Wednesday, June 6, 2007

DSQ saga: Closure in India, discovery abroad

While Dinesh Dalmia remains in the custody of the Central Bureau of Investigation in Chennai, federal prosecutors filed charges against him in the US, while the Federal Bureau of Investigations (FBI) continued to probe the deals that duped at least 80 American financiers including several well known banks. After fleeing India to escape prosecution for securities fraud and then fleeing the US this January after duping financiers to the tune of $130 million (including around $30 million to British financiers), Dinesh Dalmia’s luck seems to have run out.

A Chennai court is understood to have cleared “polygraph, narco-analysis and brain mapping tests” to be conducted on him to get his cooperation. Such tests would probably have been considered a serious human rights violation in the US, but in India, the court reportedly considered it better and more humane than third-degree methods of the police.

Interestingly, the Americans are already probing the Dalmia-Allserve relationship that developed after 2002, while the Indian investigators are still stuck in the stock market scam of 2000 where he introduced fake shares in the market having surreptitiously and illegally enhanced the capital of DSQ Software.

The missing link is when he stripped DSQ Software of all valuable contracts (which he sold to Scandent Network, later Scandent Solutions) in April 2002 and spun off the foreign offices of the company into separate companies which were later used to kick-off the call centre business. Dalmia pocketed Rs 145 crore from the sale of DSQ Software’s lucrative contracts to Scandent, but none of that money ever reached DSQ Software, the listed company.

In April 2002, I wrote: ‘‘Companies with the Scandent Network name and different suffixes are also being registered across Europe for enabling the sale. The DSQ companies, including those located abroad, which Dalmia has renamed under the head Total Infosystems are being divided into two categories. The ‘target companies’ are the DSQ companies and they will transfer specified assets, lucrative contracts, nearly 90 per cent of the employees, the goodwill and intellectual property owned by the group.’’

‘‘The ‘mirror companies’ (the nomenclature is self explanatory) are those to which the assets will be transferred by DSQ Software. The transactions were expected to be completed by April 5, 2002. The contracts transferred by DSQ Software, DSQ Europe and Total Infosystems included those with Peregrine Systems Inc, the California-based Liberty Mutual Group, Exel Logistics (formerly known as MSAS Global Logistics Ltd). The deal has never been reported to DSQ Software’s Indian shareholders.’’

The Ministry of Company Affairs (DCA) still allowed him to compound several of his offences. It was only in 2005 that the Company Law Board ordered the appointment of nominee directors on the board of DSQ Software and put them in charge of management. The Serious Frauds Office, which also operates as a part of the MCA has yet to make any known headway in the investigation, although details about Dalmia’s shenanigans are spewing out through media efforts in Indian and the US.

After Scandent acquired the DSQ contracts, it set up base in Bangalore and even got listed on the Indian bourse through a reverse merger with SSI, which it had acquired. Scandent never

had to file a prospectus or face detailed scrutiny by the regulator. Dalmia vanished from India after the Scandent deal in 2002 despite a red-corner Interpol notice against him. He set up base in the US by acquiring a palatial mansion at New Jersey and a fancy red Ferrari. Soon enough, DSQ Software’s branch office was converted into the US headquarters of Allserve Systems. The Allserve story has also ended after the bankruptcy filing in the US. Its operations in London were the first to shut down, followed by those at Bangalore, Gurgaon and Chennai.

Again, Dalmia’s employees have suffered the consequences. Dalmia began to default on US repayments since April 2005, but filed for bankruptcy only around November 2005. By January 2006, employees at Allserve’s Indian operations were not being paid. An employee writing on condition of anonymity says, “We had a big drama and Dharna in the company” to demand payment. After three days of agitation and stoppage of work, we received 50% of our salary”.

But the impact on operations was drastic. The staff strength at that BPO dropped from over 500 per shift to a mere 50-odd employees. At the end of February, the emails stopped and the operations have probably shut down. Meanwhile, Dalmia’s US financiers and investigators are still unscrambling his operations.

The Star-Ledger, has a colourful description of the dawning realisation of how they were duped which merits repetition. ‘‘Charles Stanziale (the bankruptcy trustee) stood yesterday in the ‘cool room’, a climate-controlled, glass-enclosed corner office in North Brunswick where a cluster of cables was designed to link a bank of 6-ft-tall, flashing computer servers to clients across the globe. When tanziale and his associates pulled the plugs on the machines a few weeks ago, a funny thing happened: nothing. “Nobody called,” he said.’’ ‘‘The hardware represented the crumbs left behind from a memorable feast. The host, authorities say, was Dinesh Dalmia. Using aliases, subordinates and shell companies, Dalmia allegedly persuaded seasoned US financial companies to invest more than $100 million in his plan to equip call centers in India. Had they looked closely, the investors would have discovered the hardware was outdated, useless machinery’’, says the writer John P. Martin.

According to Christopher Byron of the New York Post, Dalmia faces up to 40 years in a US prison if he is extradited and convicted on all counts.

http://www.suchetadalal.com/articles/display/80/2003.article

Jet Airways: flying into troubled skies?

