Is It Goodbye To All That?

The agnostics have reigned supreme this fortnight as two more gods of the corporate world revealed clay feet. The Tata group and A.F. Ferguson (AFF), two institutions with formidable reputations, are smarting as their wounds get exposed.

The halo around the Tata group began to evaporate late last year when J.E. Talaulicar, director, Tata Finance Ltd (TFL), was indicted for insider trading. The news broke when SEBI acted upon a letter it received and investigated the TFL rights issue of April 2001. The process eventually led to the indictment of Dilip Pendse, managing director (now sacked), TFL, who allegedly worked in collusion with Talaulicar. Now audit and management consultancy major AFF has seen the back of one of its most prominent partners, Y.M. Kale, on a question of unethical practice. At the centre of the controversy is the investigation report Kale prepared for TFL.

After SEBI's inquiry, an internal independent committee was set up by the Tatas in August 2001 to probe the insider-trading charges. The Tatas went to AFF and specifically asked for Y.M. Kale, senior partner and No. 2 at the firm, to head the investigation. Kale was handpicked for his formidable reputation. People who know him closely describe him as "adamant in his views", "committed to the shareholders' interest" and a "tough auditor". The investigating team discovered that Talaulicar was involved in insider trading. Talaulicar conducted his business through Pendse, who paid the broker about Rs 70 lakh from Nishkalp Investments and Trading Co, a TFL subsidiary, where Talaulicar was CMD.

But the Tatas were not happy with the final report submitted in April 2002. In a confidential letter to AFF dated July 23, Ishaat Hussain, chairman, TFL, outlined why. The letter stated instances to indicate that Kale had overstepped his brief, and selectively. It saw the report as going easy on Pendse even where he was clearly at fault. Hussain mentioned how legal opinion was attached at some places but not at others which, he felt, went in favour of Pendse. The letter even suggested that Kale had held back information such as a letter by Prakash B. Karyekar, company secretary and chief accountant of Nishkalp, in favour of Pendse. Hussain strongly advised AFF to take another look at the report.

So in an unprecedented move, AFF agreed to withdraw and redo the report. Well-placed sources say that AFF's other partners told Kale that the firm would lose the Tata group account if he did not cooperate. AFF does work for 36 Tata group companies—a business worth about Rs 9 crore, over a third of the firm's total revenue. AFF, the respected temple elephant of the industry, has a history of never seeking work or hawking its services. So such a loss could be near fatal. Kale, however, preferred to resign from the firm than modify the report.

AFF issued a press release that referred to Kale's "past conduct", how the client had "lost confidence" in him and how it was "the unanimous opinion of all the partners that they had lost faith in him". The release categorically stated that there was no coercion from the client and his resignation was "consequent to a detailed internal inquiry". The release then explained that the company had withdrawn the report for examination and review "in pursuance of good governance". In effect, it conveyed that Kale was solely responsible for this embarrassment.

The man who had spent 36 years in AFF to rise to the second position in the firm had become untrustworthy overnight. Overnight, the man who had fought and won five elections for the company in the Institute of Chartered Accounts of India, the man on the international accounting standards board and on several SEBI and RBI committees had turned a crook. The release "unequivocally stressed" that "the firm would normally always stand by its partners". This is true. Old-timers recall the first time AFF got into a mess. In the Trisure IPO, AFF was held liable for mis-statement in the prospectus. The infamous 1976-77 case went up to the Company Law Board. Interestingly, the signatory then was the current managing partner.

AFF escaped ignominy then. This time, highly-placed sources say, its image will take a severe beating. "Is it possible that such a controversial report was vetted by Kale alone?" asks the CEO of a leading company. "All accounting firms have a Four-Eye Policy whereby at least two people look at a report before it is sent out." Sources claim the managing partner and at least three other partners followed the report through its development and vetted it. Three people from the client's end, including Hussain, were in the know of developments. Kale is known to have methodically got both his own people and the client's managers to initial their statements on the report. Professionals say it is difficult to believe no one else was aware of the report's contents or that it was sent out without the head honcho's okay. And despite the irregularities thrown up, the company's regular auditors were not rapped on their knuckles.

Sources close to the goings-on insist that the core of the issue is that the Kale-led team found more than it was supposed to discover. Asked the report: "How could so many questionable transactions ever be discussed, let alone actually be contracted or recorded, by senior officials of such reputed companies, even on the assumption that someone wielding authority had proposed these transactions? In other words, even if the suggestion to commit irregularities had emanated from a few, how were these acquiesced to by so many? How did these not arouse widespread consternation and why did they not rush to report the goings-on to the board of Tata Finance/Nishkalp Investments or even higher?" Thus, the report clearly alleged that the blame lay as much on other shoulders as on Pendse and Talaulicar.

"Could there be other senior Tata executives that the group is trying to shield?" asks a top chartered accountant. "Could it be that the group wants to pin it all on Pendse and let sleeping dogs lie, especially at a time when the group's market capitalisation has been nearly halved in five years?" Says a well-placed source: "It looks like nobody was in a mood to listen to what they didn't want to hear. The group could have just set the report aside but it was leaked to the press. So it had to write the letter to AFF to safeguard its position. Otherwise, why would they express their displeasure in July when the report was submitted in April?" Senior Tata sources allege that a rival Mumbai-based group was behind this leaking of the report to besmirch the Tata reputation.

When the TFL scandal broke, the Tatas moved in quickly to salvage the situation. They duly filed cases against Pendse and wrote to SEBI and RBI to take necessary action right after the SEBI investigation last October. Tata Sons pledged Rs 500 crore to TFL so shareholders wouldn't suffer. Last week, following the press blitzkrieg on the AFF issue, the group contained damage by releasing full-page ads that condemned the "campaign of vilification". The ads listed out "Fact" and "Fiction", the latter being what was reported in the media until then.

But why is Kale not defending himself? Kale was asked to surrender all the files, nearly 140 of them, on the client. He did so. Only after that was he asked to quit. Kale, having been on a profit-sharing basis, has a good part of his life's earnings stuck in the company that he will get in deferred payment. Arbitration is allowed in his deal with AFF. It waits to be seen what steps he takes.

The truth on the affair may out only after SEBI does an independent study of the report. Meanwhile, a letter by Karyekar has been unearthed by a leading daily that seeks to make the case that his earlier statement to Kale where he spoke of falsification of the books of Nishkalp by Pendse, among other things, was factually incorrect. He claims that it was "prepared under tremendous tension with disturbed frame of mind due to shock and also under the threat of an arrest". This is only the newest twist to a murky tale.