Sucheta Dalal on a brazen and audacious scam at Stockholding Corporation of India
As financial scams go, this would have been really big if it were not nipped quickly by direct intervention of the Prime Minister’s Office. There has hardly ever been a case of the top brass of a well-known company looting a subsidiary and scooting away - right under the nose of its directors representing names such as Life Insurance Corporation, ICICI Bank, IDBI, Industrial Finance Corporation of India, General Insurance Corporation and Unit Trust of India. The case of Stock Holding Corporation of India Limited (SHCIL) involves a stunning regulatory failure on the part of the stock exchange and the Securities Exchange Board of India (SEBI). So brazen was R Jayaraman Iyer, the SHCIL chairman, that he thought nothing of mocking the very concept of good governance by appointing as senior vigilance officer, a police officer who was indicted for helping the mother of Dawood Ibrahim, a notorious gangster, to obtain a fake passport.
The story is simple. SHCIL is India’s largest custodian and depository participant. It has a subsidiary called SHCIL Services Ltd (SSL), or rather it was once a SHCIL subsidiary. S Ramanathan is the CEO. In a nice incestuous arrangement, Iyer drew a second salary from SSL without the knowledge of SHCIL’s board and Ramanathan earned money as the advisor to SHCIL. SSL was structured in a way that almost its entire infrastructure cost as well as a big chunk of personnel costs were loaded on to SHCIL.It was almost impossible for an outsider to demarcate the businesses and responsibilities of each entity, especially because Iyer and Ramanathan seemed to control all decisions at both entities. The gameplan was to make SSL strong and SHCIL, held by the public-sector companies, weak.
For instance, SHCIL had a revenue sharing of 85:15 in its favour in a deal with UTI Securities. But when SHCIL and SSL entered into a sub-broking agreement on 13th April 2006, the deal was totally to SHCIL’s disadvantage. It opted for a 50:50 revenue sharing with waiver of DP charges adding to its loss with licence fees for sub-broking payable @ Rs15000 per exchange, per segment, per licence installed, to be paid to SSL. All incidental costs for providing and maintaining the infrastructure for SSL were to be borne by SHCIL, including 45% of the rent for SSL’s ground floor premises in the BSE building. The idea was to drain money out of SHCIL. Then came the bigger scam in a contract to be the Central Record Keeping Agency for an e-stamping project that could potentially expand nationwide to capture a Rs50,000 crore revenue stamp market.
On bagging that deal, Ramanathan and Iyer began to work furiously to cream offSHCIL’s profits to private entities. First, they diluted SHCIL’s holding in SSL down to 24%. The shares were given to a Singapore-based entity called E-Ventures Capital and three unknown individuals. SSL also acquired a Singapore-based entity called Unitech Value Solutions (UVS). Iyer and Ramanathan then floated four companies in India, which used the pre-fix SHCIL, while in fact they may have had a small investment from SSL (already privatised and under their control). These were:
l SHCIL Hannobe Technologies Pvt Ltd, based in Kerala. It was started by SHCIL Projects Ltd and two individuals - Pradeep Kumar Karunakarn and Vishwanathan Lakshmanan (a charge-sheeted SHCIL employee). Someone called Boney Shek, a former employee of CrimsonLogic Pte, now claims to be in charge. It was working out of SCHIL’s office at the Technopark at Thiruvananthapuram and has now been asked to vacate the office and remove the prefix SHCIL from its name.
l SHCIL Projects was registered on 10th August 2006, in Chennai. SHCIL holds 7 lakh shares of the company, SHCIL Services holds 2.5 lakh shares and another 2.5 lakh shares are with GK Management Services (India) Ltd. SHCIL’s HR database with payroll information, say informed sources, were outsourced to GK Management Services.
l SHCIL Value Infosolutions was promoted in August 2006, in Chennai with T Kannan Jagan and Indira Jagan as directors. They are listed as defaulters to a Karnataka government entity through their privately-owned company -Value Infosolutions. The registered address of, SHCIL Value Infosolutions Pvt Ltd., say sources, is a house belonging to the wife of S Ramanathan at T-Nagar,Chennai that was hired by SHCIL on 28th October 2005.
The Scam Surfaces
How did all this come out? It was a set of whistleblowers inside SHCIL who began to inform us about the murky and unbelievable dealings of Iyer and Ramanathan. But their fantastic story acquired credibility when Ramaswamy Ravindran (a former Singapore parliamentarian) who helped seal the deal with CrimsonLogic went public. He says that he was given shares in E-Ventures Capital and a board position in SSL, in lieu of his consultancy fees. He was told that the SHCIL board had cleared all the convoluted deals. He stepped down when he smelt a rat and on March 12, 2007, slapped a legal notice on SSL and sent copies of it to SEBI, the Central Vigilance Commission (CVC), the CBI, Reserve Bank and the Finance Ministry. They were ignored. Ravindran says he was alerted by the involvement of Andrew Quek in E-Ventures who has been convicted for corruption. He openly alleges that both the e-stamping and broking business would have been ultimately controlled by Iyer and Ramanathan privately. I began to write about these incidents in February. The government action finally started in mid-April when IDBI Chairman VP Shetty was asked by the PMO to take charge and Jayaraman Iyer sent on compulsory leave. RK Bansal, a senior IDBI executive, was asked to take over.
