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Financial Crimes: Catch the Countless Small Fish Too
On 6th September, the Supreme Court of India refused to permit Ravi Ruia, promoter of the giant Essar group of companies to travel abroad. Here’s what a bench of Justices JS Khehar and Arun Mishra said while rejecting his plea. “We have allowed a person to go abroad but he never came back. He was no less big than you in monetary terms. We don’t want to take chances now. We are now once bitten twice shy. We are not going to give liberty to anyone.” 
 
Although the Court did not name anyone, the immediate speculation was that the judges were referring to Vijay Mallya, the controversial UB group chairman and Member of Parliament who has failed to return to India to face trial.
 
The apex court’s tough stance is heartening for investors and creditors. Promoters of a slew of Indian companies can remain overseas indefinitely because they have plenty of funds stashed abroad. These funds have been siphoned out of their Indian businesses or raised from money circulation schemes that robbed the rich and poor alike. The Pearls Agro Tech Corporation (PACL), which has been asked by the market regulator to refund a stupendous Rs49,000 crore, has large assets in Australia and a few other countries. The Sahara group, built on alleged investments by India’s poorest people, has assets in the form of luxury hotels around the world including Macedonia. Subrata Roy’s wife and son are even understood to have acquired citizenship of the Republic of Macedonia. 
 
If this is the case with high-profile and flamboyant businessmen, smaller industrialists with dubious track records are not far behind in diverting funds to build nest eggs abroad. 
 
Investors faced with huge losses are ending up playing sleuth and setting up groups or associations to track the flow of funds, file cases, or merely support one another, in an effort to recover their investment. This has happened in the case of shady companies like PACL and QNet as well as with smaller listed companies where people have lost a lot of money. The Sahara group is the only exception where no investor seems concerned at the fate of her investment, raising another set of questions about who really invested in its schemes. 
 
Often, such investor groups do manage to track the fraudulent diversion of funds from listed entities; but their effort is, eventually, frustrated by the tediously slow investigation and judicial process. A good example is that of Dr Datsons Lab, a little-known pharma company that was allowed to run, what seems like, a money laundering and price manipulation operation, right until 22 May 2015 when the two all-India stock exchanges, finally, suspended the shares. 
 

This was a month after its bankers had obtained a court order putting the company into liquidation, had taken possession of its registered office (which was owned by the promoter Dr Kannan K Vishwanath) and invoked 100% of the promoter’s shareholding which was pledged with banks. And, yet, this company had managed to fool people with a massive investment from foreign institutional investors (who held 56% of its equity at one time) and ‘winning’ a series of awards for good governance, innovation, transformation and leadership! 
 
Dr Datsons Lab (DDL) is a fit case for investigation under the draconian Prevention of Money Laundering Act (PMLA); but we see no sign of any such action. Instead, a group of investors continues to ferret out information about the promoter’s latest antics and write to the government pleading for action. 
 
In a letter to the finance minister, an investor, Lt Commander Joginder Pal Kanaujia, has listed seven frauds by DDL’s former promoter Dr Kannan Vishwanath. He has painstakingly compiled this information, along with a group of investors, over the past 15 months. Each instance of fraud, mentioned in the letter, is accompanied by some evidence in the form of court judgements, patent registration details, or mirror companies set up by the promoter (mirror companies are entities with similar names set up in different countries to obfuscate facts and fool regulators and investigation agencies). Lt Commander Kanaujia has sought an investigation by the Central Bureau of Investigation (CBI) to bring back Rs250 crore of DDL investors’ money which he believes was siphoned off to Hong Kong through a laundering operation. Here are some interesting questions raised by the letter.
  • When DDL was first listed on the bourses, its IPO (initial public offer) document had disclosed that a part of the issue proceeds would be used to repay its bankers, State Bank of India and Shamrao Vithal Bank, and Rs10 crore of unsecured loans from directors. It now turns out that a ‘consortium’ of bankers, led by Bank of Baroda, had gone ahead and funded its plants which are now being sold to recover money. One can understand investors being lazy and foolish and failing to read a prospectus. But isn’t it time we, as a country, begin to act against public sector bankers who extended fresh loans to DDL without adequate monitoring, when the disclosures in its offer documents proclaimed its shady character?
  • The risk factors in the IPO document had clearly stated that it had negative cash flows at the time of the issue, had placed no orders for plant & machinery and the object for which funds were raised was not appraised by any bank or institution. Worse, many of its trademarks were also not registered in the company’s name but were held by the promoter. Why would Bank of Baroda lend to this company after project appraisal officers had read the stinking prospectus? The answer is obvious; but is anyone asking questions?
  • Has the tax department sent any notices at all to Dr Kannan Vishwanath under the PMLA or obtained information that is being shared by its investors about his brand new Hong Kong-based company called Windsonn Exim Ltd? This company claims to hold the same 15 patents that once belonged to a wholly-owned subsidiary called Fair Success HK Ltd which was acquired by Dr Datsons Lab after fund raising.
  • Which lender or government agency will be authorised to secure overseas assets of DDL such as the following wholly-owned subsidiaries --Eros Pharmachem Pte (Singapore), Aanj Pharmalabs Limited Fze (Dubai), Dr Datsons Labs Limited (UK) and Fair Success (HK) Limited? Of these, Fair Success apparently has Rs80 crore in its bank account.
Unless this government makes a break from the past and holds public sector bankers accountable for corrupt and collusive lending, the mountain of bad loans, which are eventually paid by the taxpayer, will continue to mount. When large lenders collude with fraudulent promoters and allow them to strip cash and assets from the company, they also deal a crippling blow to investors and unsecured creditors. This has been going on for the past several decades; unfortunately, there is no sign that things will change even under this government. A focus on a few big names like Mr Mallya and Mr Ruia only ensures that hundreds of such cases fly below the radars of multiple investigative agencies tasked to bring financial criminals to book. 

