The Crime

Quick, what do you get when you put together an ambitious entrepreneur dreaming of the big time, a low-profile broker in plain vanilla government securities, and a politically-connected co-operative bank head? The answer, as must be evident to anyone who has been reading the papers, is a Rs 600-crore scam. For those whose obsession with India's sabre-rattling post the attacks in J&K has caused them to block out everything else from their consciousness the facts (in brief) are as follows. Sanjay Agarwal, the 36-year-old founder and CEO of Home Trade (that's right, the financial portal that ran a campaign featuring Shah Rukh Khan, Sachin Tendulkar, and Hrithik Roshan), and Ketan Sheth, a 40-something broker who is increasingly being referred to as the other Ketan-the original, of course, being Ketan Parekh, who too was in the news at the same time, thankfully in a different context-allegedly defrauded co-operative banks and the Seaman's Provident Fund of Rs 598.7 crore.

How? By simply taking money from the victims for the purchase of government securities, and failing to deliver them. The scam came to light when Sunil Kedar, the Chairman of Nagpur District Central Co-operative Bank (NDCCB), filed an fir with the Nagpur Police against five brokerages, Home Trade, Gilt Edge Securities, Century Dealers, Indramani Merchants, and Syndicate Services over the non-delivery of government securities worth Rs 125 crore. With interest, the amount came to Rs 150 crore. Two other banks, Osmanabad District Co-operative and Wardha Co-operative, announced, in quick succession, that they were infected with the G-sec virus too.

Sanjay Agarwal: The victim or the crime

Sanjay Agarwal: His big-time dreams are now dust The Kolkata-boy who grew up to promote Home Trade, along with Ketan Sheth and Baluchan Rai, a Hong Kong-based NRI, was always a dreamer. An MBA from Bombay University, Agarwal (now 36) began his career with Tata Consultancy Services (TCS). He moved rapidly, always up, always with that big dream in sight, and dollars in his eyes, to Citibank, brokerage SSKI, and Lloyds Brokerage. However, the Gupta family that controlled Lloyds wasn't happy at the brokerage's performance and sold it to Agarwal, who acquired it in December 1998, at Rs 1.50 a share. Some of Agarwal's former colleagues at Lloyds Brokerage suspect Agarwal could have been siphoning out funds in an effort to ensure sizeable returns to Baluchan Rai for whom he was then managing funds in an independent capacity. Rai, in return, played angel investor to Home Trade by providing venture capital funding. Agarwal hired the best money could buy. PriceWaterhouseCoopers framed Home Trade's distribution strategy; he sought out former KPMG and Coopers & Lybrand hand J. Rajagopal to head Ways India, an associate company that provided mobile commerce solutions; and St Luke's, a United Kingdom-based creative hotshop was working on a campaign to take Home Trade global. Only, all that now seems to have been part of an elaborate quest for respectability. In the end, Agarwal's focus on appearances back-fired, and with an unsustainable business model, and no products to speak of, he may have been forced to veer from the straight and the narrow path. Ketan Sheth, who's rapidly emerging the villain of the piece, may have thought up an easy way out. Or Agarwal himself could have conceptualised the G-sec heist. Victim or the crime - either way, his dreams are now dust. -Roshni Jayakar

Only Kedar wasn't a victim. The son of veteran Congressman Balasaheb Kedar who founded NDCCB, and a member of the Sharad Pawar-led National Congress Party (NCP), he was the third member of the triad, the one who purportedly put the brokerages in touch with other co-op banks that wanted to buy G-secs. As for the Rs 125 crore ndccb spent over the last two years on buying G-secs, he didn't even insist on a receipt from Sheth and Agarwal. Only in April 2000, when the cheques issued by Home Trade/Gilt Edge in lieu of the G-secs bounced, did he go to the police.