On April 14, Iyer was removed as chairman of SHCIL and SSL and soon after, SHCIL’s institutional shareholders appointed KPMG’s fraud detection arm to investigate. Once the scam details became available, KP Krishnan, Joint Secretary, Ministry of Finance, wrote to the Ministry of Company Affairs seeking its intervention. On May 14, DK Gupta from the Registrar of Companies was asked to investigate, under Sec. 247 (i) of the Companies Act, the real ownership of SSL. On May 17, the Company Law Board passed orders under Sec. 250 (2) to freeze SSL’s shareholding and block all voting rights or transfer of shares and restore the position as it existed in 2005 when SSL was set up as National Depository Company of India Ltd. Unfortunately, this order is so badly worded that it restores power to the original signatories to the Memorandum and Articles of Association which include a former MD who has long since retired, two charge-sheeted executives and Manoj Borkar (company secretary), who have all been actively involved in the hijack of SSL andexecuted most of the agreements.
Nearly six weeks after he was sent on compulsory leave, Jayaraman Iyer caused a flutter at SHCIL’s office by barging in with some hangers-on and claimed he was back. Insiders say that he spoke to RK Bansal and later collapsed and had to be taken to hospital. He returned the next day and attempted to enter his office again. Bansal and IDBI then decided to seek police protection to ensure that the board meeting on June 2nd was not disrupted. Earlier, the board had decided to induct two independent directors - G Ramamurthy (corporate ethics expert) and N Balasubramaniam (an academic) . It now decided to remove R Jayaraman Iyer, AT Pannir Selvam (former Union Bank Chairman) and T Narasimha Rao (independent) as directors from SHCIL. These moves were to be formalised at the Extraordinary General Meeting on June 20th.
Source of Power?
SHCIL has had a chequered past. It was investigated in the 1990s for the Reliance share-switching episode. During the Ketan Parekh scam, four of its employees were charge-sheeted, yet it engineered a “clean chit” for them by appointing an independent consultant and also through SEBI. Ironically, the charge-sheet remains valid and is documented in detail in the Joint Parliamentary Committee Report without any exoneration. Jayaraman Iyer and Ramanathan were particularly skilled at building a slew of convoluted connections. The most powerful of these was the close personal friendship with SEBI’s top brass including the chairman and whole-time board members. They worked out astrological charts and religious pilgrimages together. It was not just celestial; there were materialistic connections too.
SHCIL hired a house owned by TC Nair (whole-time SEBI member) at Palghat - on the Tamil Nadu-Kerala border -- as its guesthouse. SHCIL’s new management has discovered that the guesthouse was never used because it had no operations there. When asked, Nair told us, “I have met this guy, Jayaraman Iyer, just once. The house was taken through SHCIL’s southern office through my father-in-law who takes care of it. I would be too glad to get it back as I am told that they have dug too many holes on the walls to fit air-conditioners. Also, I would need this house as I may go back to Palakkad any time”. Interestingly, having a house furnished and maintained is one of the perks of leasing it as a guesthouse and Jayaraman Iyer was adept at building such relationships.
At SHCIL’s board meeting on June 2, 2007, the board decided to drop a proposal to set up a securities market training institution at Tripura, where it had obtained 3.5 acres of picturesque land free of cost from the state government.Why would SHCIL want to set up a securities training institute at all? And why set up one at Tripura, which has hardly any investor population, nor is well connected to Mumbai?SHCIL’s new management found no justification for the move and decided to give up the land that was allotted as recently as 24 March 2007.
The fascination with Tripura was probably the fact that SEBI chairman M Damodaran and his executive assistant are Tripura cadre bureaucrats. In a written reply, Damodaran told us, “the proposed setting up of the institute was not at my instance. I have no views on either the proposed setting up of an institute or the reported decision not to do so”. That may be true, but it is also true that SEBI has not been too keen to investigate SSL, a regulated entity under it. In fact, Iyer also set up one of the rare DP offices (an unprofitable operation) in the North-East and had it inaugurated by the SEBI chief.
The close relationship with the SEBI brass also appears to have helped SSL become a broker of the BSE without scrutiny of its shareholding. No SEBI or BSE investigation has been launched even after such scandalous revelations and government action. Indeed, SSL’s application for starting a portfolio advisory service was cleared double quick and most recently, it was granted registration as a Depository Participant (DP) without the regulator questioning the need for a subsidiary (as SSL ostensibly was) getting into direct competition with the parent (SHCIL). So far SEBI has made no attempt to inspect SHCIL’s or SSL’s operations.
