Pendse has alleged that he regularly updated Ratan Tata on important matters relating to Tata Finance Dilip Pendse, Former MD, Tata Finance

Tata claims Pendse told him of TFL's problem only in April 2001, and denies being part of any decision-making Ratan Tata, Chairman, Tata Sons

On September 9, 2002, Dilip Pendse will find out if he can get second-time lucky. That's when the Bombay High Court will conduct the second hearing on the case against the former managing director of Tata Finance Ltd (TFL), accused by the Tata group of siphoning off more than Rs 400 crore from the company for his personal benefits. Earlier, on June 10, 2002, the High Court had granted him an interim relief against the civil suit filed on May 17, 2002, claiming Rs 424 crore in damages.

There's no saying how the hearing will go. But for the moment, Pendse-one-time executive assistant to group Chairman Ratan Tata and a man who held the personal power of attorney for Tata-looks comfortable. On August 22, 2002, Mumbai police said it had not found any proof of transfer of funds from TFL by Pendse or that TFL lost money due to wrong decisions taken by Pendse. The Securities and Exchange Board of India (SEBI), however, is simultaneously questioning Pendse for suspected insider trading. Meanwhile, the Tata group has been busy teflon-coating its own image and that of its executives through full-page advertisements in newspapers that attribute the 16-month-old controversy to a vilification campaign by its rivals.

With allegations and counter-allegations between the Tata group and Pendse flying thick and fast, some vital questions are getting blurred. Questions like 'did Pendse really conspire to defraud TFL of more than Rs 400 crore?' If yes, how come the TFL board-which had eight members, most of them Bombay House loyalists-did not smell rat and clip Pendse's wings before it was too late?

Understandably, these are not easy questions to answer. Yet, it is reasonable to expect that a group like Tata would have put in enough checks and balances to prevent abuse of power by a CEO. Yet, Pendse seems to have been given excessive leeway. For example, Tata sources told BT that he would go to the board only to ratify investment decisions already made. Even conceding to the insiders' claim that the cheques made out for these investments were of small amounts, and within Pendse's powers, why didn't the board question him on these? In fact, audit firm AF Ferguson, which was hired by the group to investigate into the scam, raised issues of corporate governance within the company. Its 904-page report is believed to have unearthed several questionable inter-group transactions intended to help various group companies like Tata Engineering and Tata Chemicals book profits. Also, the report is said to have been critical of Kishore Chaukar, a key group executive and then a director on the TFL board.

The manner in which the group reacted to the report is not in keeping with its known standards of professionalism. First of all, Y.M. Kale, Ferguson's Senior Partner and the author of the report, was made to resign; the original report itself was 'reviewed'; the firm is said to have returned Rs 95 lakh in audit fees; and even allegedly shredded documents-a la Andersen. The Tata Group may not have had anything to do with any of the firm's decisions. But the fact remains that it acquiesced to them. Surprisingly too, the group's Central Ethics Committee, believed to be more powerful than Tata himself, chose not to intervene, although the urgency was obvious.

Did Pendse Cheat?

According to the fir and various other complaints filed by the Tata Group against Pendse, he is alleged to have advanced huge inter-corporate deposits to TFL subsidiary Niskalp Investment & Trading, which in turn is said to have carried out dubious deals. Some of the alleged offences of Pendse include: criminal breach of trust in diverting large amounts of funds of TFL through ICDS to Niskalp; entering into circular transactions at the end of every quarter between September 1999 and March 2001; misleading the board and the regulators about the exposure of the company to Niskalp; entering into back-dated transactions with a view to showing profits in Niskalp; cheating the board of directors by concealing the real losses of Niskalp by artificial infusion of capital into the company from TFL and taking that out again to TFL as subscription of cumulative redeemable preference shares; undertaking illegal and unauthorised carry forward transactions in Global Telesystems through Jhunjunwala Stock Brokers and falsifying information in TFL's rights issue offer letter.

