Waiting To Explode

QUITE like its stature, size and strength, its seam too has no peer With a deposit liability of Rs 5,383 crore on a depositor base of five crore investors, the country's largest residuary non-banking company (RNBC), Peerless General Finance and Investment, is a time bomb simply waiting to explode. When it does, it will be a disaster many times the size of the CRB collapse. And one in every 20 Indians will be affected.

With the RBI and the Supreme Court finally taking a long, hard look at what could possibly have been the finest, most successful finance story in the country it seems that, barring the scale, the Peerless ripoff was no different from the CRB swindle.

The company, according to a Supreme Court judgement, has flouted almost every Rat rule relating to RNBCS. The court declared that while Peerless was showing handsome profits, declaring generous dividends and incredible bonuses, the reality was different: it was incurring huge losses. The judgement states that the company had been boosting profit in an unauthorised manner. Malpractices include: taking very high commissions, duping depositors and squandering the money ( see chart ). Most of Peerless' depositors are from rural areas and are gullible and illiterate, according to an RBI report. They are unaware of their legal rights or how the Peerless management has blown their money. Most of the dividends and other financial benefits headed only towards the promoters of this closely held company. The company would deduct 40 per cent of the initial deposit from investors as commission and service charges. This, according to the Supreme Court judgement, flouts RBI norms. The implications: Peerless is looking at an accumulated liability of Rs 771 crore for booking unauthorised profits over the years. Insiders say the company will also have to provide an additional Rs 150-200 crore as the market value of its investments does not cover its liabilities. In 1995-96, Peerless reported a loss of Rs 29.52 crore. This was adjusted through transfers from general reserves. But, according to analysts, the initial loss was understated as Peerless declared as profit earlier liabilities and provisions for income tax, which were suddenly no longer required. These adjustments amount to Rs 98 crore and without this windfall the loss would have been about Rs 128 crore. If the Rs 771-crore liability, which had earlier been booked as profits, was provided in the profit and loss account, Peerless' losses would have swelled to about Rs 900 crore. But the management took care of this through clever financial engineering by debiting the sum to "miscellaneous expenses not provided for" and crediting it to a social welfare fund (the company's liability to its depositors) to avoid showing it in the profit and loss account. But this has only postponed the day of reckoning. Peerless does not have the means to meet this liability. Scope for future financial jugglery is now limited as Peerless has exhausted most options. The loss in 1996-97 is expected to top Rs 60 crore. Reason: following the Supreme Court judgement, the company slashed commissions to its agents. This resulted in an agitation by the agents, leading to a steep fall in deposit mobilisation. Peerless' net worth is also expected to be officially wiped out. Also, following the judgement, Peerless' service charge--treated as income so far-has dropped by over 98 per cent, from Rs 363.59 crore to Rs 6.58 crore while provision for doubtful debt increased 28-fold to Rs 7.88 crore. The provision for fall in value of investment has been put at Rs 5. 76 crore but sources say this is much too low. For instance, Peerless has an investment of Rs 4.2 crore in CRB Mutual Fund which is likely to be a total loss. In addition, it had invested Rs 5 crore in Taurus Mutual Fund whose market value stood at Rs 1.87 crore on March 31, 1996. These are just two examples of Peerless' reckless use of its depositors' funds. Peerless' operations differed from CRB's in that it did not lure depositors by offering attractive upfront commissions. In fact, it pays just 10 per cent per annum but mobilises deposits by forced sales. The company's traditional target was the gullible rural population and all efforts were directed to book the first installment, as the agents and the company appropriated over 40 per cent from this. There was no effort to collect subsequent installments. The result: about 90 per cent of the depositors discontinued payment after the second or third years, according to the RBI report. Under a contract signed with the company, the depositor lost the right to get back his money. And whatever he had paid till then stayed with the company. Although the current managing director Sunil Kumar Roy, son of the company's founder controls about 70 per cent of Peerless' equity, the company was run by his brother-in-law, Prasanta Chandra Sen, since April 1986, with Roy quite happy to remain a joint managing director under Sen's shadow. Sen ran a high-profile operation and dramatically increased Peerless' deposits from Rs 600 crore to Rs 4,000 crore during his l0-year tenure. Despite this, profits were poor and Peerless would have shown losses if accounts were maintained according to RBI rules. As per an RBI report on Peerless' operations as on March 31, 1993, during this period the company mismanaged nearly all its operations. The report observed that the company was liable to face penal action for massive diversion of funds from approved securities to other investments, including stock-markets, inter-corporate deposits and the Rs 88-crore unsecured, interest-free loans to its group companies, many of which diverted these funds to other entities. For instance, Peerless invested Rs 11.85 crore in the equity of its subsidiary Peerless Hospitex Hospital and Research Centre and gave it an interest-free loan of Rs 35 crore. This subsidiary has an accumulated loss of Rs 15.82 crore which has wiped out its net worth. There is little possibility of recovering the money, as it is not being run by professional managers but by T.K. Roy--S.K. Roy's elder brothel. Although the RBI threatened to take "appropriate action