Despite copious disclosures, Sebi needs to take time to clear the IPO document
Globally, the airline industry is a mess. Oil prices remain high and airlines are reeling under the impact of thin margins, intense competition and expensive fuel. US Airways and United have filed for bankruptcy and Delta Airway may lose revenue due to lower fares. While the global industry suffers from over-capacity, it is boomtime for aviation in India.

Aviation minister Praful Patel’s liberalisation initiatives have set the stage for new entrants in the Indian skies. As many of these will seek to finance their fleet expansions with public money, a rash of Initial Public Offerings (IPOs) from airline companies can be expected next year.

However, intense competition, tariff wars and high fixed and operating costs will continue to keep airline finances in a precarious state. Fortunately for the sector, researchers find investors are attracted by aviation stock. A study in a Wharton School journal says, “Despite all the challenges in the airline industry, investors are willing to buy airline debt and stock leading to a continuous crop of new competitors entering the market”.

In India, the likely candidates for a public debut are Air Deccan and Kingfisher Airlines, Bombay Dyeing (Go Airways) and Britannia (if it enters the business). In addition, the minister has announced that Indian Airlines (IA) and Air-India may be allowed to divest 10% of their equity in 2006. After its recent financial turnaround and aggressive marketing, IA is certainly capable of giving the competition a run in terms of service as well as efficiency.



• A rush of IPOs from airline companies is expected next year
• Investors must be conscious about all facts before investing
• Sebi terms of clearing Jet Airways prospectus will set the benchmark

Nobody has ever seen an annual report of Sahara Airlines, so it is unclear whether it would subject itself to the sort of disclosures that are demanded from IPO documents. But Jet Airways has taken the plunge and filed a draft prospectus with a 20% offer of its equity.

Although the ownership of Jet Airways has been controversial and subject to multiple investigations, the risk factors listed by the company are startling. Tail Winds Ltd, an Isle of Man company (which holds a 99.99% stake) and a few other entities own Jet Airways. Tail Winds is wholly-owned by Naresh Goyal (NG) and the draft prospectus reveals that he and the promoter group will continue to have a stranglehold over all significant decisions even if their shareholding drops to just 26%.

Apart from Naresh Goyal being a permanent chairman, the NG group will have the power to appoint managing directors, executive directors and one-third of the board. Tail Winds is an overseas corporate body (OCB) which had been deregistered by the Reserve Bank of India and needs to divest its holding to resident and non-resident Indian investors.

Interestingly, for all the airline’s success and the power vested in NG and the owner group, Jet Airways doesn’t even own the brand “Jet Airways”. This is owned by Jet Enterprises, a company “substantially owned by Naresh Goyal”. The company is contractually bound to pay out a fat fee varying between 0.10 and 0.20% of gross revenue as licence fee to NG’s Jet Enterprises. It also pays a fixed annual licence fee of Rs 0.1 million for each trade mark licensed to it.

That too is not a secure arrangement. The draft prospectus says, “Certain parties have raised objections to the registration of the Jet Airways trade mark in the UK and United States”. If the company loses this litigation, would it fly to some destinations under another name? Worse, if the licensing agreement for the trademark expires or is terminated, the Articles of Association of Jet Airways explicitly state that the airline will have to discontinue using the “Jet Airways” trademark and change its corporate name.

Further, the general sales of Jet Airways is outsourced to Jetair Pvt Ltd, another Naresh Goyal-controlled company, which earns a 3% commission on all passenger sales. In addition to the commission (which is over that paid to travel agents) Jetair, the sales agent, seems to recover most of its infrastructure and employee costs from Jet Airways through a ‘charge back’ agreement. In addition to Jetair, there are other promoter-owned subsidiaries in Dubai, Canada and South Africa who also earn commissions from Jet Airways.

These arrangements present what the draft prospectus confesses could lead to “potential conflict between Naresh Goyal and his promoter group and the interests of the airline”. Investors have to be conscious about these facts before investing.

Not owning the trademark becomes even more significant when you read that some of the “promoter group” companies are making losses. However, Jet Airways shows a net profit of Rs 163 crore for the year ended March 31, 2004 and Rs 129 crore for the six month period ending September 2004. These profits were possible after contingent liabilities that add up to a hefty Rs 400 crore. They include Rs 163 crore on outstanding letters of credit, Rs 157 crore on outstanding bank guarantees and Rs 8.8 crore of arrears on “cumulative dividends” to be paid to the International Finance Corporation.

