Investigation: Trapped in the forest fire

Suddenly, Suresh Prabhu, the powerful Union Environment Minister, finds his clean-n-green reputation going up in a blaze of irate investors, court cases, and political vendetta. What's the verdict?

This jungle trail runs from business to politics, from bankruptcy to deceit, from ambition to jealousy. At every twist and turn, it appears to have turned cold, but there is no doubt that the track unerringly leads to a swamp of fraud which the investor has, unwittingly, stumbled into. Embroiled in this forest of controversy is the 46-year-old Union Minister For Environment And Forests, Suresh Prabhakar Prabhu, whose meteoric rise in the last 2 years has stunned both his rivals and his friends. After all, Prabhu, who was not even a primary member of any political party when the Shiv Sena first announced his candidature in the 1996 Lok Sabha elections, immediately became the Union Minister For Industry in the 13-day Atal Bihari Vajpayee Government.

Since then, the cases against the flamboyant chartered accountant-turned-banker-turned-politician have been mounting. Totalling over 30--and filed in Panjim, Ernakulam, and Mumbai--they have uncorked his past: strong connections and cosy relationships. Did Prabhu prey on investor gullibility? Or is he the victim of a political plot? Prabhu swears by his innocence: "The campaign against me has been launched by some vested interests." The small investor, who has dragged him to court, disagrees. And, although all the cases are sub-judice, the needle of suspicion points to politics as much as it does to business.

It certainly appeared so when a criminal case was filed before the Judicial Magistrate (First Class ), Court No. 2, Ernakulam, on January 6, 1997. A Kochi-based investor, K. Joseph, complained that 2 cheques--which were issued by a Non-Banking Finance Company (NBFC), the Rs 7.83-crore Western India Financial Services, for Rs 2 lakh and Rs 9,896, respectively--had bounced. That was hardly surprising: since 1996, investors have lodged as many as 60,000 complaints against nbfcs with the Securities & Exchange Board of India (SEBI) and the courts.

What was unusual about Joseph's case--and the 30 others filed against Western India Financial Services--was the name of the co-accused: Suresh Prabhu. Nearly 15,000 investors had deposited Rs 20 crore with the NBFC promoted by the now-bankrupt industrialist, Nandan Gadgil, 42, whose Rs 300-crore empire--including the Rs 90.66-crore Western Paques, the Rs 68.97-crore Western India Industries, and the Rs 11.47-crore Western India Securities (later renamed Wisec Global)--crumbled in 1996-97.

Like other scams, a businessman's (Gadgil's) fraudulent offices led to a politician's (Prabhu's) home. Prabhu--who won the Parliamentary polls as a Shiv Sena candidate from the Rajapur (Maharashtra) constituency in May, 1996, and March, 1998--was the Chairman and Managing Director of Western India Financial Services besides being a director on the boards of 11 other companies, including the Rs 486.63-crore Global Tele-Systems and the Rs 387.38-crore Sai Service Station. Which is why criminal charges under the Negotiable Instruments Act were levelled against both Prabhu and Gadgil after investors discovered that the post-dated cheques issued by the company had bounced.

Even as Gadgil's Pune-based uncle, Avinash Wardekar, 61, is desperately trying to resurrect the Gadgil Western Group, Prabhu is fighting to prove his innocence. Legally, the bouncing of a cheque is an offence under Section 138 of the Negotiable Instruments Act, and the directors of an offending company can be prosecuted under Sections 141 and 142 of the same Act. While the Metropolitan Magistrate Court, Mumbai, has accepted Prabhu's plea that he should be discharged from the case, the Judicial Magistrate (First Class) Court, Panjim, has refused to follow suit. Instead, the latter has contended that Prabhu's innocence can only be proved after a full trial. BT explores the nexus by investigating the cases against Prabhu, and his proximity to Nandan Gadgil.

