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The resignation of an ID should cause concern among investors. This is a case where the disclosure did not reveal the truth.

  • In August 2014, a listed NBFC appointed a legal professional as an ID.
  • On January 29, 2019, a news website accused the Company and its promoters of violating several laws, including, but not limited to, the Companies Act, 2013, and siphoning off funds.
  • The report inter alia alleged that
    1. The promoters had floated several shell companies to siphon off funds to the tune of INR 31000 crores, through grant of loans and advances to these shell companies.
    2. These shell companies had no business income, and their mandatory filings on MCA’s website were also not complete.
    3. The money was then re-routed via these dubious companies and was parked outside India so as to acquire assets.
    4. The Finance Committee, comprising the 2 promoters, had powers to approve loans amounting to INR 200 crores and more. It ensured that the loans were granted to shell companies, without any collateral or security, and the money reached the companies that were owned or controlled by the promoters.
    5. The promoters created a number of shell companies, with a nominal capital of INR 1 lakh, with a number of them having the same/similar registered office address, and having the same set of initial Directors, and on many occasions, having the same group of Auditors, to mask the financial details.
    6. Apart from these irregularities, these loans were disbursed in a single tranche, rather than following the established norm of carrying out this process in stages against the progress of the project works.
    7. The Company advanced monies to several companies, which had the same address, and whose operations had been put on hold, to the tune of INR 1160 crores and INR 1320 crores.
    8. Shell companies of the promoters made huge political contributions to a political party, an act which was prohibited under the Companies Act, 2013.
    9. