The Circular Deals Modus Operandi

In just about one year -- between March 2000 and March 2001, Tata Finance Ltd's (TFL) exposure to the information, communication and entertainment (ICE) sector through its former subsidiary Niskalp Trading jumped from Rs 220.37 crore to Rs 502 crore.

The Tatas have alleged that former TFL managing director Dilip Pendse "conceived an ingenuous but utterly dishonest" method of managing the capital adequacy ratio of TFL through circular transactions.

This is how it worked:

Short-term bridge loans/overdrafts were taken by Niskalp, usually from Bank of India main branch or HDFC Worli branch for seven to 10 days before the end of every quarter.

This bridge loans/overdrafts were then used by Niskalp to repay the inter-corporate deposits of TFL by issuing cheques or director transfer from Niskalp account to TFL account in the same bank.

TFL would then retain the money with the same bank as a short-term deposit or credit balance in the account.

This arrangement was the security offered to the bank for the bridge loan. The money never left the bank as there only book entries.

After a few days, TFL would either liquidate or encash its deposits and place inter-corporate deposits with Niskalp which would enable Niskalp to repay the bridge loans.