Sucheta Dalal :Fraudulent Bank (31 Aug 2003)
Sucheta Dalal

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Fraudulent Bank (31 Aug 2003)  

On August 25, the Haryana police finally arrested one Manik Lal Maitra, a non-resident Indian (NRI) operating from Germany who was brazenly running a ‘fraudulent bank’ at Copola Towers, Rajendra Place in New Delhi without Reserve Bank permission.

Maitra’s ‘bank’ had the unlikely name of NRI Lead Bank, and he had been collecting deposits from gullible businessmen on the pretext of arranging low cost External Commercial Borrowings for them. His modus operandi was allegedly to collect the deposits and then try and tie up the depositors in false litigation. Finally, some of Maitra’s victims filed a complaint and obtained an arrest warrant against him.

Incidentally, the RBI had issued an advertisement in 2002 saying that the so-called bank had been operating fraudulently and without its permission. But Maitra still managed to evade arrest for almost a year before the long arm of the law caught up with his brazen swindle.

Penny stock shenanigans

Some of the worst manipulations in the stock market these days are in the penny stock category. Companies that were trading well below their par value have registered a growth of anywhere between 500 to 700 per cent. These scrips suddenly register heavy volumes and are the subject of active discussion on the message boards of investment website.

But their operations are usually so tiny that their actions and shenanigans go unnoticed by the market regulator. Here are a couple of examples. A reader points to, Continental Controls, a BSE listed company as an example. Last year, it issued an advertisement saying it would buyback its shares at a price not exceeding Rs 25 and its share price rose from nearly nothing to Rs 12. Its book value then was Rs 11 and the earning per share was 0.19. After the buyback was dropped, the price again dropped to Rs 2. Alka India is another BSE company that advertised great results on the front page of a prominent pink paper followed by glowing write-ups in other pinkies about a big boom in export orders for its cotton dresses. The scrip, with a face value of Rs 1, immediately registered volumes running into several shares and jumped over 600 per cent. Message boards on stock tips suggest that company sources have actively spread the good news about Alka’s prospects, but the price is still drifting downwards on rumours that Sebi is checking into price manipulation. Interestingly in July 1999, the promoters of Alka and several other related entities had been indicated by Sebi for manipulating the shares of Magan Industries.

Getting it right

The speed of the 1,320 point rally of the BSE sensitive index over the last four months is now being compared to the notorious, Harshad Mehta led bull run of 1992. And the remarkable irony is that a decade later, the Custodian appointed under the Special Court has finally managed to catch this big market move to sell the late Mehta’s scam-tainted shares and recover good value for them.

In fact, the recovery effort itself has gained momentum only after D. K.Tyagi, the current Custodian, took charge. Over the last year, he has managed to recover nearly Rs 1,000 crore by selling Harshad Mehta’s shares in 117 companies, of which Rs 600 crore came in last year. Some of these shares have been sold in the secondary market after transferring the scrips to the Custodian’s name.

The latest auction garnered Rs 85 crore from scrips such as Reliance, ITC, Tata Tea, Apollo Tyres and Punjab Tractors. Harshad Mehta’s famous Toyota Lexus fetched Rs 20 lakh and next on the block is his sprawling duplex apartment in Mumbai with a mini putting green.

Angry lot

Investors in several Aditya Birla group companies are an angry lot these days. The cause is the recent open offer by an investment vehicle of the group to acquire 20 per cent of the outstanding shares of Indo-Gulf Fertilisers, that closed last Friday. The offer was made at Rs 75 per share and all group companies such as Indian Rayon, Grasim, Hindalco and even the Birla Asset Management Company tendered their shares at that price in the open offer.

It was supposed to be part of an elaborate exercise to untangle the cross-holdings within the group. However, investors of individual Birla companies find the offer price too low. They argue that if a loss making Godavari Fertilisers could fetch Rs 124 for the Andhra Pradesh government, then isn’t Rs 75 too low a price for IGF? They may be right, but they are a part of the same family of investors who made no protest when Grasim paid such a hefty premium for acquiring Reliance’s controversial holding in Larsen & Toubro. Minority voices writing protest letters don’t count in a corporate democracy.

-- Sucheta Dalal