding Rs12,847.77 crore (5,000 times of its net-worth) for Pan India spectrum and then ended up being sold on the day of completion of the auction, indicating Infotel Broadband's collusion and sharing of confidential information with a third party, in violation of Auction Conditions/Rules. Neither the top management of the DoT nor important committees like the application screening committee (ASC), Inter-Ministerial Committee (IMC) and Committee of Secrataries (CoS) could detect the tell-tale signs of collusion and sharing of confidential information by the biggest bidder, a tiny ISP. The government should get the matter investigated even at this juncture, fix responsibilities on the bidders that violated the auction conditions/rules prescribed in the notice inviting application (NIA) and cancel the allotment of the BWA spectrum along with exemplary punishment for the colluding firms."
During October 2013, Reliance applied for a Unified License (UL) for all the 22 circles won by Infotel Broadband in the BWA spectrum auction. Reliance Jio became the first telecom operator in India to get a pan India unified license and on 21 October 2013 signed an agreement with the DoT, after submitting required documents and paying the requisite entry fee. "With the grant of a unified license, Reliance Jio has migrated its existing ISP license along with broadband wireless access (BWA) spectrum to the unified license with authorisation for all services, except global mobile personal communication by satellite service (GMPCS) under unified license in all service areas," RIL had said in a release at that time.
However, CAG said this (granting of unified license to Reliance Jio) had given a windfall of over Rs22,800 crore to the company. "...by permitting ISPs to provide mobile voice service using BWA spectrum won in 2010 auction, the government has brought ISP licensees with BWA spectrum at par with UAS/ CMTS 3G spectrum winners. Hence, Infotel Broadband, now Reliance Jio Infocomm, appeared to have been according undue advantage of Rs22,842 crore, i.e. the difference of the proportionate prices for 20 MHz block size in 2.1 GHz spectrum band (3G spectrum) and 2.3 GHz spectrum band (BWA spectrum) plus the net present value of the entry fee for UASL at the end of FY2009-10 (Rs20,653 crore plus Rs3,847 crore-Rs1,658 crore). Besides, the sanctity of the entire auction process has been rendered vitiated due to post auction interpretations and interventions after three years. It was therfore no surprise that Reliance Jio Infocomm was among the first group of companies which applied for a UL immediately after the introduction of the Scheme and obtained a letter of intent (LoI). Had the spectrum blocks been specified and declared as liberalised spectrum blocks i.e. open for all technology/services in the NIA in February 2010, there was no doubt that bidders would have taken an informed decision for putting up their bid and the market discovered price would have been significantly different for 3G and BWA spectrum," the CAG said.
The CAG report also expressed surprise over the mid-way exit of incumbent operators like Vodafone, Idea, Reliance Communications and Tata Communications from the BWA auction.
"...a tiny new ISP (Infotel Broadband), ranked 150th in the list of ISPs as on 31 December 2009 by the TRAI, connived and colluded with a major corporate giant (RIL) in flagrant violations of the confidentiality clause/auction conditions/rules provided in the NIA and made a mockery of the sanctity and transparency of the auction process, bidding a sum of Rs12,847.77 crore, which was more than 5,000 times of their net-worth, to win a Pan India chunk of BWA spectrum. Two major UASL operators-Vodafone Essar Ltd and Idea Cellular Ltd-did not win the BWA spectrum even in a single circle in the auction. Two other major UASL operators promoted ISPs, Reliance Communications Ltd and Tata Communications Ltd, also withdrew from the auction without winning BWA spectrum in any circle".
Infotel Broadband was controlled by the promoters of the infamous Himachal Futuristic Communications Ltd (HFCL). More than 18 years ago, the tiny HFCL gained notoriety by being the highest bidder for new telecom licences when the telecom minister was Sukh Ram. Nobody knew who was funding HFCL at that time. But unlike last time, this time it is clear who is funding Infotel.
According to sources, banks provide guarantees for a corporate deal after scrutinizing the financials. Sometimes banks also consider the promoter entity and its net-worth while providing BG to a group entity. However, in the case of Infotel Broadband, the net-worth of its promoter entity was also miniscule, compared to the Rs252.50 crore bank guarantee given as EMD by the company before bidding for BWA spectrum.
Infotel Digicomm Pvt Ltd, set up in March 2007 was the promoter of Infotel Broadband and held 99.99% stake at the time of submission of application for the BWA auction in March 2010. Infotel Digicomm had an equity capital of Rs6 lakh and its net-worth was Rs8.55 lakh as on 31 March 2009. This promoter company did not have fixed assets and had earned a revenue of Rs2.59 crore mainly from other income with a net profit of Rs42.8 lakh as on March 2009. It had also given margin money in the form of a fixed deposit of Rs25 lakh. as security against issuance of BG for Rs25 lakh as on 31 March 2010.
