Expedient target

Print edition : January 05, 2002

Shankar Sharma and his company First Global, held responsible for the market crash on March 2, 2001, seem to have become the target of investigating agencies because of Sharma's substantial stake in tehelka.com.

SHANKAR SHARMA'S colleagues knew it was coming. It was clear to both Sharma and his wife Devina Mehra that the Enforcement Directorate (E.D.) would take him into custody any time. At a press conference he organised on November 27, 2001, a visibly distressed Sharma bemoaned that he was being hounded by the income tax and stock exchange authorities. "The most absurd cock and bull stories have been floated by the government. All they want to do is to slander us," Sharma said.

First Global director Shankar Sharma and wife Devina Mehra at a press conference in Mumbai on May 16, 2001.-SHASHI ASHIWAL

Twenty days later, Sharma was remanded to the custody of the E.D. Said Sharma's lawyer Rani Jethmalani: "We were expecting this. It was an obvious next step in incriminating him. It has come from a government which is very, very frightened that it has been exposed."

Why is the Central government targeting Shankar Sharma, Devina Mehra and their company First Global, which has carved a niche for itself in the global market? Sharma and his lawyers say it is because he is tehelka.com's principal investor. Sharma's 14.5 per cent stake in Tehelka, amounting to Rs.3.5 crores, has proved to be the bane of his life. "Since the day of the Tehelka expose, our lives have been turned into a nightmare by a vengeful government," lamented Sharma in his press conference. His lawyer Sidharth Luthra reiterated: "The only wrong Shankar Sharma has done is that his company invested in Buffalo Network - the holding company of Tehelka. For the last nine months he is paying the price for that. His home has been raided repeatedly. The income tax, stock exchange and enforcement authorities have brought his business to a stand-still."

At the press conference Sharma spoke of the proceedings initiated against him by several government agencies. "Since March 13, when Tehelka broke its story, we have been served close to 200 summons from different agencies of the government and have suffered 25 raids," he said.

The E.D. does not agree with Sharma. Appearing for the E.D. before the Metropolitan Magistrate's court in Delhi, Additional Solicitor-General K.K. Sud said: "It is wild imagination to say that Sharma is being targeted because of the Tehelka expose. We started our investigations on March 4, 2001, while the Tehelka expose took place on March 13. Shankar Sharma has been uncooperative from day one of the investigation. He has always adopted a threatening posture against the authorities. He did not provide the E.D. with the required information, hence his arrest became necessary."

The E.D. is looking into cases of violation in the sale of the shares of Himachal Futuristic Communications Limited (HFCL) by First Global. It has booked Sharma for alleged violation of provisions of the Foreign Exchange Regulation Act (FERA), 1973, in the transfer of HFCL shares to Foreign Institutional Investors (FIIs). The E.D. has charged Sharma with not declaring up to Rs.125 crores in foreign exchange, which was earned through the deal.

According to the E.D., on March 3, 2000, First Global sold 5,92,000 equity shares of HFCL to 10 FIIs at an average rate of Rs.1,060 a share against the market price of Rs.2,100 to Rs.2,250 a share. The E.D. has alleged that Sharma siphoned off the rate difference on each share from the FIIs' sub-accounts in violation of the Act. Working on this premise, on December 19, two days after it arrested Sharma, the E.D. clamped down on some of the FIIs that had links with First Global. It part-blocked their bank accounts and directed the concerned banks - HSBC Bank and CitiBank - not to allow withdrawal of the funds beyond certain limits from these accounts. The FIIs concerned include Govett Asset Management, John Dere Pension Trust, Chase Manhattan, I and V Trust, PLC and GMO.

After scrutinising the balance sheets of five associate companies of First Global for the period ended March 31, 2000, the E.D. said that neither were transactions of sale and purchase of HFCL shares recorded by these companies nor was any profit on such sales booked by them. The E.D. further alleged that First Global issued fabricated bills to the five companies.

The E.D. arrived at these conclusions after examining the bills. It averred that while the bills were dated March 10, 2000, the transactions were executed on March 3, 2000. It raised other tenuous points, such as the names of the sellers on the bills being incorrect. For instance, UD and MD Private Ltd., have been referred to as UD and MD. It said that the settlement number on the bills did not match the Bombay Stock Exchange (BSE) or the National Stock Exchange (NSE) settlement number on the day of the transaction.

