The “funny money” problem in India is no longer a minor bump; it is severe, it is suspected to be much more than the readiness to blame ISI of Pakistan, and requires a total overhaul of the laws pertaining to counterfeit currency
I usually pay for fuel by card at my regular filling station, but needing some at an unfamiliar pump at a remote location outside Delhi a few days ago, chose to pay by cash. What came out of the wallet first was a brand new thousand rupee note, which I handed over to the attendant. He looked at my unkempt hair, dirty clothes and the dented and highway dust-encrusted car, and then I saw some hesitation in his eyes, he then looked at the mint condition of the thousand rupee note again, and asked me if I didn’t have a used note, or hundred rupee notes, or would I not want to use my card instead?
Has something like this happened to other people, too?
The seizure by the Indian authorities in Delhi of Rs6 crore worth (or much more, according to another source) of counterfeit Indian currency, apparently in mint condition and reportedly brilliantly perfect in all respects when compared to the real currency, finally proves what the grapevine has known and whispered about all the time. That the “funny money” problem in India is no longer a minor bump; it is severe, it is suspected to be much more than the readiness to blame ISI of Pakistan, and requires a total overhaul of the laws pertaining to counterfeit currency, amongst other things.
As background, being seafarers, we were always aware of as well as taking precautions on getting saddled with fake currency notes globally. Junk value East German marks being passed off as hard currency West German marks was something all of us had been warned about, but it still did not prevent traders trying to palm them off on us, in all parts of the world. Shipping Corporation of India owned and operated a passenger ship named ‘CHIDAMBARAM’ of all things, which was well known for being used by fake currency smugglers from the Far East into ports along our East Coast.
Oh yes, we developed a nose for this stuff early on in life, when most people our age were still surviving on pocket money from their Mummy-ji and Papa-ji. We got stuck with bad money, we had no mummy-papa; we were in trouble—simple as that.
In addition, the Goa-Karnataka-Maharashtra triangle, roughly bordered by Kolhapur on one side and Hubli-Dharwad on the other, was made famous by Telgi of Khanapur fame—the business here of fake currency notes being a legacy of the colonial ex-rulers of Goa and the politics therein. Likewise, the opening up of land borders in Rajasthan, the rapid growth of private ports in Gujarat, the shift in opium trade patterns and most of all, the rampant growth of this ‘business’ in the border districts of Uttar Pradesh adds to the ‘traditional’ suspect routes from the Persian Gulf and Far East countries. Add the hill tracts and delta of the Padma to this, and you suddenly have a situation where the attack from all sides is now really serious and terrible for the nation.
So far, however, it was in the realm of people in the cash business, the black economy.
But now, it appears to be reaching the corporate world too—DeLorean was one example of a top-end business-person who got mixed up in the narcotics and counterfeit currency business to try and rescue his business. Closer home, the activities of Ponzi schemes of the SpeakAsia sort as well as assorted ‘savings schemes’ offering high rates of return barely hide the role of counterfeit money being used for pay-outs, what better way of spreading this currency wider?
And then, with the ongoing slowdown impacting droves of first generation business-people nationwide, the lure as well as squeeze of using funny money to get out of sticky situations is reaching epidemic proportions. One ‘system’ doing the rounds apparently works like this, if you are a businessman who is in debt, and wants to bail out, then the loan sharks you owe money to approach you, put the squeeze on you, and you:-
1) Provide some sort of collateral, say Rs5 crore worth of property, gold, or anything tangible. Use that to get liquidity of genuine money, white or black. This amount is used for a supposedly genuine purpose and sent out of the country.
2) The genuine funds now sent out are ‘invested’ in funny money with a “face value” to the tune of about two-and-half to three times this amount.
3) After 45-60 days, once the ‘shipment’ is received, the original collateral is returned, along with an equal amount which is adjusted against the debt.
4) The rest of the profits are also kept by the people running this racket.
5) All this is in counterfeit money.
Obviously, such things are not cast in stone, but this is broadly how it works. The risk with the genuine collateral, of course, is if things go wrong. The counterfeit currency gets out into circulation by one means or the other—and here too—the role of a variety of private agencies in the business of stuffing of ATMs as well as currency chests in some parts of the country are not above suspicion.
The bigger issue here is that the law as it stands today makes a criminal out of the person who is the last in the chain, usually the innocent citizen saddled with a dud currency note, even if he took it out of an ATM a few minutes ago. That is the major change needed, if we really want to fix the issue, especially as the nation heads towards elections. Things are so bad that some young people who got in touch with this correspondent to develop their own counterfeit detecting machine were simply unable to do so, because the risk of running trials on real fake money were too high for them.
We have to change the laws, those who find counterfeit money ought to have the legal protection if and when they approach the authorities, instead of being prosecuted, as things stand with the current dispensation. Or we shall see even bigger seizures taking place.
(Veeresh Malik started and sold a couple of companies, is now back to his first love—writing. He is also involved actively in helping small and midsize family-run businesses re-invent themselves. Mr Malik had a career in the Merchant Navy which he left in 1983, qualifications in ship-broking and chartering, a love for travel, and an active participation in print and electronic media as an alternate core competency, all these and more.)