As this magazine goes to press, the Ponzi scheme that Agarwal and Sheth crafted is becoming clear. Like all Ponzi schemes, it is at once both audacious and absurd. The brokerages would take money from co-op banks for the purchase of short-dated government securities. Then, they would either never buy them, or buy them and allegedly pledge them as collateral with other banks, and use the money. If a bank asked them where the securities were they would say it had been sent to RBI for delivery. When the securities matured, they would repeat the deal with another co-op bank to pay the first. It helped that decision-makers like Kedar and Seamen's Provident Fund Commissioner Arup Kumar Ghond proved amenable to their suggestions. Sheth has gone on record that he paid Ghond a bribe to swing his decision to invest Rs 92 crore in G-secs.

The Broken Link

It isn't clear what Sheth and Agarwal did with the money. Since they must have known that they would have to square things with the co-op banks eventually, it is unlikely that they burnt it, say, on a private island in the Caribbean. Chances are, a large part of the money found its way into equity-financing where it's possible to earn returns in the range of 15-18 per cent. Even if the duo accounted for the interest on G-secs, 8-9 per cent, the spread was still attractive enough for them to go through with the scheme.

It was easy to convince co-op banks. In some cases, the promoters were venal; in others, the incentives offered by Home Trade, Gilt Edge, or any of the other brokerages-Hoogly Trading and Investments, Pacific Finance, Dalhousie Securities-were attractive enough. Some banks did insist on some proof that the transaction had been completed; that often ended up being a receipt issued by one of the brokerages that was part of the ring to another, a mere paper transaction. The delivery-delay excuse was plausible. RBI allows small entities like co-op banks to transact physically in G-secs; all others take the DEMAT route.

Which link of this Ponzi scheme collapsed isn't yet evident. Or maybe the problem wasn't with the scheme itself but one of the players. Everything points to Kedar. He dealt with Home Trade without the permission of NDCCB's board of directors. He advanced Rs 30 crore to Osmanabad District Central Co-operative Bank to invest in government securities through Home Trade. He loaned an additional Rs 20 crore to Euro Discovery Technology Ventures, Home Trade's holding company; the collateral was Home Trade stock. Then, either something soured between him and the Agarwal-Sheth duo, or he simply got cold feet.

Agarwal, meanwhile, continued to lavish money on Home Trade. He hired the best and paid for it. As this sentence is being written on May 21, sources on the Street claim Agarwal had invested in K-10 stocks (favourites of the bull Ketan Parekh) in 2000-01. When the market crashed, he resorted to the G-sec heist to funnel money from co-operative banks to equity financing and to play the stockmarket. The value of his holdings, though, continued to erode and despite the spread he was making on equity financing, he kept his Ponzi scheme going, paying hefty incentives to the co-op banks.

That's a more plausible theory than the one suggesting some of the money-around Rs 600 crore-went out of the country. Agarwal is unlikely to have engineered that; he wanted to make it big in India. First on his agenda was a proposed IPO for Home Trade to mop up Rs 1,500-2,000 crore. Simultaneously, he had also started working on getting the company listed on BSE. The objective was straightforward: list on BSE, offload equity to mutual funds and financial institutions, and then go for the IPO. Only BSE wasn't willing to play ball; its board postponed the decision on the listing in April 2002, citing the fact that Home Trade's income primarily came from selling shares of group companies. The board also found that the company's shares had been rigged on Pune Stock Exchange, helping it show a market capitalisation of Rs 2,000 crore. This was the second disappointment for Agarwal; earlier, his proposal for an IPO for Home Trade's associate company Ways was scotched by BSE. And after Ways' global partner Brokat declared bankruptcy, its CEO, former KPMG hand J. Rajagopal, put in his papers.

Today, the Home Trade website is down, and Agarwal, Sheth, Ghond, and Kedar are being interrogated by the Central Bureau of Investigation. The Agarwal-Sheth heist was audaciously simple, but they certainly couldn't have done it without co-op banks. Once again, just over a year after Madhavpura Mercantile Co-operative Bank's involvement in the Ketan Parekh scam, these institutions find themselves in the middle of a controversy.

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