Sucheta Dalal :The flip side of the great Indian IT story
Sucheta Dalal

Click here for FREE MEMBERSHIP to Moneylife Foundation which entitles you to:
• Access to information on investment issues

• Invitations to attend free workshops on financial literacy
• Grievance redressal


You are here: Home » Column Topics » Financial Express » The flip side of the great Indian IT story
                       Previous           Next

The flip side of the great Indian IT story  

Feb 13, 2006

India’s information technology (IT) industry offers a curious and dangerous mix of the good, the bad and the ugly. Leading the pack are the big blue-chip companies that have set high standards of ethics, efficiency and corporate governance. They represent and showcase the best of India and have made it almost de rigueur for top Indian IT companies to display similar standards of ethics and professionalism. This extends beyond their work space and has happily created a growing base of conscious Indians who willingly lend their skills to activists and NGOs connected with environment protection and social upliftment.


The smaller and mid-size IT companies also aspire to cast themselves in a similar mould and benefit from the goodwill generated by the front-runners. Unfortunately, the large shadow of the IT leaders also hides a host of dubious operations that have been thriving in this space. This has allowed a clutch of small and mid-size IT companies to obtain stock exchange listing, raise public money at a fat premium and manipulate share prices. They still keep their shenanigans under wraps because it is difficult for outsiders to verify the true value of overseas contracts or the quality and technical skills of their employees.


Ketan Parekh’s infamous K-10 list was dominated by several such companies, whose prices collapsed in a little puddle once the dotcom bubble went bust and his market manipulation began to fail. These columns have often documented the activities of Dinesh Dalmia, who is running rings around regulators in India and the US. There was also Cyberspace Infosys, a company that has quietly slipped out of the public eye and appears to have escaped regulatory action.


Let’s keep aside these extreme examples and concentrate on just a few companies that have been making news in this bull market and the curious trend in their share prices. For starters, there is Scandent Solutions, which set up business by acquiring the most lucrative contracts of DSQ Software while the latter company sank into obscurity. A few weeks previo-usly, Scandent’s founder, Ramesh Vangal, suddenly stepped down to pursue other businesses. And on February 7, he was replaced by Pawan Kumar, who at one time headed the very same DSQ Software. Recent press releases, however, omit Pawan Kumar’s DSQ connection.


Ramesh Vangal’s exit and Pawan Kumar’s appointment as president clearly hasn’t enthused investors, because the scrip (listed through a reverse merger) slipped from Rs 221 on December 30, 2005, to Rs 185 on February 10, 2006, even as the Sensex roared up to 10,100. Meanwhile, the company plans to issue convertible bonds to a Merrill Lynch subsidiary called Indopark Holdings Ltd, on a preferential basis. This company will end by holding over 5% of Scandent’s equity on conversion of the bonds.


• A clutch of smaller IT firms are manipulating share prices and rules

• The H&M-Moksha technologies deal raises a number of such questions

• Do exchange disclosure rules apply to only those who abide by these?


Pawan Kumar’s immediate previous job was as co-founder of Moksha, another IT company, that has over 500 employees and three international entities—Moksha Technologies Inc, USA; Moksha Technologies Pte, Singapore; and Moksha Technologies, Bangalore. Pawan Kumar had co-founded this company with Rajeev Sawhney, a non-resident Indian millionaire.


Moksha hit the headlines on April 12 last year, when Helios & Matheson (H&M), announced a $19 million deal to acquire it and said that Pawan Kumar would continue as its CEO. H&M’s share price soared. However, Moksha’s co-founder, Rajeev Sawhney, was allegedly shut out from this action and initiated legal action.


Now cut to February 7, when Pawan Kumar moves to Scandent and has apparently cut his ties with Moksha and H&M. I learn that Rajeev Sawhney has now acquired full control of Moksha through a settlement with Kumar. In an e-mail to friends, Pawan Kumar admits to having “signed a definitive agreement to sell my interest in Moksha and bought my partner’s interests in Fortress and Jadoo Works.” This is accompanied by his new coordinates.


Does this mean that the H&M-Moksha deal has fallen through or was never sealed? There is no announcement to the stock exchanges or to shareholders. The only indicator that things are not all well is the share price. H&M had announced a 89% jump in its net profit for the fourth quarter (ending December 31, 2005), causing the share price to spiral up from Rs 206 at the end of December to Rs 257 on January 19. But while the Sensex crossed 10,100, H&M slipped down to Rs 218 on February 10.


Meanwhile, the State Bank of Mauritius (SBM) has received a letter from Rajeev Sawhney, founder of Moksha and Pawan Kumar’s partner, questioning how the bank opened an account in the name of Moksha Technologies Ltd, Mauritius, with the signature of only one director, Pawan Kumar. More pertinently, the account was used to borrow $13.5 million on June 28, 2005, which was transferred to H&M through SBM’s Chennai branch. Why was Moksha borrowing money and transferring it to H&M rather than the other way around?


Sawhney’s letter further says Pawan Kumar, director and shareholder, has sold his stake/shares to the former and moved to his next assignment. As in the DSQ software case, stock exchange disclosure rules are only for those who choose to follow these. Here is a case where at least two listed companies owe an explanation to their shareholders.


Ironically, stock exchanges routinely cross-check media reports about companies, but what is not reported to the bourse or by the media remains nicely buried.


-- Sucheta Dalal