Was the Tata board ignorant about Niskalp?

The Group cannot distance itself from Tata Finance’s problems

Sucheta Dalal

In the 1990s, when Ratan Tata gradually got rid of Russi Mody, Ajit Kerkar and Darbari Seth — the powerful satraps of the business empire — there were many who applauded his consolidation drive. For the first time the Group put in place a retirement policy, tightened the control of Tata Sons over the group companies and began to claim a fee for using the Tata brand name.

By year 2000, one would have expected a period of good governance and compliance, independent and vigilant boards and transparent reporting practices. But it is not so. In the last few months alone, the abrupt exit of key executives from several group companies has caused unease among investors. This has only worsened after the Tata Finance Ltd (TFL) controversy (first reported by this paper in April) leading to serious charges of cheating against former MD Dilip Pendse in July and the sacking of five employees.

Pendse has been accused of falsification of accounts, criminal breach of trust, circular deals and failure to inform the board about the losses in TFL and its subsidiary Niskalp Investments.

Unfortunately for the Tatas, this picture of a rogue MD alone causing losses to TFL has been ruined by the insider trading allegations against Niskalp’s former chairman J E Talaulicar. Talaulicar and his family sold one lakh TFL shares at Rs 69 on spot basis when the market price was Rs 35. The deal which is under investigation suggests that Talaulicar was aware of TFL’s problems and was taking care of his personal investments first and also extracting twice the price.

Though Talaulicar has resigned from TFL and its subsidiaries after the regulator began to investigate the insider trading issue, he remains on the board of other Tata companies. Is it because Talaulicar may open a can of worms that cannot be shut by Tata’s blue chip reputation alone?

Facts that are now beginning to emerge from TFL indicate that Dilip Pendse’s investments through Niskalp were indeed a big problem, but the Tata directors simply cannot disclaim knowledge about its precarious finances. For instance, TFL would have declared a loss last year but for the bumper profits and dividend from Niskalp. That is why TFL chairman Freddie Mehta had lavished high praise upon Niskalp at the last annual general meeting. Even Telco had propped up its bottomline last year after its subsidiary Sheeba Properties sold 16 lakh TFL shares on spot basis and declared a hefty dividend to Telco.

Secondly, a large chunk of TFL’s problems are due to the funding of Telco dealers. The exposure to Telco dealers exceeds Rs 166 crore and four dealers — Rohit Automobiles, Jasper Industries (Rs 50 crore), Competent Automobiles and Autoriders — alone account for over Rs 100 crore which is considered largely irrecoverable. Telco, funded by TFL, had allegedly dumped inventory on these dealers in what is described as “efforts to maintain and improve the sales of vehicles or launch new products”. Since the vehicles remain unsold, the dealers are unable to pay. Responding to a query about these loans, Tata Sons says: “The quality of loans is being assessed as per RBI guidelines on the matter and provisioning as necessary will be made as and when required”.

Thirdly, Pendse is accused of having “conceived an ingenuous but utterly dishonest” method of managing capital adequacy through short term borrowings and circular deals. But as recently as July 27, when asked about these short term borrowings every quarter, Tata Sons told this paper that “Bank of India has made available to TFL lines of credit in its ordinary course of business. These facilities have been raised in accordance with all necessary approvals and safeguards.” This again indicates that the board knew and approved of the deal.

But that is not all. If Pendse is accused of circular deals to maintain capital adequacy, then to the lay person the ‘desubsidiarisation’ of Niskalp by Tata Sons appears no different. On the face of it, Ewart Investments, a subsidiary of Tata Sons, has bought into the equity of Niskalp and now owns 49.8 per cent of the company. The rest is held by TFL. But the money for the acquisition of Ewart’s investment is a clean loan from TFL.

A Rs 40 crore cheque dated June 28 was paid by TFL to Ewart Investment; on the very same day Rs 39.85 crore went back from Ewart Investment to Niskalp as its investment. Two other payments of Rs 28 crore and Rs 16.13 crore each have been made by Tata Finance to Niskalp on June 20th and June 28th respectively. According to Tata Sons, “this investment by Ewart has raised the exposure of promoter group companies to Tata Finance to over Rs 180 crore and reflects the long term commitment of the promoter group to Tata Finance.” Doesn’t it make a difference that the money came from TFL itself?

But the moot issue here is whether the Tata directors on the board of Niskalp and TFL knew what was going on and endorsed these decisions when Niskalp was a star performer. Don’t forget that all the TFL directors and top employees were paid a hefty bonus last year to celebrate TFL’s profits. Documents available with us show that TFL Chairman Freddie Mehta (who also heads Tata Investment Corporation (TIC) ) and the now under-a-cloud Talaulicar used to receive a daily Net Asset Value statement from Niskalp.

Surely, they could not have failed to notice that Niskalp was playing deep and heavy in K-10 stocks such as Pentamedia, Zee, HFCL, Global Tele, DSQ Software, Kopran, Vakrangee, Software Solutions etc. Moreover, the three scrips which caused havoc in the Niskalp portfolio — Global Telesystems, Vakrangee and DSQ Software — are present in large quantities in the TIC portfolio as well. But the Tatas say that it is unfair to make such comparisons, deny that the holdings are substantial and argue that TIC is a reputed company with an excellent record.

Surely, directors who collect performance bonuses are expected to ask the right questions? The report by independent auditor A F Ferguson’s senior partner Y Kale may have something to say about TFL’s flawed business model and behest lending to Telco dealers and for aircraft funding. But that document remains confidential and is not even mentioned in the First Information Report. This time, it will not be easy for Tata Sons to distance itself from TFL’s problems merely by sacking five employees.

Authors’ email: suchetadalal@yahoo.com