The M.S. Shoes affair

Print edition : August 05, 2000
LYLA BAVADAM

ON April 6, 1995, Pavan Sachdeva, chairman of M.S. Shoes East Ltd., was arrested by Central Bureau of Investigation (CBI) officers at his Delhi office and taken to a police station. He was then flown to Mumbai and produced before the Additional Chief Met ropolitan Magistrate on April 10. Sachdeva was in Delhi to meet some executives of the Inter Continental Hotels Corporation and fund managers from Hong Kong in a bid to salvage a hotel project venture by M.S. Shoes. He had hoped that his foreign visitors would arrange funds to pay an instalment of Rs.40 crores, which was due to the Housing and Urban Development Corporation (HUDCO), which had put out the bid for the project.

The CBI levelled the following charges against Sachdeva:

* That he entered into a criminal conspiracy with officials of the Securities and Exchange Board of India (SEBI) and the merchant bankers, SBI Capital Markets, to allow a gap of 90 days between M.S.Shoes' public issue (which was to start in April) and a rights issue. According to the CBI, this would have enabled Sachdeva to divert funds accrued from the public issue to subscribe to the rights entitlement of promoters, amounting to about Rs.130 crores. SEBI rules do not allow for a gap of more than 30 da ys between a public issue and a rights issue;

* That the company was permitted to collect 50 per cent of the subscription money on application against the norm of 20 per cent;

* That the prospectus did not mention the ex-rights price, thereby misleading investors into believing that the issue price of Rs.199 was attractive;

* That Sachdeva violated the Companies Act in using company money to buy its own shares.

The main charges centred on cheating, breach of trust and abuse of authority under the provisions of the Indian Penal Code (IPC) and the Prevention of Corruption Act.

Sachdeva had caught the attention of the corporate world when he bagged a contract in the mid-1980s to develop at Andrews Ganj in New Delhi an integrated four-star and five-star hotel complex at a cost of Rs.456 crores. He entered into a tie-up with Inte r Continental Hotels for this. In 1985, the CBI initiated proceedings against the hotel venture on charges including the violation of the Customs Act and the Export Import Act. A fine of Rs.40,000 was slapped, after which project was out of Sachdeva's ha nds. This left him with the liability of a bridge loan of around Rs.100 crores, apart from other losses.

The money to make up the losses was expected to come from the company's activities. Its prospectus showed a projected turnover of Rs.200 crores for the year ending March 1995. The net profits, gross fixed assets and current fixed assets of M.S. Shoes wer e expected to reduce Sachdeva's burden. Besides, M.S. Shoes sent notices to all underwriters devolving the issue and decided to refund its shareholders their subscription money.

Sachdeva was supposed to pay about Rs.100 crores in instalments to HUDCO. When he defaulted on his payment, HUDCO cancelled the allotment and tried to re-tender the bid. Sachdeva appealed against this, lost the appeal, filed another appeal and managed to get a year's time. But he was still unable to pay HUDCO its due.

RAM JETHMALANI as Union Minister for Urban Development wanted to restore the allotment of the hotel contract to M.S. Shoes. He said that HUDCO had not obtained the necessary clearances on time and that was why Sachdeva could not make the payments. Appare ntly the officials of the Ministry maintained that the matter was beyond his jurisdiction and took up the matter with the Prime Minister's Office (PMO). Jethmalani retaliated by accusing the officials of stealing the relevant papers and passing them on t o Janata Party leader Dr. Subramanian Swamy.

The stand-off between Attorney-General Soli Sorabjee and Ram Jethmalani dates back to the beginnings of the M.S. Shoes affair. Kuldip Nayar, Rajya Sabha member, raised the matter of the M.S. Shoes project twice with the Prime Minister in the recent past. First he sent a letter seeking clarifications on Jethmalani's alleged attempt to bail out Sachdeva's company with regard to its dispute with HUDCO. Nayar was told that the matter had been referred to the A.G. Subsequently, Nayar sent another reminder, a nd on July 24 he raised the matter in the House. Apparently, the government has got a report from the CBI some months ago on the M.S. Shoes case. This was referred to the A.G., who sought a detailed CBI investigation into certain aspects of the case. The A.G. had also apparently stated that Jethmalani, as Law Minister, should be kept out of the HUDCO appeal in court.

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