Far more is hidden than revealed (24 February 2003)
The arrest of two journalists, from a couple of leading pink dailies, while they were collecting an extortion payoff, has sent a scare through the media. The journalists (one was an ex-journalist) were allegedly caught accepting a Rs 7 lakh bribe in a five-star hotel; this was the second tranche of a Rs 25 lakh pay-off that had apparently been negotiated down from the initial demand of Rs 1 crore. But the question that has remained unasked is, what was the story that was worth a Rs 25 lakh payoff? And what had Malu Financial Services (the company that laid the trap to nab the extortionists) done that was worth demanding such a sum to avoid media publicity? Information gathered by this writer shows that the journalists had questioned Poonamchand Malu, the proprietor of Malu Financial Services about his involvement and ‘arrest’ in cases of forgery and a ‘stolen share racket’ that were registered in New Delhi and Mumbai in 1998. Malu had denied the charges and pointed to counter complaints filed by him.
However, the main issue raised by the journalists was a preferential allotment of one million shares to Malu by Pentamedia Graphics on January 30, 2001 at Rs 500 per share. Days after getting the allotment, Malu had got these shares transferred into a custodial account of Nikko Stock Brokers P. Ltd at Centurion Bank. The regulations require that preferential allotments have to remain under mandatory lock-in for a year and Pentamedia ought not have transferred these to another beneficiary. Nikko in turn pledged these shares with Centurion Bank in order to enhance its funding limits. Later, when the market fell and investigation into speculative excesses began, Nikko was declared a defaulter and its proprietor, Vimal Chaudhary disappeared for a month. But all of this, including the name of Malu Financial Services has been reported in several business newspapers in 2001. In fact, newspapers even had additional details about the preferential allotment controversy. For instance:
In September 2001, there were media reports about major stock exchanges suspending trading in Pentamedia Graphics due to ‘irregularities’ in the preferential allotment. The fact that lock-in rules seemed to have been violated in transferring the shares to Nikko was also reported. Later, the press reported that the Bombay Stock Exchange (BSE) was upset at Securities and Exchange Board of India’s (Sebi) letter exonerating Pentamedia Graphics of any wrongdoing in the transfer and pledge of Malu’s shares during the one-year lock in. The BSE had reportedly begun to investigate the allotment when the shares under lock-in found their way into the stock market. In fact, Sebi’s divisional chief, P. R. Ramesh had written to the BSE saying “there appears to be no system available with the depositories to disable creation of a pledge” of the shares that were still under lock-in and that it was ‘taking up’ the matter with the Depositories. Malu Financial Services had also filed a case in the Madras High Court and before the Company Law Board to try get Centurion Bank to transfer the Pentamedia shares back to him. He has, however, been at pains to protect Pentamedia Graphics from any charge of wrongdoing.
Since most of these facts were already in the public domain, they were surely not worth a pay-off. Even on the question of source of funds, Malu has provided Sebi with a break up of his payment of Rs 50 crore to pay for the Pentamedia shares as recently as September 2002. Malu Financial Services also told Sebi that he enjoyed a trading facility of as much as Rs 100 crore from brokerage firms—Kotak Securities, Nikko Stock Brokers and Nikko Capital Market. While Malu is fighting to get back his shares, the value of the Rs 50 crore investment is down to Rs 1.3 crore. Separately, Malu claims that Centurion has adjusted the Pentamedia shares against some other dues of Nikko.
On the face of it, these facts are so outrageous and bizarre that maybe far more is hidden than revealed. Bt we may never know the truth thanks to Sebi’s pathetic record of investigations, which remains unchanged despite stringent criticism by the Joint Parliamentary Committee (JPC) in its December 2002 report.
Pentamedia Graphics is one among the 15 notorious companies identified by the JPC for a detailed probe into the promoter-broker nexus. The others are: Adani Exports, Aftek Infosys, Cyberspace Infosys, DSQ Software, Global Telesystems, Global Trust Bank, Himachal Futuristic Communications, Lupin Laboratories, Padmini Technologies, Ranbaxy Laboratories, Shonkh Technologies, Silverline Technologies, SSI Ltd and Zee Telefilms. With regard to Pentamedia, the JPC report mentions Malu’s involvement and also draws attention to its three successive preferential issues by the company in the years preceding 2001. Malu Financial Services was one of five entities allotted shares in the second preferential allotment, but the nature of its relationship with Pentamedia Graphics remains unknown. One of the main reasons why the unholy nexus between promoters and brokers remains unexposed is Sebi’s never-ending investigation. Two months ago, the JPC noted in its report that “Sebi has not completed its investigation in most of the cases” even 18 months after they commenced. It said that investigations have to be completed in a reasonable time, otherwise it had a bearing on the health of the capital market. The JPC asked Sebi to fix a timeframe for completing investigations as a part of its regulation and procedures. It also blamed its inability to go into the corporate-broker nexus on the lack of support from regulatory agencies. Further, the JPC wanted the DCA and Sebi to tighten the rules regarding preferential allotments and private placements in order to prevent their abuse. Out of the 15 companies marked for special investigation, in at least seven cases, the price manipulation can be attributed to a significant change in the capital structure or share ownership through preferential/bonus issues or private placement. These are — Aftek Infosys, Padmini technologies, Pentamedia Graphics, Shonkh Technologies, Silverline , Zee Telefilms and SSL Ltd. Despite the JPC’s criticism, Sebi is in no hurry to complete its investigation; and scamsters are exploiting the delay to bury crucial evidence. In most of these cases, especially DSQ Software, Cyberspace Infosys, Aftek Infosys, Global Trust Bank and Global Telefilms, Sebi’s powers to probe the nexus of promoters and investors across brokerage houses in several exchanges is crucial to nailing their link with the promoters or with Ketan Parekh. But unless Sebi shows an inclination to complete its investigations efficiently, the guilty will not only go scot-free, but will also have the guts to turn around and proclaim their innocence. -- Sucheta Dalal