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Summons issued to Veritas analysts

Last updated on: August 14, 2012 09:42 IST

Summons issued to Veritas analysts

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N Sundaresha Subramanian in New Delhi

Summons have been issued to Canada-based analysts of Veritas Investment Research for a personal appearance following complaints by the Indiabulls group.

The move followed two different complaints by Indiabulls against the research firm in Mumbai and Gurgaon alleging Veritas had filed "grossly misleading and erroroneous reports with the ulterior motives of profiteering".

Veritas had published a detailed report on the governance practices and related party dealings of three Indiabulls group firms namely, Indiabulls Financial Services, Indiabulls Real Estate and Indiabulls Power.

"Indiabulls has chosen to pursue the people behind these cognizable offences so that the offenders are punished and no other Indian company is subject to this type of tactics in future. Police authorities have issued notice/summons to the accused persons for personal appearance on August 27, 2012," Indiabulls said in a public notice published in some newspapers on Monday.

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Image: A broker monitors share prices at a brokerage firm in Mumbai.
Photographs: Stringer/Reuters

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Summons issued to Veritas analysts

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Indiabulls also, for the first time, responded to the Veritas allegation of using private companies controlled by promoters Sameer Gehlaut, Saurabh Mittal and Rajiv Rattan to siphon off profits of the group's listed firms.

According to Indiabulls, IIC was an EPC (engineering, procurement and construction) company for carrying out construction of power projects. INFC is a 100 per cent subsidiary of IIC.

"Promoters have invested significant amount of money and also have raised external money for these companies."

The total capital base of these companies stood at Rs 540 crore (Rs 5.4 billion) and "not one rupee of this is contributed from any group entity," the company said.

The EPC companies were created to ring fence Indiabulls Power from various litigations which happen during the course of developing mega projects. IIC and INFC employ 537 people for various project-related activities, Indiabulls said.

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Image: BSE building is reflected on a glass window as people look at a large screen displaying India's benchmark share index in Mumbai.
Photographs: Arko Datta/Reuters

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Summons issued to Veritas analysts

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In its report Veritas had alleged that Indiabulls Infrastructure Company and IINFC, two companies owned by controlling shareholders of Indiabuills serve as a conduit for the controlling shareholders to siphon funds via loans and advances from IBREL and IBPOW into other privately owned entities, which then subscribe to warrants and/or buy shares of Indiabulls Financial Services, Indiabulls Real Estate and Indiabulls Power from the open market, thereby boosting the stake of the controlling shareholders in the public entities."

It had further alleged that, "the utter duplicity of controlling shareholders is further evidenced by the fact that IIC and IINFC are essentially flow-through entities. For FY10 and FY11 all costs associated with running these two organisations was borne by shareholders of publicly-traded entities."

According to the Veritas report,  in FY11, IINFC reported nil expenses related to employees on revenues of Rs 610 crore (Rs 6.1 billion), while IIC reported employee-related expenses of a meagre Rs 2.18 crore (Rs 21.8 million) on revenues of Rs 350 crore (Rs 3.5 billion).

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Photographs: Amit Dave/Reuters

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"To us it is evident that publicly-traded entities of the group bear the costs associated with running private companies of the controlling shareholders, thereby impoverishing shareholders while enriching insiders," the analysts said.

Moreover, given that warrants amounting to Rs 582 crore (Rs 5.82 billion) in Indiabulls Real Estate and Indiabulls Power have been forfeited by the management since FY'08, some of the loans and advances to these entities routed through IIC and IINFC are a write-off, thereby calling into question the recoverability of loans and advances on the books of IBREL and IBPOW, the Veritas report had said.

Indiabulls said the promoters have funded the purchase of shares and warrants of Indiabulls companies through loans of more than Rs 550 crore (Rs 5.5 billion) raised from third party financial institutions and banks, against mortgage of their personal property and personal guarantees.


Image: A worker tightens steel rebars at a construction site in Chennai.
Photographs: Babu Babu/Reuters

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