Sucheta Dalal :CanR17;t Nab On Advance Information
Sucheta Dalal

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Can’t Nab On Advance Information  

Apr 8, 2002

Last week, this column wrote about how Dinesh Dalmia, the incorrigible chief of DSQ Software had finalised plans to sell large chunks of his company to a NRI group. A deal was being negotiated with Ramesh Vangal (former chief of Pepsi in India), Satyen Patel (former managing director of Nike-Southeast Asia) and Globetech Worldwide Ltd, a company incorporated in the British Virgin Islands. We have since discovered that negotiations on behalf of Vangal and company are being handled by the leading investment bank, DSP Merrill Lynch with help from Stewart & Mackertich or SMIFS of Kolkata.


One week later, the reactions of Dalmia and various regulatory agencies provide valuable insight into how Indian laws and procedures allow promoters to transfer funds and assets away from listed companies with impunity. Let us start with Dinesh Dalmia’s response to some of his directors who have been repeatedly questioning him about adverse newspaper reports. Details from DSQ insiders show that Dalmia’s response is typical of most corporate houses — he dismisses our report as “false, mischievous, instigative, misleading and baseless”. He also claims to have issued a press release (which has yet to be published by any newspaper) in which he states: “The company does not have any short term or long terms plans at all to sell all its assets and any of its development centres in Chennai as reported”.


But he goes on to add the rider that “the company had taken approval from the members for hiving off certain divisions/businesses to strengthen the core focus areas of the company”. He then admits that “the company is actively talking to various groups but no decision has been taken so far”. He ends by saying that the restructuring, if finalised, “will involve the sale of a small portion of its (DSQ Software’s) overall assets — less than one per cent”.


Our report last week indicates that this small portion includes some of the most lucrative overseas contracts that the company has and also binds his employees to the deal. But more interesting than Dalmia’s assertions and denials is his confidence that no investigation agency will take the case seriously. In this, he has unfortunately been very accurate. Dalmia tells his directors: “We have not received any query from stock exchanges/media for clarifications. Normally, stock exchange and media persons will call/ fax us before 10 am for clarifications for her news. We have not received any call, in this regard. Hence, it is clear that stock exchanges, regulatory authorities and media persons have not taken a serious note of her news”.


Dalmia has probably listed those regulators in his missive, who he believes have the power to question him, but is clearly confident that they will not. However, Dalmia is wrong on one count. Although the regulators are excruciatingly slow and would probably let the horse bolt before they lock the stables, they are not all sleeping. For instance, the Enforcement Directorate has informed the Joint Parliamentary Committee that DSQ software is indeed guilty of violation of foreign exchange regulations with regard to allotment of shares to three Mauritius-based Overseas Corporate Bodies in May 2000.


It had allegedly not sought prior permission from the Reserve Bank of India. The details of that allotment, ostensibly made to acquire a San Jose- based company called Fortuna Technologies was first exposed by this group of publications. It was later established that Dalmia had claimed a deal with Fortuna where none existed. However, the Enforcement Directorate is slowly inching its way forward in the investigation. While Dalmia may be correct about the Securities and Exchange Board of India and the stock exchanges asking no questions, this claim is certainly not true of the Department of Company Affairs. The newly rejuvenated DCA had previously issued a show cause notice to DSQ Software on November 9, 2001 asking why penal action should not be taken against the company for violating section 217(3) of the Company’s Act. Dalmia had then told his directors that the DCA investigation was over.


Similarly, the Vysya Bank branch of Chennai has issued several notices to DSQ under section 138 of the Negotiable Instruments Act for cheques issued by it in January this year that have bounced. This is just one of a series of notices issued to the company by creditors in connection with the tendency of DSQ’s payment cheques to bounce.


The DCA followed up our latest reports about Dalmia’s plans to sell its most lucrative contracts, by checking the statute book to see what could be done to stop him. The DCA is also understood to have consulted the Company Law Board and come to the conclusion that it has no powers under the act to do anything until after the event. Astounding as it seems, the DCA is actually saying that it cannot act on advance information, but can only pursue a company after the stakeholders funds have already been diverted.


Is it any wonder then that one of our readers from Amritsar, R C Khanna says that “investors betrayed by financial manipulations and political connivance have been on an indefinite strike. They are seething with rage at the painful sight of their life’s labour going down the drain with no one to hold their hands in solace”.


Also, doesn’t the DCA’s lament sound similar to the Sebi’s frequent complaint about the lack of adequate powers? If neither Sebi nor the DCA have enough powers to nab manipulative industrialists and fraudsters then the statutes need a drastic overhaul. Ironically, the DCA is operating under a Companies Act which was extensively rewritten and amended just a couple of years ago. When the amended act was passed, the country had already witnessed a series of scams and there were plenty of examples of companies diverting or siphoning off funds.


Why did the amendments not arm the DCA with adequate powers to tackle corporate crime effectively? The reasons are obvious. The eminent members of the committee that drafted the amendments were lawyers, tax experts, corporate head honchos, management experts and auditors. In other words, a set of people who depended on the corporate sector for their fees. The victim category, which the Indian investors, had no representation and nobody bothered to protect their interests. Ironically enough, unlike Sebi, the DCA has never come up with any specific request for statutory changes that would empower them to deal effectively with corporate crime and until that happens, Dalmia and his ilk will continue to have a free run.

-- Sucheta Dalal