Investment advisers and investor protection groups in the UAE have raised questions about the effectiveness of India’s enforcement agencies and regulators when it comes to corporate governance laws, in view of the increased fraud by promoters of listed companies.
The Registrar of Companies, the Securities and Exchange Board of India (SEBI), Bombay Stock Exchange, the Reserve Bank of India and the Prime Minister’s Office (PMO) have been blamed for failing to ensure companies comply with corporate governance law to protect investors.
“Though India has one of the most stringent and rigorous corporate governance laws in place, investors are taken for a ride by some corporates with [the] ‘right connection’ at high places,” said Jiten Puranmall, chartered accountant and legal consultant with JP Associates, Dubai.
Pravasi Bandhu Welfare Trust, an NGO that takes up the grievances of investors, is preparing a memorandum to be submitted through the Indian embassy in the UAE and Consulate General of India in Dubai, to the Indian government and SEBI to investigate and bring to book the culprits who defraud the investors.
Among the several cases reported are Anugrah Stock & Broking, Mumbai; a Pune-based pharmaceuticals packaging company; and CG Power, all listed on the Bombay Stock Exchange.
It was alleged that brokerage firm Anugrah Stock & Broking and its associates were running a Ponzi scheme that defrauded nearly 40,000 investors, including NRIs, to the tune of INR 14bn (£139.7m, $191.8m, €159.3m).
Though licensed to act as a stock broker, the company attracted deposits by promising assured returns up to 20%.
As there were not enough profits to give away the promised returns, the company started paying its early customers from the funds received from new investors and by selling the shares of other clients.
The company kept its investors in the dark by sending false account statements.
Only when some clients checked their holdings with the depository, was it revealed that their shares were missing.
Though many investors complained to the regulators, no action has been taken so far. It’s a clear case of corporate governance failure.
“Investors are cheated by promoters of some companies with the ‘right kind of connection’ in connivance with top officials from the regulatory bodies and government departments,” said Harilal Ramakrishnan, managing partner, Lal Quila Investor Services, Dubai-based consultancy.
“We demand a thorough investigation into the whole affairs to safeguard the interest of the investors.”
Serious fraud investigation
Another case of corporate governance failure is the Pune-based pharmaceuticals packaging company which has been reporting losses since 2017.
Media reports said the company has been blatantly flouting corporate governance norms with the connivance of some top officials in the Registrar of Companies, in spite of there being an investigation under way by the Serious Fraud Investigation Office.
The Ministry of Corporate Affairs has ordered the Serious Fraud Investigation Office to investigate the charges of diversion of funds of more than INR 10bn by the promoters of company.
The investigation found that the company accepted deposits of INR 3.5bn crore from public as well as shareholders, but failed to pay interest to thousands of deposit holders.
Among them are several NRIs, who approached investment advisers to take up the matter with the authorities concerned.
Investment advisers cited another case of corporate governance abuse. It is alleged that the promoters of BSE-listed CG Power tried to rob their own company.
Its chairman, who has now been ousted, has been accused of using clever means to siphon off money from his own company.
“The promoters have a fiduciary duty towards the company, shareholders and employees. They are expected to act in good faith to promote their interests. However, in corporate India, there have been many instances when the promoters and the boards forgot about their fiduciary duty and used fraudulent means to benefit themselves,” Ramakrishnan added.
These abuses of corporate governance are happening at a time when the Indian market is becoming more attractive to the foreign institutional investor – meaning it is in the interests of the government and wider market to stamp out such practices.