On April 14, Jayaraman Iyer was removed as chairman of SHCIL and soon after, SHCIL’s institutional shareholders appointed KPMG’s fraud detection arm to investigate. Once the scam details became available, KP Krishnan, Joint Secretary, Ministry of Finance, wrote to the Ministry of Company Affairs seeking its intervention
The SHCIL Scam - A Primer
What is SHCIL? It is India’s largest custodian and depository participant. It is so large and important because 83% of its shares are held by public sector entities and banks, including LIC, GIC, UTI, ICICI Bank, IFCI and IDBI. It is also one of the largest professional clearing members of the national bourses and one of the largest distributors of government savings bonds. SHCIL moves nearly Rs200-300 crore of funds to stock exchanges or the Reserve Bank everyday and has over 130 offices in India.
What is SSL? SSL stands for SHCIL Services Limited. It was a wholly-owned subsidiary of SHCIL which started as a broker on the Bombay Stock Exchange (BSE). It is key to the scam, since it was hijacked and privatised by two SHCIL officials right under the nose of the SHCIL board.
How was it “privatised”? The SHCIL Chairman R Jayaraman Iyer and SSL’s CEO S Ramanathan told SHCIL’s board to approve a small dilution to meet stock exchange rules - this was false. After the initial dilution, they quietly sold off 76% off SSL to Singapore-based E-Ventures Capital Pte and three unknown individuals -Gopika Vaishnav and Vivek Vaishnav of Ahmedabad and Padma Subramaniam of Hyderabad. E-Ventures is controlled by Andrew Quek of Singapore, who had filed for bankruptcy in 2001-02 and has a criminal conviction for corruption. E-Ventures is the largest shareholder of SSL through its holding of convertible preference shares.
What is Unitech Value Solutions Pte (UVS)? It is a Singapore-based subsidiary, clandestinely set up by SSL for routing payments to CrimsonLogic of Singapore for e-stamping technology. Only one payment ofSingapore $360,000 was made to UVS on March 15, 2007.
What was the intention? The intention was to siphon off half the payments that SHCIL would make to CrimsonLogic for e-stamping and the broader intention was to create a series of private enterprises that would live off SHCIL and enrich the two co-conspirators who headed the quasi-public sector entity.
How widespread is e-stamping? Only two countries have e-stamping -- Singapore from 2000 and Hong Kong from 2004. Malaysia will introduce it soon. CrimsonLogic developed the world’s first e-stamping system for the Singapore, which has been working successfully.
What was the modus operandi? In the past one year, SHCIL set up four companies with the prefix SHCIL, which had nothing to do with SHCIL itself. They had SHCIL as the registered office address, but the control was private. SHCIL was being made to outsource many of it operations to these companies on inflated contracts. The aim: enrich the scamsters at SHCIL’s expense.
How big was the scam? Almost Rs50,000 crore of transactions every year require revenue stamps. The e-stamping deal provided for 0.65% commission to SHCIL, which has pilots running in Gujarat, Maharashtra and Karnataka. The scam aimed at siphoning half the technology fees, in addition, SHCIL would be bled directly by SSL and also through the four entities mentioned above.
How to hijack commissions from a Rs50,000 crore business
Following the massive fake revenue stamp scandal (Telgi scam), which put several senior Maharashtra police officials behind bars, the Indian government decided to issue electronic revenue stamps or e-stamps in the belief that it would be safer and more secure. Since SHCIL was India’s largest custodian and depository and was government-controlled, it was chosen to be the Central Record-Keeping Agency for automation of stamp duty operations. The total value of contracts that require revenue stamps is a whopping Rs50,000 crore per annum and growing rapidly. The moment SHCIL bagged this prestigious contract in a couple of states, R Jayaraman Iyer, chairman of SHCIL, and his key associates embarked on a series of daredevil dealings to take away businesses from the quasi-public sector SHCIL into several secret private subsidiaries over which they would wield control.
They worked out a technology agreement with a reputed company called CrimsonLogic Global Pte. of Singapore. But instead of signing the deal directly with SHCIL, the business was routed through Unitec Value Solutions (UVS), an SSL subsidiary. SHCIL was to pay $10 million to UVS for the project while UVS was to payonly $5 million to CrimsonLogic. The remaining money would presumably vanish into private coffers. UVS would have creamed off $25 million at SHCIL’s expense overthe five-year contract with CrimsonLogic. The Iyer-Ramanathan duo clearly had global ambitions. Although SHCIL had a contract with just two Indian states, the technology arrangement was for all the SAARC countries, but strangely without any technology transfer to SHCIL. The bizarre manipulations of Iyer and Ramanathan had all the potential of being a sequel to the Telgi scam. This is all the more amazing becauseKP Krishnan, Jt Secretary, Finance Ministry (in a letter to the Ministry of Company Affairs) says that the e-stamping contract was awarded to SHCIL because it is perceivedas a sovereign entity.
Appeared ISSUE 35 – 5 JULY 2007 MoneyLIFE Magazine