It was meant to revive the sagging fortunes of the Gadgil Western Group, which had diverted Rs 139.15 crore from its cash-rich companies--Western India Industries (1996-97 net profits: Rs 11.31 crore) and Western Paques (Rs 22.22 crore)--to finance its unrelated diversification into financial services, sugar, and shipping. In Western India Financial Services' 3-month fixed deposit scheme--which had been launched at regular intervals since 1995--investors were allowed to participate in the bill-refinancing business. After discounting a Bill of Exchange, Western India Financial Services would re-discount it in favour of the depositors based on the latter's quantum of investment. They were promised attractive returns: an annualised yield of 20 per cent on deposits of less that Rs 5 lakh, 22 per cent on deposits between Rs 5 lakh and Rs 10 lakh, and a "negotiable" yield on deposits of over Rs 10 lakh.

To reduce the depositors' risks, WIFS issued post-dated cheques for both the principal and the interest. It also forced the parties involved in the bill discounting deal--the issuer and the acceptor of the bill--to sign the bills of exchange. This was, obviously, done to protect the interests of the depositors in case the money was not paid up by the creditor company. But, at the time of encashing their profits, all that the depositors got was a stream of bouncing cheques. On November 14, 1996, when Joseph deposited 2 cheques in his account at the Central Bank of India, he was told that they could not be honoured due to "insufficiency of funds." On December 23, 1996, Joseph received a letter (dated November 14, 1996) from Western India Financial Services, which explained: "Due to the prevailing market conditions... our cash inflows are disturbed... Therefore, we request you not to present the aforesaid post-dated cheques as we are not certain of funding the account on the due date."

Little wonder, then, that the investor is crestfallen. Laments Joseph: "All my life, I had invested in schemes of the Unit Trust of India and the Post-Office. But, I guess, a mistake had to be made some day." By then, other creditors like H.G. Parekh, a Mumbai-based businessman, started realising what was happening. A cheque for Rs 1 lakh, which was issued to him by the company, bounced in September, 1997. But it was too late; Gadgil's empire was on the verge of bankruptcy, and investors had no option but to approach the courts to recover their money.

Expansion had contracted the Gadgil Western Group's fortunes. Between 1991 and 1997, Gadgil set up several greenfield ventures across the globe: in India, Dubai, and the US. He also raised large amounts of money by floating public issues at premiums. Not surprisingly, the share premium reserves of the group were Rs 329 crore on March 31, 1997, but it owed Rs 350 crore to the financial institutions, banks, corporates, and investors. Worse, the group's diversifications backfired: while the Rs 23.15-crore Western India Shipyards incurred a loss of Rs 30.35 crore in 1996-97, the Rs 5.68-crore Western Orissa Sugars made a loss of Rs 3.28 crore.

Gadgil was on the run. Law-enforcers finally caught up with him in April, 1997, when he was arrested in Dubai for another bounced cheque, which had been issued to a Dubai-based financier, Sunil Mansukhani. But he managed to get bail by putting some of his assets--including the Dubai-based Western India Oil Refinery, which planned to use a new technology to extract kerosene and diesel from refinery-wastes--on the block, and obtaining an advance from his bankers to repay his creditors. While Western India Financial Services has since been sold to Yogesh Kumar Tiwari, a Mumbai-based businessman, Gadgil's uncle, Wardekar, has taken over Western India Securities.

The case for the defence, essentially, rests on a single date: the day Suresh Prabhu resigned from the Western India Financial Services board. If it can be proved that his resignation was effective May 7, 1996--when the letter, dated May 6, 1996, was received by the company--it will prove his innocence. Since all the bounced cheques were issued after that date, that means that Prabhu was not involved in the scam. Points out Prabhu: "I resigned from the boards of (12) companies on May 6, 1996, to contest the Lok Sabha elections. I was not on the Western India Financial Services board when the cheques were dishonoured."