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COMMENTS

naveen chaitanya pappula

7 months ago

Very Good Article written without any fear. Atleast now with the above evidence , SEBI or ED or any other agency must act swiftly and punish the fraudsters severely. India seems to be a safe haven for Financial Mafias.. !! Our bureaucrats are colluded with fraud promoters. Plz save our nation from this mafia.

N.Hanumanta Rao

8 months ago

Excellent

Kaviraj Patil

8 months ago

Those who invested in IPO's in 90s will be aware of the number of fly by night promoters that flourished those days. As far as my knowledge goes, I dont know a single such promoter being punished. I guess if you make a few crores and throw a couple to a powerful politician, you are assured of immunity. The way BOB harassed a few small account holders since their names were similar to some director in Kingfisher is clear evidence of how slipshod these banks are. So, it is a cosy club of corrupt politicos, crooked promoters and their willing henchmen, the bankers.

Nalin Patel

8 months ago

i agree with ashwin mehta,, very good article

manish jain

8 months ago

excellent

Ashwin Mehta

8 months ago

The majority of C.As, LLBs (Advocates) have ruined India, They are the people who advise to do wrong to Businessman/ Builders and common people. Since the LLB degree is awarded to any Tom & Herry, those people keep on misguiding the common man in general by inflicting fears about various Taxes and the harrasement by govt. officials etc.. the honest common man gets carried away by their advice. First they allow the man to commit a mistake and then pose as his rescuer in govt. machinaries.This is true with 80% of the Chartered accountants of India. I congratulate Moneylife for showing courage to expose the mighty Institutions in Financial sector.

Suketu Shah

8 months ago

Very good piece and thoughts.I know of a CA who operates 2 PAn Cards and forces her clients to do white to black for "tax saving".Quote like a doctor suffering from incurable disease trying to cure his patients.Once the law is the same for all such experiences chronic fraudsters wl not survive in India.Things are chaning under NaMo govt although to erase 60 yrs of damage esp the collosal damage under PC 2004-2014 wl take a few more yrs.

Gopalakrishnan T V

8 months ago

Bankers get the first feel of the misuse of funds by the promoters and it is for them to tighten the discipline on the wrong doers and fraudsters. Most of the promoters have fudged balance sheets and their own contribution in the business is by and large in the form of lands with inflated value beyond imagination. The promoters come with the idea of loot and not to run any business. Many defaulters of banks have the backing of Chartered Accountants, bankers, lawyers, bureaucrats , tax officials and Institutions like SEBI. Most of the Corporates have umpteen number of subsidiaries which facilitate them to fudge the accounts in such a manner that even the best intelligent auditor cannot find anything wrong with the accounting. Banks can have an immediate feel of the problems and if they are shrewd to warn the borrowers and their contacts at the right time, many frauds taking place in the economy involving banks and the Government authorities can be easily prevented. The approach of the courts is in the right direction and it should give sufficient warnings to borrowers, banks, Chartered Accountants, bureaucrats and all other associates that things are becoming difficult to loot the system and get away permanently as did by the Great Mallya. This article also is an eye opener to those who have plans to play with the financial system with ulterior motives. Money Life is doing a wonderful service to society by keeping a close watch on the wrong doings by the key Institutions and the Corporates who want to enjoy everything at the cost of tax payers and other stakeholders of the economy.

Vaibhav Dhoka

8 months ago

There are many small fishes in this huge financial sector who plays fraud and remain unnoticed by public,now with present government trying to wipe off corrupts,these fraudsters should be dealt with iron hand.Similar is case with land mafia,tenants blackmailing landlord under umbrage of law and judiciary.

N.Hanumanta Rao

8 months ago

I wish you to highlight similar frauds. Some listed companies like Microtechnologies (India) Ltd, Navi Mumbai, Elder Pharma Ltd, Plethico Pharma Ltd have collected Fixed Deposits through Newspaper ads. etc. Many of the Investors were Senior citizens in their sun-set days (above 65years). Also they don't have pensioners benefits and any other source of income. Even their nearest kith&kin have abandoned them. They are in great distress and misery. Please take an article on such bogus companies and their managements and do justice to the hapless citizens.

Saumil Mehta

8 months ago

What about YashBirla? Jaypee group? Plethico Pharma?

REPLY

Kamal Garg

In Reply to Saumil Mehta 8 months ago

I remember, persuading me for an FD with Yash Birla's firm, some agent telling me a few years ago that "have you even seen a Birla firm going bankrupt or not honouring their commitment on payment of FD".
There can be numerous such examples of cheating by promoters with one trick or the other. I agree that it is the bankers who can the first sniff of any wrong doing. And that they should be held accountable in the first instance. How on earth, you can have a NPA of more than 6 to 7% of your advances, when HDFC Bank is having it at less than 0.5%. The collusion is very clear.
As far as Dr. Datson Lab is concerned, the government and regulators should hold their noose tight against the promoters, should take over the entire Indian and foreign companies and then resell the same immediately as happened in the case of Satyam Computers.

N.Hanumanta Rao

In Reply to Saumil Mehta 8 months ago

People should come forward and raise their voice against such fraudsters and cheaters.

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