Another Satyam in making Helios and Matheson

The Helios & Matheson story is a chilling reminder of the deep rot in our regulatory and enforcement structure

 

Last week, our news site put out a detailed report about how Helios & Matheson (H&M), a company whose net profit had jumped 35% to Rs 74.12 crore (after providing for interest on all borrowings) for the four quarters ending September 2014 (against corresponding period the previous year), was unable to pay salaries and had not been repaying fixed deposit-holders.

 

Moneylife readers know that we have been writing about H&M’s failure to pay back fixed deposits (FDs) since July 2014 when the advance cheques issued by it had bounced. But the stock exchanges, which mechanically verify news reports, apparently don’t bother to read such signals or question the declarations made by H&M. However, investors began to panic and the stock price dropped 3% on 21st January (after our report was published) and another 12% (to Rs66) on 22nd January. 

 

What is rather shocking is that the share was quoting at Rs78 until 19th January and it continues to hold firm at Rs66, even when employees are tweeting about not being paid and the notice for a winding up petition has been served on the company by unpaid depositors. 

 

In the buzz that followed our report, we discovered that H&M’s investors were not only senior citizens lured by the offer of a slightly higher interest rate. They include a retired foreign banker and a well-known doctor who had FDs in the company, while a sharp Harvard Business School alumnus expressed relief that he had managed to sell the stock before it crashed 12%. 

 

“Is this another Satyam in the making?” they wanted to know. Well, we don’t know. That is because all those who are supposed to check, verify, audit, regulate or provide credit ratings have not done their job. What we do know is that a profitable company should not have problems paying salaries or refunding FDs. Documents collated from several FD-holders show that the company’s cheques have been rejected for ‘insufficient funds’; in many cases, the cheques had been stopped by H&M.

 

Saytam was cleverer. It used to delay paying its vendors, who never went public about the company’s tight finances until after Ramalinga Raju famously confessed to fraud. 

 

I first began to write about Helios & Matheson in early 2006 over its controversial acquisition of vMoksha, an IT company, promoted by one Rajeev Sawhney (who brought in the funds) and Pavan Kumar. Mr Kumar a high-flier in the IT industry then, who was also on the board of Infosys and went on to join Scandent Solutions, another strange company that sneakily bought over all the lucrative software contracts of the scandalous and defunct DSQ Software and got itself listed on the Bombay Stock Exchange through a reverse-merger evading full disclosure of its antecedents, as required in a public offering.

 

Mr Kumar sold vMoksha to H&M in a funny-money deal. H&M ostensibly paid $19 million for the purchase, of which $15 million was seemingly paid out, but as much as $13.5 million went back to H&M in the form of a loan transfer. The loan itself was fraudulently obtained by Mr Kumar for vMoksha, from State Bank of Mauritius based on nothing more than his personal guarantee and that of the chairman and managing director of H&M. Both the guarantors were resident Indians and the Bank did not bother to obtain clearance of the Reserve Bank of India (RBI). The deal, however, caused the H&M stock to soar from Rs100 to Rs500. This is just the broad picture of the many legal violations in the deals. 

 

Rajeev Sawhney’s story was brought to me by a wealth manager of JM Financial Services who thought media exposure would lead to a serious investigation. Stacks of documents were available and provided to all the regulators by Mr Sawhney—the Securities & Exchange Board of India (SEBI), RBI, the Enforcement Directorate, Central Bureau of Investigation (CBI) and the stock exchanges. 

 

Everybody did a little bit of investigation that only established the veracity of Mr Sawhney’s charges but would not initiate action. SEBI went a step further; it slapped countercharges against Mr Sawhney and quietly closed cases against him and H&M through the controversial ‘consent order’ route and payment of money. Since many entities are forced to opt for consent agreements, to avoid decades of harassment by SEBI, nobody was any wiser about the truth. Mr Sawhney then filed litigation. But every time he won, it was contested. H&M took its appeal all the way to the Supreme Court where it was finally thrown out and the apex court reverted proceedings to the Bombay High Court. The litigation still remains inconclusive. 

 

At a time when prime minister Narendra Modi talks about ease of doing business, this is a chilling story about India’s excruciatingly slow legal system that can deny justice even to someone like a wealthy Rajeev Sawhney, who has the resources to knock on the doors of every court, investigation agency, regulator and ministry, without making any headway for almost a decade. 

 

The H&M story shows that companies can get away with fake disclosures. Regulators will tinker with reporting requirements and make them more and more onerous, until it is difficult to do business. But they will avoid the focused work involved in a random verification, or one based on market intelligence. In fact, over the past few years, SEBI chairman UK Sinha, has made it a virtue for SEBI officials to avoid any interaction with the market, leave alone seek market intelligence. And, yet, more SEBI officials are facing CBI investigations than ever before!

 

If regulatory failure was one part of the H&M story, the other was its active promotion by a cabal of market-players, including institutional investors, and a careless rating agency. Consider this. In 2013, our best-known rating agency, CRISIL, gave H&M the highest fundamental rating of 5/5 ignoring H&M’s questionable past and the cases pending against its promoters. In October 2014, CRISIL downgraded H&M’s fundamental rating from 3/5 to 2/5, over three months, after its interest and redemption cheques to depositors began to bounce. And, when it has already stopped paying some of its employees, CRISIL still said the fair value of the stock was trading at Rs91 at one time. 

 

It also said, “At the current market price of Rs134 per share, our valuation grade is 1/5, indicating that the current market price has strong downside, since it had to repay deposits when they matured or before 15 March 2015.” CRISIL did not wonder about the trick of giving false confidence to depositors through advance interest and redemption cheques which were bouncing. It called it a temporary liquidity issue. It also produced a rating report which, when you cut through the gobbledygook, essentially said that H&M was in deep financial trouble unless it finds someone to give it funds. The rating agency was happy to believe the management’s story of outstanding receivables without wondering if any of it was true. The stock price of such a company cannot remain so high unless it is actively manipulated. 

 

Investors who stand to lose money, if H&M fails to pay, have got together under the banner of ‘Depositors N Shareholders of Helios and Matheson’. They are also urging investors to send their complaints to the SEBI chairman, director CBI and director inspection & investigation at the ministry of corporate affairs. But will it be of any use to investors, if all these agencies refuse to act quickly to protect investors’ funds or pull up those who failed to do their job? How will investor confidence ever be restored if regulators allow investors and depositors to routinely lose big chunks of their savings?