Did he? Agrees Manoj Tirodkar, 34, CEO, Global Tele-Systems: "We had asked Prabhu to be a non-executive director of our company. He resigned from our board on May 6, 1996." To buttress his claim, Prabhu shows copies of Form 32, which were filed by 11 companies--including Sai Service Station, Global Tele-Systems, and Global Wireless--with the Registrar of Companies (ROC) to indicate board-level changes. Indeed, all of them show Prabhu's resignation date as May 6, 1996.

Unfortunately, that is not the case with the form filed by Western India Financial Services, which uncapped the controversy. That document, filed by the NBFC on December 13, 1996, states that Prabhu, along with Gadgil and another director, Brij Bhushan Nagpal, resigned on November 14, 1996--the day Gadgil signed an memorandum of understanding to sell the company (which has since been renamed Amnet India) to Tiwari. In fact, the 4 new directors appointed on that date were Tiwari and 3 of his aides. However, another Form 32, dated March 26, 1997, lists Prabhu's resignation-date as March 15, 1997. If either of these dates (November 14, 1996, or March 15, 1997) is right, Prabhu will become an accused in at least some of the cases filed against Western India Financial Services.

To set the record straight, Prabhu even appears to have got the roc, Mumbai, to issue a clarification. In response to his letter, dated June 9, 1998, the roc wrote to Amnet India on July 24, 1998: "It appears that Suresh Prabhu had resigned on 7/5/96, and not on 15/3/97, as per Form 32 dated 26/3/97. You are, therefore, advised to rectify Form 32 immediately on receipt of this letter." Indeed, Prabhu's lawyers used this letter as evidence in their legal battles in Panjim and Mumbai to indicate that he had resigned from the boards of companies on May 7, 1996.

Last month, the roc also initiated legal proceedings against Western India Financial Services for violations under Section 303 (2) of the Companies Act. In a case filed in the Metropolitan Magistrate Court, Mumbai, the roc alleged that the company failed to file Form 32, notifying Prabhu's resignation in May, 1996, within the mandatory 30 days.

If true, why did Western India Financial Services decide to deliberately delay Prabhu's resignation? The reason, as disclosed by Prabhu's lawyers to the Judicial Magistrate (First Class) Court, Panjim: the company's board of directors would have lost legal sanction if Prabhu's resignation had been accepted in May, 1996. That's because Section 252 of the Companies Act states that a public company's board should have a minimum of 3 directors. And, after Prabhu's resignation in May, 1996, Western India Financial Services would have had only 2: Gadgil and Nagpal.

Those fears should not have influenced the resignation submitted by a director who wanted out. Points out S.S. Rana, 57, Advocate, Delhi High Court: "Nobody can stop a director from resigning. If it contravenes the law, the other 2 directors can co-opt a third director till the next general body meeting ratifies the decision, or inducts a new director." Maintains Prabhu: "My effective date of resignation from all companies, including Western India Financial Services, is the date on which I submitted my resignation to the respective companies." That was May 6, 1996, or May 7, 1996, if one considers the date when the letter was received by the company. Although there is no provision in the Companies Act about the process through which a director can resign, such events are decided by the relevant provisions in the Articles of Association of a company and legal precedents.

Take the case of Western India Financial Services. Article 155 of its Articles of Association states: "A director may, at any time, give notice in writing of his intention to resign by addressing it to the board of directors of the company and delivering such notice to the secretary or leaving the same at the registered office of the company Thereupon, his office shall be vacated." Legal precedents also support Prabhu's defence. Agrees Tirodkar: "A director's resignation is effective immediately if there is no mention in the Articles of Association. Else, one has to go by specific clauses in the Articles."

Are deliberate attempts being made to villify Prabhu? Yes, says Kirit Somaiyya, 44, the Maharashtra State President of the Bharatiya Janata Party (BJP), who has known Prabhu since 1975: "The number of cases filed against him reflects the extent of political jealousy. Notes Prabhu: "Most of the cases against me were initially filed 20 months ago. They were refiled after I became a minister once again in March, 1998."