under the law unless Peerless took remedial measures", the company paid scant regard. Sen could allegedly defy the RBI with impunity, as he wielded tremendous influence, having sanctioned huge loans to the West Bengal government and state public sector enterprises. These loans stood at Rs 1,282 crore in 1996. It is also being alleged that Sen used depositor funds to help out top businessmen, important politicians and some media groups. Most of these loans have turned into non-performing assets. In return, he bought protection and Peerless was allowed to squander depositor funds away from the public gaze. One indication: although Peerless' financial situation is well-known, no searching question has been asked either in Parliament or in the state legislature about this delinquent company. This is despite the fact that the RBI has deplored the way it has been run. Barring former West Bengal finance minister Ashok Mitra, who had dubbed the Peerless management as buccaneers, no West Bengal parliamentarian has raised his voice against the company. Predictably, Mitra's caveats were ignored. Peerless could also juggle with depositor funds with impunity because RNBCS have even less restrictions on their operations than non-banking finance companies (NBFCS) like CRB. Peerless is not governed by SEBI. A credit rating is not mandatory for it to mobilise deposits. The RBI has the sole responsibility to scrutinise its operations, and protect depositors and debtors. But all RBI'S efforts to impose transparency and discipline on Peerless have proved unsuccessful, allegedly because of Peerless' clout in high places. Take funds management. According to RBI rules, Peerless must keep 10 per cent of its depositors' funds with nationalised banks and 70 per cent in government-approved securities. The company can freely deploy the remaining 20 per cent of the deposits mobilised. But according to the RBI report, Peerless has flouted this rule and deployed much more than 20 per cent. Peerless apparently had unauthorised investments worth about Rs 1,021 crore in 1993. Recently, the RBI has tightened the investment norms of RNBCs in line with the recommendation of the Khanna Committee on NBFCS. But it will be difficult for Peerless to return to the stipulated investment norms as it can do so only by selling a large chunk of its investments and reinvesting the proceeds in government-approved securities. But this would expose a large unprovided-for fall in the value of its quoted investments, which has been estimated by the management at Rs 108 crore in 1995-96. The fall in the value of unquoted investments is over and above this. Another reason why Peerless could go unnoticed was its status of a closely-held company, which did not require it to be listed on the bourses. As a result, there is no investor interest in this company. This led to tame annual general meetings tucked away from the public and the media. CURRENTLY Sen alone is being blamed for all Peerless' misdeeds, but according to insiders, Roy, though in the background, had approved all Sen's actions. He has now distanced himself from Sen. The RBI report observed that Peerless' paid- up capital at Rs 2.07 crore was abysmally low compared to its total funds of nearly Rs 2,330 crore and constituted only 0.09 per cent of its liabilities. To set the situation right, the RBI urged the management to infuse new capital. But the management responded by issuing 15:1 bonus shares by capitalising the revaluation reserves, thus ensuring the Roy group's holdings were not diluted. Issuing bonus shares out of revaluation is a practice frowned upon by prudent accountants. But the ethics in this case are even more questionable as the assets which were revalued were acquired by investing depositors' funds. Roy, family and friends, therefore, are controlling these huge funds by bringing in cash for only 2 per cent of Peerless' equity. They control Rs 33 crore of Peerless equity on a total cash investment of merely Rs 66.80 lakh--a fiftieth of the total value. Here's how: Peerless had an initial share capital of Rs 36.80 lakh. A 1:1 bonus followed in 1987, doubling the equity to Rs 74 lakh. In 1988, through a private placement, the Roy group pumped in Rs 30 lakh to acquire an additional 30,000 shares. But here, the price of the share was reduced from the last transacted price of Rs 1,100 per share to Rs 100 per share. Another 1:1 bonus issue followed in 1991, and in 1995 came the 15:1 bonus, raising the share capital to Rs 33.15 crore. The RBI has pointed out the inherent dangers of controlling huge deposits with negligible investments by promoters. Besides facing his company's financial collapse, Boy could also lose majority control of Peerless if Parasmal Lodha's petition is upheld by the Calcutta High Court. Lodha, a Calcutta-based building promoter has alleged that Sen and Roy breached a verbal agreement, depriving him of majority control of Peerless. Sen, who is now out of Peerless after a bitter and public fallout with Roy, has switched sides to support Lodha's contention. He has gone on record, saying, "I have done beimani (breach of trust) with Paras", and "I stole the shares for Roy". After Sen's departure, Roy took the helm, but the Central and West Bengal governments were beginning to panic about Peerless' rotten core. Chief Minister Jyoti Basu and the then Union finance minister Manmohan Singh, personally persuaded proven professionals, former State Bank of India chairman D.N. Ghosh and former Unilever chairman S.M. Datta, to join up as non-executive chairman and director respectively. But the company continues to be run by the same team of executives who had grossly mismanaged it for all these years. The few professionals who have been recently inducted have little say and have been sidelined by the old guard, according to insiders. In spite of total mismanagement, Peerless is a household name and if it is allowed to go under, it will not only hurt crores of poor depositors and demolish confidence in the country's financial and regulatory systems, but also have far-reaching economic, social and political consequences. The CRB seam could then begin to look like a picnic.