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Dubious links in First Global's HFCL deal found

Savio G Pinto & George Smith Alexander

The Income Tax Department has found suspicious links in the First Global Finance conducted private placement of Himachal Futuristic Communications Ltd's equity. First Global had acted as the sole book runner for the $175 million deal.

Documenting its suspicions, the department says of the 7 million shares issued (in the placement), 10, 68,275 shares were allotted to various concerns of the assessee.

Moreover, the shares purchased by other group concerns were sold on March 3, 2000, at the rate of Rs 1,050 to First Global Stock Broking, which in turn sold it to various FIIs at Rs 1,060.

The IT department says that the shares were sold one day later, on March 4, 2000 at Rs 1,060 per share (to the FIIs) when the ruling market rate was around Rs 2,100.

The department also says that since the sales to FIIs were not a part of the private placement, but an open market sale, such sales should have been effected at the market price of Rs 2,100.

The department further notes that the funds for purchase of these shares on a private placement basis were arranged by First Global Stock Broking.

The IT report says that in such an event, there was not enough reason why the shares should have been sold to various FIIs at Rs 1,060 per share when the ruling market price was much higher.

"The huge profit accruing on these share transactions totalling Rs 1.49 billion approximately is therefore to be taxed in the hands of various concerns of Shankar Sharma Group," the note concludes.

However, in a faxed response, First Global director Shankar Sharma said, "HFCL issued 7 million shares to FIIs, FIs, mutual funds and others in February 2000, at a price of Rs 1,050 (per share).

Certain FIIs can do only delivery-vs-payment transactions, whether primary or secondary. In such cases, delivery is taken by the intermediary by paying the allotment money to the company and is sold to the FIIs at exactly the same price plus funding costs.

The shares issued are unlisted and once delivery is received by the custodian, the payment is released, as is the case in DVP trade.

The profits, if any accrue to the FIIs, and not to the intermediary. All these placements are to reputed FIIs, and all transactions can be confirmed from them, as to their genuineness and bonafides."

The report also says that further enquiries regarding the genuineness of the sub-accounts of the FIIs should also be conducted to ascertain the ultimate destination of these shares and the possibility of these sub-accounts acting as name lender of Shankar Sharma Group.

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