In fact, the controversy has seeped into the Goan political arena. There, the legal campaign against Prabhu is being spearheaded by Gopal Mayekar, 64, a former Congress-I Member of Parliament, who himself had invested Rs 2 lakh in Western India Financial Services, and is actively involved in the 29 cases filed by Goan investors against Prabhu. All these cases have now been transferred to the Sessions & District Court, Panjim, and the next hearing is scheduled for January 6, 1999. But Mayekar denies that the charges are politically motivated: "There is no campaign against Prabhu since I am also a victim. In fact, he was the only director against whom we could initiate prosecution as all the others (including the promoter, Nandan Gadgil) are missing."

Of course, his political links have compounded Prabhu's problems. Points out Somaiyya: "When Madhu Dandavate represented Rajapur in Parliament between 1971 and 1989, Prabhu always supplied him with details on crucial business issues. He was also close to Congress (I) politicians like Sharad Pawar and Vittal N. Gadgil." But, in the same breath, Prabhu's friends contend that he has never been involved in any controversy before the Western India Financial Services scam. Agrees Mukesh Kalmadi, 46, Joint Managing Director, Sai Service Station, where Prabhu was a director: "He has a clean image in business and politics."

But, then, how did Prabhu get involved with Nandan Gadgil? Explains Prabhu: "I was invited by a number of promoters, including Nandan Gadgil, to join the boards of their companies because of their perceptions about my standing in public life." Moreover, Prabhu's political aides contend that neither did he have any executive powers in any of the companies--including Western India Financial Services--nor large equity stakes in them. For instance, his family's stake in Western India Financial Services, which had an equity base of 58.50 lakh shares, was a mere 300 shares.

Of course, Prabhu's business roots go deeper (see box). Both in his capacity as a chartered accountant and the chairman of the Saraswat Cooperative Bank (1997-98 income: Rs 254.83 crore), he was close to numerous businessmen. For instance, Tirodkar admits that Prabhu's chartered accountancy firm was the auditor of one of his companies. And Prabhu himself says that, as the chairman of the Saraswat Bank for 81 months (between 1989 and 1995), he regularly interacted with businessmen. Indeed, he is still a director on the bank's board and, in September, 1998, he and his supporters were again elected to it. In fact, among the 12 directors elected, Prabhu got the maximum number of votes.

Going by the number of cases against Prabhu, he may find it tough to emerge completely unscathed. Already the rulings of the Panjim and the Ernakulam Courts indicate that he is unlikely to wriggle out of his predicament easily despite the fact that he has received a favourable decision from the Mumbai High Court. For instance, after the Ernakulam Court issued 2 non-bailable warrants against Prabhu on January 14, 1998, and March 19, 1998, in the Joseph case, he managed to get a stay on the proceedings from the Kochi High Court on July 2, 1998. But, on October, 23, 1998, Joseph filed a counter-affidavit before the High Court, which has yet to deliver a final judgement.

In Goa, the lower courts have delivered a body blow to Prabhu's defence. States the judgement by the Judicial Magistrate in Panjim, C. Fernandes, delivered on August 29, 1998: " the alleged defence taken by the accused No. 2 (Suresh Prabhu) will be looked into only at the stage of trial where both the parties adduced their respective evidence and documents." And in another case in Goa--filed by the Panjim-based Gulf Goan Hotels Company--the Judicial Magistrate, Desmond D'Costa, ruled on September 1, 1998: "At this stage, there is a strong suspicion that the accused (Prabhu) had cheated the complainant by inducing the investment of money"

Prabhu's defence will be further demolished if fresh cases--relating to the period when he was the Chairman and Managing Director of Western India Financial Services--are filed. Indeed, many companies promoted by Nandan Gadgil have failed to repay their creditors, but they have decided against taking legal action against him or his companies. Points out Kalmadi, who refuses to disclose the exact amount his company lent to the Gadgil Western Group: "We are sure that we will not get the money back. And this is part of doing business in India."