Infotel Broadband was set up in February 2007. In November that year, it was granted a pan-India licence for operating an ISP and started its commercial business from 1 April 2009. The company had only one subscriber (leased line) and had earned revenues of Rs14.78 lakh during 2009-10.
Infotel Broadband's authorised share capital was Rs3 crore, while its paid up capital was Rs2.51 crore with no reserves or surpluses as on 31 March 2009. For the year ended March 2009, the company had cash and bank balance of Rs18 lakh, of which Rs11 lakh was tied up as 100% margin money for the bank guarantee (BG) of Rs10 lakh given by Infotel Broadbankd to the DoT for the ISP license.
TINA.org has filed an objection to the proposed settlement between the FTC and L’Oréal urging the Commission, among other things, to require the company to pay a monetary penalty for its deceptive advertising campaigns
The day L’Oréal reached a tentative settlement agreement with the FTC over allegations that it falsely advertised two of its skincare product lines, Youth Code and Génifique, as lotions that could manipulate genes in the skin to reduce signs of aging, the company had the audacity to issue a press release that stated in part:
The safety, quality and effectiveness of the company’s products was never in question. Going forward, L’Oréal USA will continue to serve its customers through industry-leading research, scientific innovation and responsible advertising as it has for the last 60 years.
I guess that I should not be surprised that after years of lying to consumers about the quality and effectiveness of its Génifique and Youth Code product lines, L’Oréal would have no qualms about lying to all of America in a press release.
First, the whole reason that the FTC went after L’Oréal was based on its false and unsubstantiated claims that Génifique and Youth Code products could manipulate genes in the skin to provide anti-aging benefits. In fact, the FTC was not the first goverment agency to scrutinize these claims. In 2012, the FDA issued a warning letter to L’Oréal over gene related claims stating “Your products are not generally recognized among qualified experts as safe and effective for the above referenced uses.” Which is to say that the “safety, quality and effectiveness” of these product lines was absolutely in question and found to be lacking.
Second, as for the claim that L’Oréal will continue on its path of “responsible advertising,” that assertion is belied by numerous false advertising lawsuits (at least 1, 2, 3, 4, 5, 6, 7) and regulatory actions (1, 2, 3, 4, 5, 6).
To top it all off, as the settlement agreement between the FTC and L’Oréal currently stands, L’Oréal will not have to shell out a penny to compensate the consumers it lied to. This despite the fact that it has sold over nine million bottles and made well over $1 billion in net sales worldwide just selling the Génifique product line. Believing that such a settlement is not in consumers’ best interest (to say the least), TINA.org has filed an objection to the proposed settlement urging the Commission, among other things, to require L’Oréal to pay a monetary penalty for its deceptive advertising campaigns.
My suggestion for L’Oréal – spend some of your R&D dollars finding a truth serum for your marketing department to swallow and stop lying to consumers.
Despite a ban on high-interest car title loans, the nation’s largest title lender has opened 26 Instaloan stores in Florida, offering a refashioned version of the loans that effectively charge the same sky-high rates the law was designed to stop
This story was co-published with The Tampa Bay Times.
When Florida lawmakers banned high-interest car title loans in 2000, then-Gov. Jeb Bush proclaimed that the new law would protect Floridians from lenders "who prey on the desperate."
But in the past three years, the largest title lender in the country has swept into the state, offering a new version of the loans that effectively allow it to charge the sort of sky-high rates the law was supposed to stop.
TMX Finance, which has opened 26 InstaLoan stores across Florida, skirts the ban on triple-digit interest rates by offering loans larded with costly and nearly useless insurance products.
TMX is clearly violating "the spirit of the law," said Alice Vickers of the Florida Consumer Action Network, a Tampa-based nonprofit advocacy group. Florida regulators should be cracking down, she said, instead of "giving them a pass."
TMX's refashioned loans are yet another example of how the nation's high-cost lenders have modified their offerings to circumvent city, state and federal laws designed to limit them. After Ohio prohibited excessive interest rates on short-term loans in 2008, payday and auto title lenders used a loophole to offer nearly identical loans under different state laws. In Texas, TMX subsidiary TitleMax has offered customers cash for free as part of a ploy to get around city ordinances.
From its Georgia base, the company now operates more than 1,470 stores in 18 states with plans to grow by more than 20 percent each year through 2017, according to a presentation made to a rating agency last year and obtained by ProPublica.
TMX officials did not respond to multiple requests for comment. Industry representatives often argue that high-cost lenders serve a vital function by providing credit to consumers who would not otherwise be able to obtain it.
