Sucheta Dalal :SEBI Finally Wakes Up
Sucheta Dalal

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SEBI Finally Wakes Up  

March 10, 2010

Over the past year, Hyderabad-based Prithvi Information Solutions has lurched from one extraordinary scandal to another while the Securities and Exchange Board of India (SEBI) has been in deep slumber. Three international audit firms walked away without signing the balance sheet in 2009.  First, it was Ernst & Young (M/S SR Batliboi & Co), which resigned after signing a heavily qualified balance sheet in March 2009. It was replaced by Price Waterhouse & Co (PWC), which resigned in panic in the wake of the Satyam scandal.

Is Prithvi Info Solutions another Satyam? It is certainly smaller in size but the goings-on are as dubious. What is, however, truly scandalous is that SEBI, the stock exchanges and the ministry of corporate affairs (MCA) have remained mute spectators to its brazen actions even though Moneylife had written about it in 2008.

When PWC resigned in June 2009, the company held an extraordinary general meeting on 23 July 2009 and appointed Walker, Chandiok & Co. This firm resigned in less than four months without signing the accounts. The company then held its annual general meeting (AGM) on 31 December 2009, which was chaired by Ms Madhvi Vuppalapati, a founder director. She apparently told the shareholders that the accounts were not signed and asked them to appoint VK Asthana & Co. She also used the opportunity to increase the company’s authorised capital and appoint three new directors.

Despite the fact that three international auditing firms had walked out, she adjourned the meeting by a mere month to
30 January 2010. In less than 23 days, VK Asthana & Co was ready with a limited review that was presented to shareholders at the 30th January meeting.  Scandalously, the Registrar of Companies (RoC) granted two extensions to Prithvi for holding the AGM, without inquiring why its auditors were refusing to sign the accounts. Also, if VK Asthana was appointed on 31st December and the statute requires 23 days’ notice for the AGM and seven days’ notice for a board meeting, then it is clear that it was fully assured that VK Asthana would sign the accounts without raising any questions. Some would even say that it was a mere rubber stamp.

Isn’t it extraordinary that stock exchanges, the first-line regulators, act like mere notice boards and are uninterested in watching companies? Finally, on 4 March 2010, we have an email from the office of KM Abraham, whole-time member (WTM) of SEBI that the issue has been sent to the appropriate department for investigation. But, even today, despite the Satyam scandal, the regulator seemed clueless about the gravity of the case.

In June 2009, CNBC reported that Deutsche Bank had filed a first information report (FIR) accusing Prithvi’s promoters of a Rs40-crore fraud. Although Deutsche Bank has remained tight-lipped in public, it is reported that Prithvi had diverted Bank funds to real estate and made false claims about significant global contracts. It was alerted when three of Prithvi’s clients informed the Bank’s New York branch that they had no dealings with the company.

The company had apparently raised money through bill discounting, by pledging future cash flow for work done for several marquee foreign clients. When it failed to pay on schedule, the Bank allegedly contacted the customers and learnt that they had no business with Prithvi. This too was neither reported to the bourses nor questioned by them. The details of the action are not known; however, Prithvi only informed stock exchanges about an interim order obtained by Deutsche Bank from the Debt Recovery Tribunal that was apparently vacated. On 4 August 2009, the company informed the stock exchanges that it had obtained a letter from the authorities that the complaint by Deutsche Bank was ‘civil in nature’. Did this prompt the bourses to ask more questions? Not at all; the notice was merely posted on the respective websites of the Bombay Stock Exchange and the National Stock Exchange.

-- Sucheta Dalal