Sucheta Dalal :SHCIL fraud: Probe team has umpteen questions to answer
Sucheta Dalal

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SHCIL fraud: Probe team has umpteen questions to answer  

May 21, 2007

Last week, investigations into the fraud at Stock Holding Corporation of India Ltd (SHCIL) took another decisive leap with the appointment of KPMG’s Fraud Detection and Forensics Advisory team to investigate a slew of management decisions that we have exposed in the past months. Two independent directors have also been inducted to the SHCIL Board — G Ramamurthy who is reportedly a corporate ethics expert and N Balasubramaniam, a corporate governance and strategy expert.

Meanwhile, SHCIL’s senior vigilance officer Pramod Kumar Pramanik, a former police officer, has finally resigned. He was appointed to the highly sensitive vigilance function at SHCIL despite being suspended from the police on the charge of having helped the mother of notorious gangster Dawood Ibrahim to secure a fake passport. His appointment at SHCIL and his continuance even after his earlier record was exposed bear investigation. But then, there are plenty of questions about almost everything that happened at SHCIL over the last year. These bizarre shenanigans had the potential of being a sequel to the Telgi scam, but were exposed before the damage was done and prevented by quick government action.

SHCIL is India’s largest Custodian and Depository Participant (DP), with almost every top public sector financial institution as its client and shareholder. SHCIL bagged a prestigious contract for electronic stamping of revenue documents as part of the post-Telgi move towards paperless stamping. SHCIL was to be the record-keeping agency for this Rs 50,000 crore market that is growing rapidly. It tied-up with Singapore-based CrimsonLogic for the technology and arranged to route its payments through two entities, the last of which was set up in Singapore by SHCIL’s professional managers. The mischief of SHCIL’s management has to be seen in the context of the potential damage and losses that their actions could have caused.

Over the last couple of months, we have exposed how the professional managers at this institution, which is 51 per cent owned by government bodies (LIC, GIC, UTI, IDBI Bank and IFCI), lost control over a 100 per cent brokerage subsidiary — SHCIL Services Ltd (SSL) — through a surreptitious sale of 76 per cent of its equity to three unknown entities. On April 15, the government asked IDBI Bank to take over the management. N Jayaraman Iyer, the former chairman and managing director (CMD), was sent on mandatory leave and RK Bansal, a senior general manager of IDBI Bank, was put in charge of management. While SHCIL has made some progress in its investigation, absolutely nothing seems to have happened at SSL, the brokerage firm that was once a subsidiary. Despite repeated attempts, the BSE has refused to respond to queries. The BSE is the first line regulator for SSL and its official website misleadingly depicts the firm as being part of the SHCIL group, without providing any shareholding details. Moreover, SSL remains hugely dependent on its former parent SHCIL. For instance, SHCIL continues to house SSL’s servers at Vikroli, which may finally be moved out at the end of the month. Does it mean that financial institutions, which own 51 per cent of SHCIL, are sanguine about the loss of the brokerage subsidiary? Well, the senior management held a day-long meeting last Saturday to take stock of SHCIL, including its staff requirements, recoveries, profitability and review of the commercial arrangement with SSL. Maybe the deliberations will lead to further action this week.

This deliberate and confusing mix of identities between SHCIL the parent and SSL the alienated subsidiary was perpetuated by getting SHCIL to turn into a sub-broker of SSL. The KPMG team ought to unravel the loss caused by an unfair revenue-sharing arrangement between SSL and SHCIL. In many cities, the two have offices next to each other; yet the charges are widely different. Interestingly, the Securities and Exchange Board of India (Sebi) has also made no attempt to inspect this convoluted arrangement or understand its implications.

In the six months before the management change of April 15, SCHIL under Jayaraman Iyer had set up four entities which all carried the prefix SHCIL but were joint ventures with private entities. We learn that some of the equipment purchased for the Disaster Recovery Site (DRS) for the e-stamping operation may have found its way to these companies. That would be another job for KPMG, including finding out who paid for the properties occupied by companies that use the SHCIL name and their true ownership. It will also have to find out why the DRS was shifted from Bangalore, which is India’s IT capital, to the Technopark at Thiruvananthapuram where SHCIL Hannobe is located.

We learn from the SHCIL management that SHCIL Hannobe has been asked to remove the prefix and vacate the SHCIL office after completion of a documentation contract assigned to the company by the earlier management. SHCIL apparently has no stake in the company. Interestingly, in an email to this writer last week, Boney Shek of SHCIL Hannobe had claimed that SHCIL Projects, another subsidiary floated by SHCIL, was keen on investing in his company.

Depending on the scope of its mandate, the KPMG team has plenty to investigate and unearth. For instance, we have recently learnt that SHCIL had been in touch with a leading investment bank to find buyers for the shareholding of its government-owned institutional investors. Similarly, it came up with the idea of investing in a wind mill project in Karnataka as a tax-planning measure (wind mills are entitled to 100 per cent depreciation). A proposal was taken to the board early this year, but was rightly rejected.

Meanwhile, the group that is aggrieved at the actions by the new management is busy with many dirty tricks. Over the last week, I have received two sets of anonymously couriered papers, which try to pin the blame on various officials who were charge-sheeted in the 2001 scam. The documents also contain suggestions and innuendoes about the IDBI top management, probably unaware that its decision to take over the management was not of its own volition but under instructions from the Prime Minister’s Office (PMO).

-- Sucheta Dalal