But, then, as Suresh Prabhu has realised, there is yet another danger of being associated with businessmen like Nandan Gadgil: that of being embroiled in a long-drawn legal battle. And, even if it is just a case of dirty business discolouring ugly politics, Prabhu cannot easily disentangle himself from the knots he himself once tied between the two.

The Friends Of Suresh Prabhu Ltd

It has been a political pole-vault for Suresh Prabhakar Prabhu. In the mid-70s, he was only the President of the Khar Residents' Association in Mumbai; by 1996, he had joined the ranks of the Union Cabinet.

Maharashtra politics was aflutter when Prabhu, a Saraswat Brahmin from Konkan's Malvan region, got a Shiv Sena ticket to contest the 1996 Lok Sabha elections. Explains a Mumbai-based Shiv Sena leader: "We though Prabhu was ideally placed to fight the elections under the Congress (I) or the Bharatiya Janata Party (BJP) banner. He was close to politicians from both the parties." Prabhu, however chose, the Shiv Sena which gave him a ticket because its supremo, Balasaheb Thackeray, apparently wanted the intelligentsia to represent the Shiv Sena in Parliament. And Prabhu had the right credentials: a gold medal in the chartered accountancy examinations in 1980; years of charitable work; and proximity to politicians like Madhu Dandavate of the Janata Dal and Sharad Pawar of the Congress (I).

What was even more important was Prabhu's influence in the co-operative movement, which wields considerable political power in Maharashtra. In fact, Prabhu's 15-year stint, from October, 1983, as the Director of the Saraswat Co-operative Bank, and his 81-month tenure as its Chairman-between January, 1989, and September, 1995-brought him close to both politicians and businessmen. During his chairmanship, the bank's net profits rose from Rs 1.96 crore in 1988-89 to Rs 7.43 crore in 1994-95 while its deposits zoomed from Rs 5,002.84 crore to Rs 8,453.41 crore. "His ambitions may have grown during this time," says Kirit Somaiyya, 44, the President of the BJP's Maharashtra unit.

What benefited Prabhu was also his proximity to Suresh Kalmadi, 54 an Independent Member of the Rajya Sabha, his brother Mukesh Kalmadi, and Nandan Gadgil, the Chairman of the now-bankrupt Gadgil Western Group. Admits Mukesh Kalmadi, 46, Joint Managing Director, Sai Service Station: "My interactions with Prabhu were due to the latter's participation in high-profile activities in Mumbai." Unfortunately, Prabhu got too close to Nandan Gadgil, whose among small investors. And now threatens to engulf Prabhu too in controversy.

'The campaign is by vested interests'

In an exclusive interview with BT, the Union Minister For Environment & Forests, Suresh Prabhu, defends himself:

Q. Mr Prabhu, when did you resign as the CEO of Western India Financial Services?

A. I resigned from all the (12) companies in May, 1996, to contest the Lok Sabha Elections.

Why is there a discrepancy in the dates mentioned in Form 32?

Form 32, which has be filed to the Registrar of Companies, has to be complied with by the companies. My resignations of the Articles of Association of the respective companies and the requirements of the Company Law as well as the prevalent practices in the corporate sector. My effective date of resignation from all the companies, including Western India Financial Services, is May 6, 1996. My resignations from these companies have been taken note of by the authorities concerned.

How many criminal cases have been filed against you? Are they related to only Western India Financial Services?

The cases are not filed against me personally, but against Western India Financial Services, in which I have been sought to be implicated in my capacity as a director. All the cases pertain to the cheques issued by Western India Financial Services, which were not signed by me. I was (also) not on the board when the cheques were dishonoured.

What explains your presence on the board of a dozen companies?

As a chartered accountant with a flourishing practice, I had relations with several companies. I was (also) invited by a number of promoters, including Western India Financial Services' Nandan Gadgil, to join the boards of their companies in view of their perception about my standing in public life. I have been working in social, and educational areas for more than 2 decades through voluntary agencies. The campaign against me is by vested interests. I do not ascribe it to any particular political party.