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Niskalp took Rs 460 million hit on carry-forward deals alone

BS Bureaux

The Tatas have accused former Tata Finance Ltd managing director Dilip S Pendse of embarking upon carry forward transactions between December, 2000 and March, 2001 in DSQ, Global Telesystems, Zee Telefilms and Pentamedia, leading to a loss of around Rs 300 million in the last quarter of fiscal 2001 itself.

The total loss suffered during the year by the Tata Finance subsidiary Niskalp Investment & Trading Ltd in carry forward transactions was to the tune of Rs 460 million.

But this may only be the tip of the iceberg. The actual loss suffered by Tata Finance on account of the Pendse affair could be much more. The company is in the process of assessing the loss and the final figure will be known over the next fortnight. Y Kale, senior partner of AF Ferguson & Co, is conducting a probe into the Pendse affair.

Pendse is accused of cheating, falsification of accounts, forgery and criminal breach of trust in the first information report (No 276/2001, dated August 7) filed with the economic offences wing of the Maharashtra government.

The FIR also alleges that Pendse and the other accused persons (BR Gazdar, AL Shilotri, AG Gaitonde, Milind Desai and PB Karyekar, all former employees of Tata Finance or its subsidiaries) have siphoned off funds for "personal benefit".

It also said that Pendse had fled the country on July 22 and asked the police to revoke his passport and bring him back to the country.

Pendse, however, returned from abroad early last week.

When Business Standard contacted Pendse to seek his response to the charges levelled against him in the FIR, he declined to comment, citing legal advice.

Broadly, the FIR alleges that Pendse kept the Tata Finance board in the dark about the precarious financial state of Niskalp, kept on pumping Tata Finance money into Niskalp and exceeding his authority and cheating the regulators (the Reserve Bank of India and the Securities & Exchange Board of India).

He took investors in 9 per cent cumulative convertible preference shares (floated to raise Tata Finance's capital adequacy ratio) for a ride by showing that Niskalp made a profit through backdated transactions and playing heavily in K-10 stocks with borrowed funds, among other things.

Pendse is accused of violating the RBI's prudential norms on two counts -- maintaining a lower than 12 per cent capital adequacy ratio and lending over 25 per cent of Tata Finance's net worth to a single entity (Niskalp).

Pendse allegedly kept the board of the company in the dark and covered up the violations of norms by reducing the inter-corporate deposit exposure from Tata Finance to Niskalp by fraudulently entering into circular transactions. Between March 2000 and 2001, Tata Finance's ICD exposure to Niskalp jumped from Rs 2.20 billion to Rs 5.02 billion.

"This act of lending is in breach of the contract of employment and in violation of the prudential norms. This unlawful act has resulted in a loss of millions of rupees to the company," the FIR said. The "falsification of accounts" was discovered by the board of directors on May 25 and Pendse was "immediately censured for his conduct", the FIR said.

Tata Finance's board had set limits on the issue of cheques, based on the designation of the signatory and the value of the cheques. To avoid having to obtain the signature of the Tata Finance chairman, cheques for ICDs were always split into smaller denominations and this way the former Tata Finance managing director circumvented the limits on his authority, the Tatas said in the FIR.

On the Tata Finance rights issue, the FIR said, "Pendse and his accomplices devised a scheme for capital infusion into Tata Finance through the means of a convertible preference share issue by cheating potential investors -- the Tata group companies -- as that was the only way to cover up the losses".

According to the FIR, Pendse "proposed a backdated sale and buyback transactions of securities between Niskalp and Tata Finance to eliminate Niskalp's losses as on September 30, 2000.

This "fraud" was carried out to ensure shareholders' participation in the rights issue. The company back-dated two sale and buyback transactions -- first of Global Telesystems and then Global Electronic Commerce Services Ltd, an unquoted share.

These two backdated transactions entered in the books of accounts of Niskalp propped up the profit by Rs 260 million (Rs 165 million from the sale of Global Tele and Rs 95 million from GECSL).

Later, after Sebi started probing the Tata Finance rights issue, the company issued an additional disclosure to its shareholders that for the year ending March 31, 2001, Niskalp was expected to show a provisional loss of Rs 790-800 million.

The circular deals modus operandi

In just about one year -- between March 2000 and March 2001, Tata Finance Ltd's exposure to the information, communication and entertainment sector through its former subsidiary Niskalp Trading jumped from Rs 2.20 billion to Rs 5.02 billion.

The Tatas have alleged that former TFL managing director Dilip Pendse "conceived an ingenuous but utterly dishonest" method of managing the capital adequacy ratio of TFL through circular transactions. This is how it worked:

• Short-term bridge loans/overdrafts were taken by Niskalp, usually from Bank of India main branch or HDFC Worli (Bombay) branch for seven to 10 days before the end of every quarter.

• This bridge loans/overdrafts were then used by Niskalp to repay the inter-corporate deposits of TFL by issuing cheques or director transfer from Niskalp account to TFL account in the same bank.

• TFL would then retain the money with the same bank as a short-term deposit or credit balance in the account.

• This arrangement was the security offered to the bank for the bridge loan. The money never left the bank as there, only book entries.

