THE GDR (global depository receipt) scam, which was perpetrated by dozens of companies between 2002 and 2014, was as simple as it gets. Float a GDR issue—the amount raised is meaningless and can be a few million dollars. It is better if the GDR is listed in a not-so-prominent exchange like the Dubai International Financial Exchange. Before the issue, ink a deal with a single buyer to purchase all the GDRs. Arrange for a bank in a slightly shadowy nation to issue a loan to the buyer.
Arun Panchariya is a Consul General of Liberia, according to the website arunpanchariya.com. It further says he has been appointed as Special Advisor on the Special Economic Zone (SEZ) to the Minister of State for Presidential Affairs, Ministry of State government of Liberia. Since July 2012, he has been heading the Consulate Mission of Liberia in Dubai. Before taking up his diplomatic position in 2012, Panchariya was a corporate financial advisor and an entrepreneur with over 20 years of experience, according to the website. His professional background is in the trading of direct equities, commodities, futures, derivatives and other market instruments and has offered advisory services to many governments on basic infrastructural development, says the website.
Through a board resolution by GDR-issuer, assure the bank that the entire proceeds will be deposited as security with it until the loan is repaid. As payments are made to the bank in instalments, it releases the amounts to the issuer. According to the stock market regulator, SEBI, this straightforward, yet reportedly fraudulent, plan was allegedly hatched by Arun Panchariya “in connivance with different issuer companies and their promoters/directors”. At present, SEBI has pinpointed 59 GDR issues by 51 companies.
One is likely to ask, what is the purpose of the fraud if the money comes back to the company, ostensibly after a delay of few months, and is invested in the operations that are stated in the GDR prospectus? Or, in a way, where are the irregularities if investors were not fooled or lost money? This is where it gets interesting. The reasons were fleshed out in a recent SEBI order on a similar case, which concerns a listed company, Rana Sugars that is owned by members of an erstwhile princely family, But before we get into the reasons behind the scam, let’s talk about the facts of this case. On May 15, 2006, Rana Sugars issued 2.45 mil-lion GDRs worth $18 million. Investigations revealed that Seazun Ltd was the sole buyer of the GDRs. Through an agreement that it signed with Banco Efisa SA on April 12, 2006, the latter granted a loan of $18 million to Seazun. As soon as Rana Sugars got the money from Seazun as GDR proceeds, it promptly deposited them with Banco Bank as security against Seazun’s loan.
Further investigations found that these events were inter-linked. In its board meeting on January 31, 2006, i.e. months before the GDR issue, Rana Sugars passed a resolution “to authorise Banco Bank to use the GDR proceeds as security” against any loans that are taken in the future. Rana Inder Pratap Singh, the MD, was authorised to deal with Banco Bank. On May 15, 2006, he signed an agreement with the bank to make a deposit that wouldn’t exceed the loan that was given to Seazun to subscribe to the GDRs.
Clearly, this three-way deal was allegedly pre-planned and in connivance with the bank, buyer and the issuer of GDRs. Banco Bank lends $18 million to Seazun, which picks up all the GDRs, and the proceeds are kept as security with the bank by Rana Sugars. The money was debited from Inder Pratap Singh’s account in Banco Bank, or paid by the bank, in 21 instalments between May 23, 2006, and December 14, 2006. The amounts were regularly transferred to Inder Pratap Singh’s account in an Indian bank.
SOME of these transfers were small, $25,000 to $650,000. Some were large, $1 milion to $4 million. Hence, as Seazun repaid the loan in instalments, the bank transferred them. As the company argued, it received the entire GDR proceeds from the bank and invested them, as mentioned in the prospectus, in two sugar mills in Uttar Pradesh. Hence, there was no fraud or illegality, only a delay in the receipt of the money by a few months. No investor was harmed, no one lost money, and there were no complaints from any quarters.
The SEBI Court did not agree. First, investigations showed that only $15.7 million of the proceeds were deposited in Inder Pratap Singh’s Indian bank account. An amount of $2.28 million was transferred to Seazun, and another $267,000 to Vintage FZE, a Dubai-based company. Although the SEBI order did not say it specifically, these amounts may be “commissions” or “management fees” paid by Rana Sugars to Seazun and others to facilitate the deals. This is evident from other news reports.
Investigations showed that only $15.7 million of the proceeds were deposited in Inder Pratap Singh’s Indian bank account. An amount of $2.28 million was transferred to Seazun, and another $267,000 to Vintage FZE, a Dubai-based company
According to one of them, Vintage FZE was a company “established in Jebel Ali Free Zone, Dubai, and its founder-director was Arun Panchariya who, according to SEBI, is the alleged mastermind of the GDR scam.” His name is mentioned in the order on Rana Sugars. There are charges that he gave the idea to manipulate the GDR issue to the Indian promoter, and sometimes arranged for the bank, and the buyer. There are reports that his family members are involved in stock trading in India.
Whatever may be the reason behind the payments to Seazun and Vintage, the SEBI order said that the entire proceeds of the GDR issue did not come back. It was thus against the law. As the order stated, “The GDR proceeds ought to have been used for the benefit of the company and its shareholders…. There can be no two opinions that by diverting and returning the said amount…to Seazun, the shareholders…have been deprived of the money raised….” This had to be remedied, and the money had to come back.
On the issue that a violation occurs only if there is any impact on stocks or shareholders due to sham transactions, the SEBI order was clear. It said that Rana Sugars’ announcement that its GDR was fully-subscribed within a day—though done through unfair deals—“gave an ostensible impression to the investors and market about the strong potential of the company”. The investors were “made to believe that the shares of the company have received an overwhelming response in the market abroad”.
THESE, said the court, represented “fraudulent and unfair trade practice”, and led to “misleading inferences and false positive expectations”. Although the order didn’t get into the details of this aspect, such impressions and expectations were used later by Rana Sugars. When the GDRs were converted into shares, as they had to be, in a ratio of 1:10, the shares were sold to the Indian retail investors. One reason for investors’ interest was the successful GDR issue. Thus, the company ended up in a win-win situation.
On the issue that a violation occurs only if there is any impact on stocks or shareholders due to sham transactions, the SEBI order was clear. It said that Rana Sugars’ announcement that its GDR was fully-subscribed within a day—though done through unfair deals—“gave an ostensible impression to the investors and market about the strong potential of the company”
First, it sent signals to domestic investors that foreigners were interested in Rana Sugars, and mopped up its GDRs within a day. Then, when the GDRs were converted into shares, the latter were sold to domestic retail investors. This was a fraud on “its own existing share-holders and also upon all the investors… who might be induced to deal in the shares of the Company due to the artificially created positive outlook about the Company’s performance”. This violated several provisions of the SEBI Act.
Although the order did not clarify this, the GDR scam can be seen as an innovative way to bring back black money stashed abroad, and launder it as legal local earnings. Imagine the GDR buyer to be the promoter’s benami firm. So, the owner’s money is used to buy the GDRs, through a bank loan to stagger repayments. When the GDRs are converted into shares, they are sold to Indian investors, and the promoter keeps the proceeds.