Restructuring business or covert sell-off?

Incredible regulatory oversight could cost DSQ investors dear

Sucheta Dalal

Just about every regulatory and enforcement agency in India is investigating DSQ Software. At the last count, these included the Securities and Exchange Board of India, the Department of Company Affairs, the Enforcement Directorate and, in a peripheral fashion, the Central Bureau of Investigation and the Joint Parliamentary Committee. The Reserve Bank of India looked into its overseas corporate bodies and turned over its findings to the Enforcement Directorate. DSQ Software is also part of an exclusive group of four companies where the finance ministry is directly coordinating the investigations by all other agencies.

Yet, for all the special attention that it has been receiving, investors of DSQ, who have seen the share price plummet dramatically in the aftermath of the March 2001 stock market collapse, have no clue whatsoever if the investigators have unearthed anything that would merit prosecution or affect the company’s prospects. Instead, bang in the middle of all the enforcement and supervisory activity, DSQ Software is signaling that it is business as usual and is going ahead with plans that may ensure that there is nobody left to punish when all are through with their leisurely investigations.

Last week, DSQ Software announced that it was seeking an omnibus approval from its shareholders for a “restructuring” exercise, the details of which are to be worked out by a “consultant” and which, newspapers speculate, may involve selling some “non-strategic divisions” of the company. In fact, the company’s plans were not announced so explicitly. What it said was that it planned to appoint a consultant who would suggest a strategy for the restructuring of its business and wanted shareholder approval, through a seemingly transparent postal ballot, authorising the board of directors to “consider and give effect to the proposal of the consultant as and when it is finalised”.

This means that at the time of giving their approval, shareholders know precisely nothing about the company’s future. If the ‘consultant’, as and when he is appointed, suggests that the best part of the business should be sold off, there is absolutely nothing they can do to stop it. In fact, the shareholders don’t even know who the consultant will be when they give their general approval to the restructuring plan.

DSQ’s proposal has to be seen in the context of its track record and the many details about its business operations, especially its international operations, which are still unknown to most shareholders. This is a company which had no problems keeping the bourses and the capital market regulator in the dark over a 50 per cent increase in its capital through the allotment of preferential shares to three Mauritius-based OCBs, claiming that it was meant to facilitate the acquisition of a San Jose-based company called Fortuna Technologies.

Some of these shares were also diverted to an Indian company (with a Delhi address at which it did not exist) with the exact same name as one of the Mauritius OCBs (New Vision Technologies); these shares were used to bail out a Kolkata stockbroker on the verge of a default after having traded heavily for DSQ’s managing director Dinesh Dalmia. Remember that DSQ’s board of directors has never, at any stage, questioned Dalmia’s antics or hesitated to grant him any approval that he has sought.

DSQ’s accounts are not to be relied upon either. A startling ‘Limited Review’ of its accounts for the period ended June 30, 2001 has seen the auditors pointing to material misstatements in the accounts such as overstating profits and understatement of depreciation, making a wrong statement regarding its share capital, and not providing the auditors with all the information that they needed. Finally, the auditors also refused to comment on large sums of money lent by DSQ Software and its recoverability — they especially pointed to over Rs 144 crore that has gone to fund all the overseas companies.

In fact, the overseas subsidiaries should be another cause for concern for investors. DSQ had invested in outfits in Singapore, Europe, USA etc in which it has sunk in a lot of money. All these companies have been quietly changing their name to Total Systems over the past year and have set up separate websites at each location. I have a copy of an e-mail sent out by Dinesh Dalmia to all his offices and employees which explains the name change as an effort to consolidate the sales and marketing efforts of all group companies such as DSQ Software, Global Software, e-Antarix Applications and Total Infotainment. Nobody is quite clear what Total Systems is all about, but the speculation is that Dalmia is slowly dissociating the international operations from the Indian company by spinning them off into a separate company, which will remain under his control.

Reliable sources tell us that DSQ’s “restructuring” is only a cover to sell some core strategic divisions to a consortium led by Ramesh Vangal, the former chief of Pepsi in India, and a deal to that effect has already been struck. What will be left of DSQ Software in India may be just a shell company.

What is indeed stunning is that none of the regulators or enforcement agencies have found fit to force DSQ to explain its changes to investors. In fact, they have not even reacted to DSQ’s latest move to restructure the company or attempted to stop Dalmia from making any changes or alienating any assets until their investigations are complete. Can this be a mere oversight and lethargy? The regulator’s studious silence is not restricted to the restructuring plan. Over the last few weeks, the DSQ share has spiraled upwards due to a combination of manipulation and speculation about the deal with Vangal. The regulator has made no attempt to investigate.

The one pocket of resistance that could possibly surface is if large investors such as the Unit Trust of India and Tata Finance, who are already stuck with a large block of shares, were to exert themselves to ask Dalmia some tough questions. After all the mantra of corporate governance which is chanted endlessly these days should also require corporate and institutional investors (especially beleaguered ones) to make a push to preserve the value of their investment.

Writer’s e-mail: suchetadalal@yahoo.com