Dilip Pendse, Former MD, Tata Finance
Ratan Tata, Chairman, Tata Sons
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
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 RS 480-CRORE QUESTION
Tata Finance gave Niskalp Rs 480 crore as
advance. In response to a civil suit by the Tatas against Pendse,
his affidavit gives a break-up of where the money went:
| Rs 201 crore Invested
in stocks, including Ketan Parekh's favourite 10 companies known
Rs 99 crore Disbursed as loans
to Tata Engineering dealers, who in turn used it to finance
Rs 77 crore Net amount advanced
for various windmills projects of Niskalp Trading & Investment.
Rs 45 crore Loans and ICDs to
Integrated Call Services, which securitised receivables of Global
Rs 43 crore Invested in unquoted
stocks, including Tata Finance Securities and Tata Share Registry
Rs 32 crore Invested in shares
and debentures of various privately-held companies
Rs 25 crore Inter-corporate Deposits
(ICDs) with several companies
Rs 16 crore Invested in purchase
of aircraft and other assets by Niskalp
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
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.
| Chronology of A Scam
How the multi-crore scam unravelled over the months.
starts trading heavily in stocks, and breaches the RBI's prudential
norms on capital adequacy.|
Niskalp pays an additional
dividend taking the total dividend paid to 200 per cent.
and Company secretary B.R. Gazdar make a presentation to TFL
Chairman F.A. Mehta and director K.A. Chaukar saying Niskalp's
capital adequacy ratio is under pressure.
A board meeting
is called to approve the Rs 90.93-crore rights issue.
and the board accepts his resignation, beginning May 31, 2001.
Rights issue letter
of offer finalised. Also, back-dated transactions of securities
are allegedly done between Niskalp and Tata Finance to elminate
losses in the latter.
Ahead of the rights
issue, one Shankar Sharma circulates a letter stating TFL is
in deep financial trouble.
and Exchange Board of India (SEBI) seeks explanation from TFL
on the rights issue.
TFL Chairman calls
for Pendse's explanation. Pendse is relieved. The group appoints
AF Ferguson to probe the TFL affairs.
Senior Partner of
AF Ferguson, Y.M. Kale, submits the interim report.
The Tata Group
files an FIR against Pendse and some other senior executives,
alleging criminal breach of trust.
Chaukar, the entire TFL board resigns.
The Tata Group
appoints an internal committee to investigate insider trading
charges against J E Talaulicar.
A.F. Ferguson submits
its 904-page report on TFL.
The report is tabled
before the TFL board. Chaukar resigns from TFL.
The Tata Group writes
to AF Ferguson disagreeing on various observations in the report.
Excerpts of the
Ferguson report make headlines.
Ratan Tata defends
Kishore Chaukar at the Tata Engineering AGM.
AF Ferguson withdraws
Y.M. Kale resigns
from AF Ferguson.
of Company Affairs swoops down on Ferguson offices in Mumbai,
fearing shredding of vital documents.
At the VSNL AGM,
Ratan Tata says that Pendse had informed him about TFL's financial
problems only in April, 2001, and denies knowledge of investment
decisions made by TFL.
that he used to brief Ratan Tata regularly on affairs of TFL.
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
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.
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.
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
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.