Previous articles on the subject, at Moneylife:
SEBI has asked Brooks to call back the ICDs advanced by it to certain entities and together with all the IPO proceeds deposit it in an interest-bearing escrow account. Investors are not getting back their money yet; but the curious fact is that investors to these dubious IPOs don’t seem to be demanding a refund of their application money either
(This is the second part of a series of articles on SEBI’s regulatory action)
Brookes Laboratories’ (Brooks) chairman Atul Ranchal, managing director Rajesh Mahajan and six others, including the merchant banker D&A Financial Services (DAFS) have been barred from the capital market by the Securities & Exchange Board of India (SEBI) as part of its crackdown on seven companies.
Brooks, a Himachal Pradesh-based pharmaceutical contract research and manufacturing services (CRAMS) company is among those whose initial public offering (IPO) came under the regulatory scanner due to price manipulation and other irregularities.
On 16 August 2011, Brooks launched an IPO to raise Rs63 crore at Rs100 per share. The primary objective of the issue was to set up a manufacturing unit at JB SEZ Pvt Ltd, Panoli, Gujarat, for manufacturing of various pharmaceuticals formulations and to meet long-term working capital requirements, some of these which included paying off “questionable” inter-corporate deposits (ICDs).
The discovery that an entity called Overall Financial Consultants Pvt Ltd (OFCL) had bought and sold 6,65,000 shares raised a red flag and triggered SEBI’s investigation which exposed a conspiracy between Brooks and other entities to siphon off public money.
1) SEBI investigations showed that as many as 12 entities were involved in routing and masking the transfer of IPO funds from Brooks to OFCL. They used ICDs to transfer Rs2.5 crore to OFCL, which had run up losses of Rs2.13 crore by trading in the Brooks scrip.
The brazen manner at which the IPO monies were routed is described below:
A firm called Shardaraj Tradefin received Rs50 lakh from Brooks as repayment of ICDs, of which Rs25 lakh each was transferred to two entities namely Makesworth Projects & Developers Pvt Ltd and Shridhan Jewellers Pvt Ltd. These entities then transferred Rs25 lakh each to OFCL.
Similarly, another entity, Konark, received Rs5.50 crore of the IPO monies towards repayment of ICDs from Brooks. Konark then transferred the entire amount to Mangalmayee Hirise Pvt Ltd. Thereafter, Mangalmayee transferred Rs25 lakh to OFCL, and a further sum of Rs1.50 crore to Khusboo Complex Pvt Ltd, Rs50 lakh each to Growfast Realties Pvt Ltd, Jaganath Consultants Pvt Ltd, Silicon Hotel Pvt Ltd, and Neelkamal Dealcom Pvt Ltd, and Rs25 lakh each to Alishan Estates Pvt Ltd and Pushpanjali Hirise Pvt Ltd. These entities then in turn transferred Rs25 lakh each to OFCL.
The graph below illustrates the above transactions: (Source: SEBI)
2) Brooks never disclosed one telling fact—the relationship between the entities—and chose to hide it from the public at large. Out of the 13 companies which had ICDs with Brooks, seven of them had common directors. Even the entities involved in diverting the IPO funds had common directors between them. For example, three companies namely Shardaraj, Makesworth and Shirdhan all had common directors. Some of them even shared the same addresses. This is also case of shoddy due diligence or collusion by the merchant banker.
3) Brooks engaged itself in improper business practices with a supplier. It transacted with a Dubai-based supplier, Neo Power, for the purpose of acquiring machinery, using pro-forma invoices received through e-mail instead of properly signed papers. What is stark was that Brooks overstated the price of the machinery in its prospectus. Instead of Rs19 crore, as mentioned in the prospectus, the price of the machinery transacted turned out to be Rs14 crore. The company had, in fact, already paid 50% of the cost of machinery and had neither mentioned the supplier’s name nor this payment in the prospectus. In a sinister twist to this transaction, even after five months since Brooks placed the ‘order’, the machinery is yet to be delivered. Simply put, Rs5 crore had been siphoned off by merely mis-stating just one item in the prospectus.
4) Parag Dinesh Doshi, the signatory of the faux proforma and CEO of Neo Power, is also the director of Hillston Advisors, one of the 13 companies that lent funds through ICDs to Brooks. Apparently, Mr Parag’s relative, Dinesh Doshi is also a director of 10 different companies that are currently under SEBI scanner. In order to escape SEBI’s radar, Dinesh Doshi resigned from Hillston Advisors on 27 October 2010.
5) Brooks had lied in its prospectus that it intended to set up a factory in JB SEZ in Gujarat. What happened was that Brooks paid for plant and machinery and also for civil work contract even though the acquisition of land has still not been completed. Despite lack of infrastructure, Brooks proceeded to place orders for machinery from Neo Power.
6) Apart from using ICDs for routing and diverting investors’ money, it also abused ICDs in a clever way. The funds raised from ICDs were paid to related entities from whom the ICDs were originally received in the form of advances for equipment, project management fees, etc, while at the same time paying the original ICD providers also from the issue proceeds.