To sum up the situation, we have promoter companies with enormous rights over all corporate decisions and who will keep earning a handsome royalty on the brand name and ticket sales, irrespective of whether the airline makes a profit or not. They will also control every significant decision and contract of the listed company, whether or not they present a conflict with their other interests. It is no wonder then that despite its copious disclosures, Sebi officials need to take their time in clearing the IPO document of Jet Airways. The terms of clearing the Jet Airways prospectus will act as a benchmark for disclosures by other airline companies, at least until Indian Airlines chooses to tap the market.

http://www.suchetadalal.com/articles/display/479/1303.article

More waves in the Dinesh Dalmia story

Last week, the Securities Appe-llate Tribunal (Sat) ordered Dinesh Dalmia, the incorrigible chief of DSQ Software, to buy back unlisted shares introduced by him in the open market at rates prevalent when these were allotted. The shares were issued at the height of the bull run, when DSQ Software traded at a high Rs 2,800. Dalmia took advantage of the euphoria to increase DSQ’s capital by 50% without informing the stock exchanges. He introduced these 1.3 crore shares in the market (originally allotted to three Mauritius-based shell companies) without getting these listed.

The Sat wants Dalmia to buy back shares from original allottees who continue to hold these today and had bought them between May 20, 2000 and January 12, 2001. Dalmia has been asked to deposit a first instalment of Rs 30 crore into an escrow account to finance the buyback, while the Securities and Exchange Board of India (Sebi) has been directed to set up an authority to conduct this transaction.

The Sat order is a modified ratification of Sebi’s earlier order, barring Dalmia from the capital market for 10 years and ordering him to buy back 1.3 crore unlisted shares, place these in a separate demat account and extinguish them. Sebi had calculated the unjust benefit which’d accrued to Dalmia through the dubious issue of shares as Rs 630 crore; the value of shares issued then was Rs 945 crore. Considering that Sat is known for slashing penalties and throwing out Sebi’s most celebrated cases, this order would have been extremely heart-warming for investors, but for one major hitch. Dinesh Dalmia, who owes money to dozens of entities (many of them have court orders against him, which are not implementable) has been absconding from the country for several years. This means that even if Dalmia surfaces, these lenders may have prior claim to any money that he possesses.

Where is Dal-mia these days? As far as the Indian investigation agencies are concerned, Dal-mia is untraceable and they have put out an Interpol ‘red corner’ notice against him. But US newspaper reports tell us that he is making news in that country, living out of a palatial home in New Jersey. And, before absconding, Dalmia destroyed DSQ Software, by surreptitiously selling its most lucrative global software contracts to Scandent Network in 2002 for an estimated Rs 145 crore.

Since then, the Company Law Board (CLB) has ordered the appointment of four government nominee directors to revive the company. Dalmia himself has reportedly moved on to the BPO business and is known to be running major call centres at Gurgaon, Bangalore and Chennai! Again, Dalmia’s links with these companies is no secret and his core management team remains the same as it was in DSQ Software and affiliate companies. Yet, none of the Indian investigators have even got to the stage of establishing Dalmia’s links to the BPO businesses or to extradite him from the US.

• Absconding financier now the subject of more than one suit in US courts
• Amazing lack of progress in matching US revelations to his companies here
• One wonders at the official line about ‘active pursuit’ of the probe


The official line from the enforcement directorate and the Serious Frauds Office is that the investigation is being actively pursued. Yet, nobody seems surprised that Dalmia has an entire team acting on his behalf in absentia. Or that the DSQ Software shares continue to be actively traded on stock exchanges. For instance, al-though the Sebi order was actively contested before SAT, none of the investigation agencies used the opportunity to question Dalmia’s official representatives at those hearings about his whereabouts and activities.

Meanwhile, the Dalmia story moved into another dimension last week, when The New York Post reported that “Major US companies are in a federal bankruptcy court, demanding they get back $83 million they loaned” to Dinesh Dalmia’s New Jersey-based outfit. The Post has openly linked Dal-mia to Allserve Systems Corporation, which filed for bankruptcy on November 18 in a New Jersey court. Christopher Byron reports that Allserve has claimed in court that “its business was, in effect, swallowed by a sink-hole that opened under its offices” in Chennai last March.

After that, the company claimed that its “Chennai operation was relocated to other offices in the city,” but the “new location was gutted in a fire six weeks ago, which permanently knocked it out of business.”

The Chennai correspondent of The Indian Express, Jaya Menon, checked out the addresses listed under the Allserve name. A watchman in the building told her that there was a minor fire in the basement, but it has been redone and was operational. There was no fire that gutted the building. Also, nobody seems to have heard of any sink-hole that swallowed any office building in Chennai, although such an event would have been sensational enough to be noted by the national press. As in India, the American creditors allege there is no explanation for $35 million of cash that vanished from the Allserve books between July and October last year. Those who have contested the bankruptcy claims include Sovereign Bank, CIT Financial, Bostonia Investment Group, Qwest Communications, GATX Technologies Services and Republic Bank.

While US investigators and lenders seem far more determined at hunting down Dalmia’s global operations, the Allserve default in New Jersey and his claims to the bankruptcy court seem exactly in line with his usual method of operating. The lenders who have sued Dalmia, however, have the advantage of his physical presence in the country. It will be interesting to see if US lenders and investigators are any more successful at recovering their money.

http://www.suchetadalal.com/articles/display/27/1836.article