In a basic 30-day title loan, consumers hand over the title to their cars for a loan ranging from $100 to several thousand dollars. At the due date, the borrower can pay just the interest and renew the loan for the principal. In Georgia, TMX's TitleMax stores often charge about 150 percent annual interest, according to contracts reviewed by ProPublica. If the borrower defaults on the loan, the lender can auction off the car.
Lenders like TMX derive most of their profit from customers who can't afford to pay off their loans and who renew them again and again. In 2009, a company executive testified in a court case that the company's typical loan is renewed eight times.
Florida's 2000 law prohibits annual interest rates above 30 percent. Three years ago, auto title lenders pushed a less restrictive bill, but a House committee rejected the measure.
So in its Florida stores, TMX changed the format of its loans, charging borrowers the maximum interest rate, and then typically adding fees for two types of insurance. Both policies protect the company, not the borrower. The most costly policy reimburses InstaLoan in case the car is damaged. Borrowers who can't repay their loans must pay fees for a new round of insurance each month to keep their cars.
A ProPublica review of 28 loan contracts made to Floridians in the past two years shows that insurance costs effectively made the loans as expensive as the TitleMax loans in Georgia. A typical Florida contract listing an annual percentage rate of 30 percent actually carried an effective annual rate of 144 percent.
An examination of consumer complaints to state regulators about TMX and its InstaLoan stores shows that the customers are often teetering on the edge. One Floridian appears to have renewed her loan 17 times in 1 1/2 years. Another woman borrowed $3,100 and made $2,600 in payments, but after rolling her loan over seven times she still owed $3,900. Rather than keep paying, she surrendered her car to InstaLoan. A third customer had $886 in monthly income, according to her loan application. Just to renew her $3,000 loan would have required more than a third of her income. Rather than pay it, she, too, surrendered her car.
"I am 59 years old and disabled, and on a fixed income. I am unable to make such payments and they are threatening to repo my vehicle next week," wrote a Pensacola woman.
Another complaint, from a 78-year-old Tallahassee woman, read: "I was pressured to buy insurance I did not need. I did not understand what I signed, evidently."
"TMX Finance appears to be violating the law and taking advantage of families struggling to survive in these hard times," said Dorene Barker, an attorney with Florida Legal Services, which led a coalition of consumer groups that pushed for the 2000 law.
ProPublica obtained the complaints through a public records request with Florida's Office of Financial Regulation. The identity of the complainants was redacted. In each case, TMX denied any wrongdoing and said it was operating within Florida law. Regulators do not appear to have initiated any action as a result of the complaints.
Consumer watchdogs said lenders are using the insurance as an end run around the law. "The sale and financing of the credit insurance as part of these auto title loans is deceptive and abusive," said Birny Birnbaum, the executive director of the nonprofit Center for Economic Justice and a former associate commissioner at the Texas Department of Insurance.
In states where high-interest loans are not banned, TMX's other subsidiaries do not require borrowers to buy insurance.
Though InstaLoan labels the fees as "voluntary," the company requires the protection, either through InstaLoan or the borrower's own insurance plan. In the complaints reviewed by ProPublica, five borrowers said they sought to avoid using the expensive policies offered through InstaLoan, but none was successful.
The insurance sold through InstaLoan is provided by Lyndon Southern Insurance Co., a subsidiary of the publicly traded Fortegra Financial Corp. In mainstream forms of insurance, the bulk of premiums typically go to claims. But that's not how Lyndon Southern's auto insurance works. In Florida, the company sends more than half of borrowers' premiums right back to lenders like InstaLoan in the form of commissions and other fees, according to 2013 data collected by the National Association of Insurance Commissioners.
Fortegra did not respond to questions about its policies.
State regulators, meanwhile, have done little to slow TMX's advance in Florida. To open a store in the state, TMX must seek approval from the Office of Financial Regulation. Early in the company's expansion, regulators inspected a TMX store at the company's invitation, finding a number of minor violations. They levied a $4,000 fine and ordered the company to fix the problems. The most significant change? TMX was forbidden from advertising itself as a "title loan lender," since the company — despite issuing short-term loans against car titles — is not registered under the law governing title lenders.
Instead, TMX is registered under a statute meant for consumer finance companies that offer longer-term installment loans. The title lender law bans the inclusion of insurance with loans. The consumer finance law doesn't.
Regulators appear to understand the nature of InstaLoan's business. When a consumer filed a complaint late last year, one state analyst wrote in an internal log, "It appears that this loan is essentially a title loan," according to the documents obtained by ProPublica.
In response to questions, Office of Financial Regulation spokeswoman Jamie Mongiovi declined to discuss TMX's loans in any detail. "TMX, through its consumer finance license, is authorized to originate consumer finance loans," she wrote in an emailed statement.
For more on how the high-cost lending industry targets lower income consumers, please see our series Debt, Inc., including our previous story on TMX Finance’s in Texas and our story about how payday lenders bounce back when states crack down.