So far, SEBI has asked Brooks to call back the ICDs advanced by it to certain entities and together with all the IPO proceeds deposit it in an interest-bearing escrow account with a scheduled commercial bank. Investors are not getting back their money yet; but the curious fact is that investors to these dubious IPOs don’t seem to be demanding a refund of their application money either.
Nifty to trade between 4,830 and 4,915
Optimism in the global arena following successful bond auctions in Spain and Italy eased some concerns in Europe and helped most Asian markets see gains. The Indian market also cheered the outcome, but pared some of its gains in late trade. Since the past four days (including today) the Nifty almost reached its second level of resistance, however, it was not able to maintain itself above that level. Today the index rose on a huge volume of 83.27 crore shares on the National Stock Exchange (NSE). From here we may see the benchmark making a range-bound move between 4,830 and 4,915.
Supportive cues from the global area helped the domestic market open higher today. Markets in Asia were mostly in the positive following the European Central Bank’s decision on Thursday to keep interest rates unchanged and good response to the Spanish and Italian bond auctions. Back home, the Nifty gained 31 points to resume trade at 4,862 and the Sensex opened at 16,145, up 107 points over its previous close. Across-the-board buying by institutional investors supported early gains.
A minor bout of profit taking in late-morning trade saw the indices dip to their intraday lows. At the lows, the Nifty fell to 4,834 and the Sensex went back to 16,050. But select buying pushed the market higher in subsequent trade.
Buying interest in metal, capital goods and realty sectors and a positive opening of the European indices enabled the market hit its intraday high around 1.50pm. At the highs, the Nifty touched 4,899 and the Sensex scaled 16,257.
The market pared some of its gains in post-noon trade but ensured a green close. At the end of trade, the Nifty settled 35 points higher at 4,866 and the Sensex gained 117 points to 16,155.
The advance-decline ratio on the NSE was 1248:586.
The broader indices outperformed the Sensex today as the BSE Mid-cap index climbed 1.14% and the BSE Small-cap index surged 1.44%.
The key gainers in the sectoral space were BSE Metal (up 3.21%); BSE Capital Goods (up 2.86%); BSE Power (up 2.39%); BSE Realty (up 2.12%) and BSE PSU (up 1.55%). BSE Consumer Durables (down 0.40%); BSE Oil & Gas (down 0.38%) and BSE IT (down 0.04%) settled lower.
Tata Steel (up 7.11%); Coal India (up 5.56%); Larsen & Toubro (up 3.84%); NTPC (up 3.11%) and Jindal Steel (up 3.07%) topped the Sensex list. GAIL India (down 3.19%); Bajaj Auto (down 2.96%); Maruti Suzuki (down 1.79%); Hero MotoCorp (down 1.25%) and Sun Pharma (down 1.18%) were the main losers.
The Nifty was led by Reliance Power (up 7.22%); Tata Steel (up 6.97%); Reliance Communications (up 6.34%); Coal India (up 5.02%) and NTPC (up 3.51%). The main losers on the index were GAIL (down 3.27%); Bajaj Auto (down 3.09%); Maruti Suzuki (down 1.91%); HCL Technologies (down 1.79%) and Sun Pharma (down 1.73%).
Markets in Asia, with the exception of China and Taiwan and Malaysia, closed with gains on the last trading day of the week on optimism from Europe after a positive response to the government bond auctions in Spain and Italy on Thursday.
The Hang Seng rose 0.57%; the Jakarta Composite advanced 0.66%; the Nikkei 225 surged 1.36%; the Straits Times jumped 1.75% and the Seoul Composite climbed 0.60%. Among the losers, the Shanghai Composite declined 1.34%; the KLSE Composite fell 0.16% and the Taiwan Weighted shed 0.07%. At the time of writing, the key European markets were trading with gains of 0.36% to 0.93% and US stock futures were trading higher.
Back home, foreign institutional investors were net buyers of shares totalling Rs506.80 crore on Thursday. On the other hand, domestic institutional investors were net sellers of equities aggregating Rs996.91 crore.
Wind turbine maker Suzlon Energy today said its German subsidiary REpower has signed a contract to supply 10 wind turbines to England-based RWEnpower Renewables for the Bradwell wind farm. The turbines, with an output of 2.05 MW each, will generate enough electricity to power the equivalent of nearly 12,000 homes annually, Suzlon said in a statement. The stock jumped 9.93% to close at Rs22.70 on the NSE.
Glenmark Pharmaceuticals today said an arbitration panel in the US has granted an interim order prohibiting Napo Pharmaceuticals from terminating their collaboration agreement for diarrhoea drug Crofelemer till the panel decides the arbitration. Glenmark gained 3.26% to close at Rs314 on the NSE.
Diamond Power Infrastructure, an integrated player in the power equipment and EPC segment, on Friday said that it has received orders totalling Rs48.30 crore for supply of 108 power transformers to diverse customers. The stock advanced 5.12% to settle at Rs110.90 on the NSE.