As the deal was off market, it should have been conducted through a member of the BSE. First Global failed to do so. Further, First Global failed to state whether the HFCL shares were delivered in physical mode or in demat mode. If they were in physical mode then the certificate number should have been written, and if they were in demat mode the ISIN number should have been furnished. Neither was done. On the strength of these findings, the E.D. has charged First Global of dealing in benami shares. It has levelled against Sharma the charges of working in an unauthorised manner while transferring securities and acquiring foreign exchange, producing fake contract notes and in doing transactions in securities without the Reserve Bank of India's (RBI) permission.

First Global maintains that since the dealing guidelines disallow FIIs from participating in non-DVP (delivery versus payment) transactions, it funded the purchase at a certain price and once the allotment was done, transferred the shares at cost plus a small margin to the FIIs. However, the E.D. has been reiterating that the shares were not transferred but sold. Hence it considers the difference between the allotment price and the then ruling market price as the profit, which it says was siphoned off by First Global through hawala or other means.

Sharma's lawyers point out that while framing charges the E.D. has ignored two fundamental facts - first, that the HFCL transactions deal with unlisted shares, and second, that FII purchasers approach the RBI, not individuals. They point out that the E.D. has not hauled up the FIIs or even HFCL. Luthra said: "Chapter 10, para 10, (B)-4 of the Exchange Control Manual framed by the RBI under FERA, 1974, permits the purchase of shares by FIIs. So there was nothing wrong in that. The E.D. is ignoring the fact that this transaction related to an open bidding of preferential allotment of unlisted shares of HFCL between February 17 and 24, 2001, when the prices were approximately Rs.1,400 for listed shares. If the contract notes were signed on March 3, 2001, it should not be held that the transaction was tainted. In any event, it was the duty of the FIIs to approach the RBI and not the broker."

However, these arguments failed to impress the Delhi court. On December 25, 2001, Metropolitan Magistrate Surinder S. Rathi rejected Sharma's bail plea, quoting Section 19 (1) (b) of FERA, 1973, which makes mandatory the RBI's permission in the transfer of any security. The court extended Sharma's remand to E.D. by seven days.

While Sharma continues to be questioned by the E.D., the Securities and Exchange Board of India (SEBI) is carrying on its investigations against him. Sharma maintains that SEBI was at his heels immediately after the Tehelka expose on March 13, 2001. On March 27, a SEBI official from Delhi visited Sharma's office and questioned him about investment in Tehelka even though SEBI has no jurisdiction over private investment. On April 19, Sharma received a fax message from the office of SEBI Chairman D.R. Mehta informing him that he had been debarred from conducting business in the Indian shares and securities market. The order was issued under Section 11b of the SEBI Act, which empowers the SEBI Chairman to debar an entity from doing business pending an investigation, in the larger interest of the capital market.

In his defence, Sharma argues that in the crucial days between the presentation of the Budget and the market crash, First Global was a net buyer. Sharma challenged the order in the Mumbai High Court which directed SEBI to convert the order into a show-cause notice. In early May, Sharma approached the Securities Appellate Tribunal (SAT), which in its interim order stated that the appellant's counsel "no doubt has fairly succeeded in establishing a prima facie case in favour of First Global." On September 19, 2001, SAT ordered that SEBI be given another 10 weeks to investigate First Global's role and pass an order.

SEBI is now investigating charges of bear hammering and circular trading by First Global before the Tehelka expose. It is clear that First Global has lost its pace and direction. Its fall has been as dramatic as its rise. First Global was started in 1988 by Sharma and his wife, an alumnus of the Indian Institute of Management, Ahmedabad, with an initial capital of Rs.7,000. After barely 10 years it had 17 offices with over 250 employees, besides membership of the London Stock Exchange. "Sadly, very few Indians have the capacity to think global. We knew that we had to operate at a global scale. Hence the name First Global," recalled Sharma at the conference.

However, before government agencies write off Sharma's fate they will have to answer certain questions that have been raised by First Global. For instance, SEBI will have to answer how between March 8 and March 13, 2001, First Global was allowed to purchase Rs.36.62 crores worth of shares. First Global has been arguing that between February 28 and March 2, 2001 it bought stocks worth Rs.15.16 crores. On March 2, the day of the crash, it had a near square position on its proprietary accounts. "Thus," as Sharma maintained at the press conference, "there is no way that First Global can be held responsible for the market fall on March 2."

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