• After a few days, TFL would either liquidate or encash its deposits and place inter-corporate deposits with Niskalp which would enable Niskalp to repay the bridge loans.

Niskalp no longer Tata Finance arm

Mired in controversial transactions with parent Tata Finance, Niskalp Investments & Trading Company Ltd was de-subsidiarised. Tata Finance no longer holds 99.4 per cent in Niskalp. Another Tata group company, Ewart Investments, picked up a shade over 50 per cent in Niskalp for Rs 398 million.

Tata sources said it is part of the restructuring exercise of Niskalp, which is an investment company registered with the Reserve Bank of India. It is into various activities in the financial markets including asset financing. In fiscal 2000, it had posted a net profit of Rs 527 million but it subsequently slipped into the red.

According to sources, Tata Finance had advanced a clean inter-corporate deposit of Rs 398 million to Ewart Investments, a wholly owned subsidiary of Tata Sons. Ewart Investments, in turn, invested this in Niskalp.

The move to demerge Niskalp has done with a view to improve the capital adequacy ratio of Tata Finance.

The losses of Niskalp are a concern for the Securities Exchange Board of India. The Sebi had pulled up Tata Finance at the time of its rights issue in April 2001 to disclose the losses of its subsidiary Niskalp, which the company had evaded.

The chronology, as per Tata Finance FIR

Here is the chronology of events, narrated by the Tatas in the FIR:

• Sometime towards the end of 1999, Pendse commenced extensive share market operations in Niskalp with heavily borrowed funds. The portfolio was lopsided in favour of K-10 stocks ("scrips linked with a broker who is currently under investigation").

• From quarter ended December 1999 to March 2000, Tata Finance breached the prudential norms of the Reserve Bank of India as regards capital adequacy ratio (CAR) and single-company exposure.

• On June 28, 2000, Niskalp paid an additional dividend of Rs 107 million to Tata Finance on a provisional profit of Rs 1.19 billion (Niskalp's year is April to March). With this, total dividend payout rose to 200 per cent (155 per cent interim dividend already disbursed).

• However, in September it was found that Niskalp's profit is insufficient to justify the dividend and hence it was converted into an interim dividend for the next year (fiscal 2001) even though Niskalp was in losses. These facts were concealed from the Tata Finance board.

• Between March 2000 and March 2001, Tata Finance's inter-corporate deposit exposure to Niskalp went up from Rs 2.20 million to Rs 5.02 billion. This act of lending is a breach of contract of employment and violation of prudential norms, the FIR says.

• Pendse "managed" to keep the CAR of Tata Finance every quarter through circular transactions. The board discovered it on May 25, 2001, and Pendse was immediately censored.

• On October 21, 2000, Pendse, along with company secretary B R Gazdar and present managing director Subodh Shah made a presentation to Tata Finance chairman F A Mehta and director Kishore Chaukar saying the CAR of Tata Finance was under pressure. The presentation did not disclose that Niskalp was suffering from losses.

• On December 19, 2000, Pendse wrote a letter to Ratan Tata, N A Soonawala, Ishaat Hussain and Chaukar persuading Tata Finance to underwrite up to Rs 620 million in the proposed rights issue. This letter did not say that Tata Finance did not have the required CAR and had a huge exposure to Niskalp.

• On January 4, 2001, Pendse called a board meeting to approve the Rs 909 million rights issue. The draft offer letter was approved.

• On February 8 Pendse informed the board that he would not seek re-appointment as managing director on expiry of the term on May 31

• February 20, 2001: At a board meeting Tata Finance agreed to support the rights issue to the extent of Rs 550 million.

• On March 20, 2001, it was decided that Niskalp's financial performance up to September would be shown in the rights issue offer letter as its December results were worse than that of September. Since Niskalp was suffering from losses even in September, Pendse proposed backdated sale and buyback transactions of securities between Niskalp and Tata Finance to eliminate the losses. Based on this the offer, letter was finalised.

• On April 16, Sebi sought explanation from Tata Finance on the rights issue.

• On April 17, Pendse sent in his explanation to Sebi executive director.

• On April 26, Sebi asked Tata Finance to modify the open offer with additional disclosures.

• On May 25, the real affairs of Tata Finance and Niskalp came to light when Subodh Shah made a presentation to the board. Pendse confirmed the presentation.

• On May 31, Tata Finance chairman wrote to Pendse asking for his explanations. It also appointed a chartered accountant firm to probe the affairs.

• Pendse wrote back to the Tata Finance chairman denying all charges. But Tatas dubbed the letter as baseless and untenable.

• On August 6, Tatas filed a FIR with the economic offences wing of the Maharashtra government against Pendse and five other senior executives of the company.

Pendse was not available for comment. However, in his letter to Tata Finance chairman dated July 21, he has denied all charges.

The letter said, "it was totally incorrect and false" that the Niskalp's ill-health came to light on May 25. The board was continuously kept informed about this and the "last such exercise was undertaken at board meetings on April 25 and 30".

He also said all necessary permissions were taken from time to time for investment in Niskalp. The cheques were given in small denominations for "administrative convenience".

He also said that the communication to the Securities and Exchange Board of India and all shareholders were approved by the board on April 25.

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