Niskalp, on its part, is alleged to have invested large sums of money into the K-10 stocks, besides building a large exposure to Vakrangi Software, a software company in which Pendse is said to have invested. As in the case of the Unit Trust of India, TFL had provided an exit route to Ketan Parekh, because it continued buying K-10 stocks even as their prices were falling. But the scam came to light in April when, just ahead of the rights issue, a letter was circulated on Dalal Street by a fictitious Shankar Sharma stating that TFL was in deep financial trouble. In May (See Chronology of A Scam), TFL Chairman F.A. Mehta asks Pendse for an explanation. Thereupon, it becomes evident that there is indeed a financial crisis at TFL. Pendse, who had put in his papers in February 2001, is relieved of his duties on May 31, 2001. AF Ferguson is appointed to investigate the matter, and on June 27, 2001, the firm submits an interim report, based on which the fir against Pendse and five other TFL executives is filed.

Within days, TFL Director J.E. Talaulicar is charged with insider trading by the Securities and Exchange Board of India. TFL also rushes to the Reserve Bank of India with a mercy petition and promises to make good the capital shortfall by pumping in Rs 300 crore within a fixed period of time. The company also starts cleaning up its balance sheet, and posts a net loss of Rs 396 crore for the year ended June 30, 2001.

Could Pendse alone have pulled off a scam of this magnitude? Not likely, say some experts. According to Section 372 of the Company's Act, board approval is mandatory for investment in other companies. Alternatively, the board can authorise a person (usually the Managing Director) to approve investments of a certain amount. In the case of TFL, therefore, either the board was lax or had vested sweeping powers in the hands of Pendse. A caveat is due, though. In the case of fully-owned finance subsidiaries-Niskalp was one-board resolution is not mandatory.

Pendse is also alleged to have owned and controlled a string of unregistered companies such as Anjudi Property and Investments, Nalini Properties, Khudah Gawah Investments, and Dhanoo Properties Investments. The implication, of course, is that Pendse also used his own companies to route money out of TFL and Niskalp. In any case, the fact that Pendse was the Managing Director of TFL when the scam unravelled makes him as much accountable for it as the board that was supposed to second-guess him. In fact, in his affidavit, Pendse has claimed that the group top brass, including Ratan Tata, was regularly updated on the affairs of TFL.

THE OTHER MEN IN THE CONTROVERSY People who, knowingly or unknowingly, got entangled in the controversy.

Kishore Chaukar: A key group executive, Chaukar is alleged to have asked page 60 of Ferguson's report to be removed from the agenda of a TFL board meeting on April 30, 2001. J.E. Talaulicar: A director of TFL, Talaulicar is alleged to have done insider trading by selling 1 lakh shares of TFL on the eve of the company's rights issue. Y.M. Kale: Ferguson's senior partner and the man who penned the controversial report on TFL. The report was withdrawn and Kale resigned on August 7, 2002. N.A. Soonawala: Pendse has claimed that this former financial advisor to the Tata group and director of Tata Industries was consulted on all important issues of TFL and Niskalp.

Says a Delhi-based council member of the Institute of Chartered Accountants of India: "According to the corporate governance norms, the board is supposed to review operations on a monthly and quarterly basis, and also look at the cash flows. If the board isn't guilty (of anything else), then at the least it is guilty of sleeping."

If that be the case, then for the Tata Group this is as good a wake up call as it will get. Its spotless corporate reputation has been sullied by this ugly controversy. Sure, in the past Tata has had to force out powerful satraps from various group companies. But never before has he had to deal with a scam of this magnitude.

More importantly, never before has Tata had to prove that he's personally above board. Now, the group must set the record straight. Fortunately, that process has already started. Recently, the group made the Ferguson report available to the Department of Company Affairs. And, Ishaat Hussain, Group Finance Head and now the Chairman of TFL, has started devoting more time to the troubled company. "I have to manage the show, build the morale of the employees, and (manage) serious issues (like) recapitalisation of the company," he says. Needless to say, L'affaire Pendse is something Bombay House, or its admirers, won't forget in a hurry.