Sebi serves new show cause notice to Tata Motors in 2001 fraud case

In June 2018, the Securities App­ellate Tribunal had rapped Sebi for letting off TFL even after investigation clearly showed substantial breach of securities law

The Securities and Exchange Board of India (Sebi) has served a new show cause notice (SCN) to Tata Motors and its top management in an 18-year-old case involving erstwhile Tata Finance (TFL) on fraudulent and unfair trade practices affecting four companies (including Infosys). 

In June 2018, the Securities App­ellate Tribunal (SAT) had rapped Sebi for letting off TFL even after investiga­tion clearly showed substantial breach of securities law, via false declarations in the draft document of a 2001 rights issue of convertible preference shares. 

“The notice has been served in January under Section 11 and 11B of the Sebi Act, to the merged entity and the directors of (erstwhile) TFL. We had sought the company reply and certain explanations and are currently examining the response,” said an officiail at the markets regulator.

Confirming the development, a Tata Motors spokesperson said: “The notice from Sebi pertains to a 2001 rights issue of erstwhile Tata Finance. At the relevant time, an exit opportunity was provided to all shareholders. Tata Finance was amalgamated with Tata Motors in 2005-06. The company has suitably responded to Sebi.”

 

Sebi took the case in 2002, on a complaint that TFL made a false disclosure in the letter of offer for the rights issue of nine per cent cumulative convertible shares (CCPS), aggregating to Rs 90.93 crore.  The complaint highlighted that TFL did not disclose losses incurred by its subsidiary, Nis­kalp Investment and Trading Com­pany, of Rs 190 crore. After probing, Sebi concluded that a back-dating reversal of trades was done at the behest of then TFL managing director D S Pe­ndse and AL Shilotri, then chief executive officer of Niskalp, with conniv­ance of broking firms connected with Bharat Patel, director of PAT Financial Consultants, an entity latter barred by Sebi from accessing the stock market. 

Sebi ruled Pendse violated various provisions of the Prohibition of Fraudulent and Unfair Trade Practices regulations and the Securities Con­tracts Regulation Act, with his illegal transactions in the scrips of HFCL, Telco (the earlier name for Tata Motors), Infosys and SSI.   It issued an SCN to Pendse and Shilotri, to PAT and Superior Financial Consultancy Services. 

Later, in 2016, Sebi had directed all four entities be barred from the securities market for three years; it also said Pendse and Shilotri would not hold a key managerial position in any listed firm for three years. In 2017, Pendse committed suicide. Shifting the focus from these four entities, SAT in its June 2018 order criticised Sebi and directed action against TFL itself, which is described as the main culprit, even after it had been established that the latter committed serious violation of the law. 

“Even after holding that TFL is guilty of making a false declaration in its letter of offer, Sebi has failed to take action against it, not only unusual but also bound to send a wrong signal to the securities market," it had said.