Sucheta Dalal :How a rogue MD shook up a blue-chip finance company (29 July 2001)
Sucheta Dalal

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How a rogue MD shook up a blue-chip finance company (29 July 2001)  

TFL’s problems are probably the absence of a truly independent board. It comprises of top executives who were reluctant to question a powerful managing director


Until a few months ago, Dilip Pendse, managing director of Tata Finance Ltd (TFL) was considered Ratan Tata’s blue-eyed boy. He was the financial whizkid who could do no wrong and was credited with expanding TFL’s operations to create India’s largest and most integrated finance company. Last week, after nearly three months of turmoil and investigation, the Tatas finally admitted that they were staring at a huge loss on account of investments by TFL’s subsidiary Nishkalp Investment & Trading Co.

In an unusually harsh action, they went on to sack five TFL employees and obtained legal opinion, which said that they had a ‘prima facie case of criminal breach of trust, falsification of accounts and cheating’ against Dilip Pendse and were contemplating appropriate action.

At the moment, the Tatas are working at limiting the damage. They have appointed the firm of AF Ferguson to assess the losses and come up with a possible solution. They have also tried to isolate Nishkalp’s problems by announcing that the Tatas would meet all of TFL’s financial obligations to its lenders and depositors. Given the Tata’s blue-chip reputation, the assurance has helped avoid a run on the company, but it is increasingly clear that the situation may be worse than has been admitted so far.

It is reliably learnt that the TFL which had lent around Rs 345 crore to Nishkalp, may be staring in the face of a Rs 300 crore loss due to investments in volatile and high risk stocks. So far, only two big investments have been made public. It is also learnt that the group has been advised that the cost of a bailout for TFL may be as high as Rs 500 crore, which would have to be pumped in by other Tata companies which are its main shareholders. The Tatas does not deny these figures, but merely say that the matter of ‘losses accruing to TFL on account of Nishkalp’ is still under audit. The company is also under scrutiny by the Reserve Bank of India, and its credit rating agencies have placed it on a rating watch with negative implications.

Interestingly, TFL’s rapid deterioration from a blue-chip finance company to its struggle for survival needed just one rogue MD and less than two years to achieve. In fact, TFL should make an interesting case study for industry associations and academics on the failure of Corporate Governance even in a blue-chip group. One of TFL’s problems are probably the absence of a truly independent board of directors. Its board comprises mainly of top group executives who would were probably reluctant to question a powerful managing director. Had the directors ever questioned Pendse’s large investments in stocks like Vakrangee Software, it is not known.

But let start at the beginning. A couple of years ago, the curious friendship between TFL and a big bull operator used to be whispered about in capital market circles. Those days, this discredited bull operator, was rumoured to be looking at yet another comeback into the capital market by pushing a couple of software companies—one of these was Vakrangee Software. Soon after, on October 2, 1999 TFL caused a flutter by announcing a hefty 5.77 per cent holding in Vakrangee Software and gave the scrip price a new respectability. On that day, its price was Rs 258 on the Bombay Stock Exchange. TFL’s investment subsidiary Nishkalp which bought the shares, went on to increase its stake to 6.6 per cent. (6.4 lakh shares aggregating to Rs 14.35 crore or Rs 224 per share). At the same time, Nishkalp was also acquiring Global Telesystems—a favourite of another bull operator Ketan Parekh and a company which belonged to his relative.

In April this year, we were told that Nishkalp held 6.6 lakh shares of Global Telesystems at a cost of Rs 67 crore (purchased at Rs 1100 per share). The share is now quoting at less than Rs 100, which translates to a loss of over Rs 60 crore in this scrip alone. It also had an investment of over Rs 500 crore in vyajbadla financing. At that time, this paper was told that Nishkalp had booked a profit of Rs 100 crore on Global Telesystems and Rs 3 crore on Vakrangee in the past. It is now learnt that Pendse may have fudged the figures, which is why he may be sued for falsification of accounts. But TFL was clearly not about Nishkalp and its stock market operations. It was, as it called itself the ‘best-integrated financial services company in the country’ with diversified operations including foreign exchange services, housing finance activities, credit cards and Internet broking.

Most of these were conducted through separate subsidiaries and blue chip joint ventures. It had also acquired Tata Share Registry in order to complete the full spectrum of financial services. TFL’s website boasts that one of its ‘significant strengths’ is its ability to raise resources from various avenues and at the best rates. ‘In a scenario where finance companies are generally considered to be high risk borrowers, TFL enjoys funded facilities of around Rs 900 crore from a consortium of over 19 banks and unsecured deposits of over Rs 800 crore from more than 5 lakh individual investors’ it says. Yet, today TFL is struggling to meet capital adequacy standards. (In a written reply to this paper, the company has stated that ‘it is not in default of its capital adequacy as of June 30, 2001’). Its public deposits have also shrunk rapidly. The deposits which stood at Rs 1,585 crore in June 2000 were down to Rs 1,100 crore in June 2001 and have dropped further to Rs 820 crore including accrued interest at the end of July.

When news about TFL’s losses first became public in April, Dilip Pendse had already resigned and announced his plans to join Global Telesystems. Yet, were told that there was no suspicion of malafide on his part. He quit in May and now heads Global Telesystem’s US operations. It is not clear if the Tatas will follow through on their threat of legal action and demand his return to India. Curiously, Dilip Pendse seems to have been to TFL what Nick Leeson was to Barings, the blue chip British investment bank that went under on account of one reckless trader. In fact, this is worse, because the managing director was himself the rogue trader.

-- Sucheta Dalal