The Stock Holding Corporation of India (SHCIL), promoted by institutions such as IDBI, Life Insurance Corporation of India, General Insurance Corporation and Unit Trust of India, is a large depository participant, custodial agent and stock-lending intermediary. But in February-March 2001, after the big bubble rally had ended, SHCIL was busy bailing leading speculators out of their shady deals.
The Securities and Exchange Board of India’s (Sebi) investigations reveal that the beneficiaries of SHCIL’s largesse were the notorious Dinesh Dalmia (chairman of DSQ Software), Harish Biyani (Dalmia’s Kolkata-based broker friend), Ketan Parekh (KP), Jayantilal Khandwala, Vivenasri Financial Services (a Hyderabad-based operator who got Rs 43 crore from SHCIL to ramp stocks such as Datasoft and Vision Technologies) and others. Sebi’s investigations were aided by a report by M Ramesh who was in charge of vigilance and is being persecuted by SHCIL for exposing it.
How did an organisation like SHCIL turn into a financier of market operators and speculators? Why did its powerful board of directors neither suspect nor question its activities? And what was the regulator doing? A Sebi investigation at the behest of the Joint Parliamentary Committee provides some answers.
SHCIL’s broker funding was routed through two schemes. One was a “Sell N Cash” (SAC) scheme ostensibly aimed at providing liquidity to retail investors. It allowed them to receive payment on the same day they sold their shares for a small fee. The other was a Cash on Payout (COP) scheme, which we will discuss later. SAC was exploited by brokers to extract several crores of rupees from SHCIL. Stockbroker Harish Biyani along with Biyani Securities Pvt Ltd (BSPL), an associate brokerage firm, was among the notorious users. He brazenly used the illiquid DSQ Industries — a shell company listed only in Kolkata — for his operations. Since shares were scarce, any significant transactions were possible only when DSQ group entities (such as Rathyatra Sales, Hulda Properties, Veersali Commodities, Gitabali Tracon, Fleuron Tie Up, Abhapra Tie Up and Naina Barter etc) provided the shares.
Sebi has documented several circular transactions where Biyani availed of SHCIL funds by executing sale transactions through BSPL and himself as counter party. Shares were provided by the DSQ group, the funds by SHCIL. The exposure to Biyani and BSPL on account of DSQ Industries alone was as high as one-third of SHCIL’s networth, or Rs 42.88 crore.
Faced with a payment crisis in March 2001, the Calcutta Stock Exchange (CSE) expunged a series of ‘circular’ transactions including a Rs 7.96 crore transaction financed under SAC. While Biyani had already collected his money, the CSE refused to pay SHCIL since the transactions were expunged. This was just a part of the sum it had to collect from Biyani.
SHCIL’s recovery attempts led to a collection of Rs 3.9 crore. It has since entered into a Memorandum of Understanding (MoU) with Ramesh Biyani to recover Rs 8.04 crore, but has not filed any litigation against him. Instead, it is trying to claim Rs 7.54 crore from New India Assurance for this highly irregular deal.
Biyani along with Dinesh Dalmia later exploited SHCIL’s COP scheme as well. This allows a seller to receive a cheque, post-dated for a day after the payout. In a situation where money is credited into investors’ accounts within 48 hours, the scheme is pointless. It is even less useful to brokers whose accounts are credited by the exchange on payout day itself.
Yet, on March 2, 2001, the very day that the market fell into a free fall after Yashwant Sinha’s dream budget, Biyani exploited the COP too. Harish Biyani sold 7.2 lakh DSQ Industries’ shares under this scheme through BSPL. The single transaction at an artificial Rs 340 per share was for Rs 24.48 crore. Although settlement was on March 13, he collected post-dated cheques for March 14, 2001 from SHCIL, payable to IndusInd bank. SHCIL didn’t even bother to ask why the broker wanted a post-dated cheque for March 14, when the stock exchange, in normal course, would have credited his account on March 13. As it happened, the CSE expunged the transactions and the rest is well documented. Biyani had discounted the post-dated COP cheque with IndusInd bank and pocketed the cash. IndusInd had protected itself with a ‘comfort letter’ from SHCIL. But with the CSE on the verge of a default, SHCIL stopped payment. The matter is now under litigation.
Sebi investigators also found direct links with Dinesh Dalmia. They learnt that Dalmia had personally accompanied Ravindra Biyani (a relative of Harish Biyani) on March 2, 2001 to negotiate the COP deal at Mumbai and to explore a further SAC facility of Rs 24 crore. SHCIL agreed to fund only the COP. Dalmia then transferred a large chunk of DSQ Industries’ shares to Harish Biyani’s beneficiary account through off-market transactions to facilitate the COP financing. The findings also reveal that:
*The CSE allows brokers to trade through other brokers (in this case circular deals by associate firms) so that they go through the clearing-house and are covered under the Trade Guarantee Fund. The exchange would thus have ended up taking responsibility for shady circular deals had they not expunged them to avoid a payment crisis in March 2001. o All transactions in the illiquid DSQ Industries (unlike DSQ Securities) scrip were initiated or instigated by Dinesh Dalmia who owns most of the stock. SHCIL merely funded the circular deals of Harish Biyani and Biyani Securities.
*In its eagerness to fund the brokers, SHCIL often collected the Rs 1 lakh empanelment fee well after it released (March 22, 2001) funds to them. o The comfort letter issued for the Rs 24 crore COP scheme was highly dubious and a first by SHCIL. It smacks of clear collusion between SHCIL officials and the brokerage entities.o Collusion is also evident in the fact that SHCIL had reduced its transaction fees and service charges for these notorious operators.
Similar deals with done with KP and his associates such as Triumph International, Classic Credit etc, but the amounts were smaller. The KP group had turned to SHCIL for funds only in February 2001, when the collapse was imminent.
All of SHCIL’s shady dealings were done during the tenure of its managing director, B V Goud, who was once such a favourite with Sebi that it had given him an extension. Instead of bleating for further investigations into a possible nexus between SHCIL officials and various brokers, it is time to frame specific charges and file cases.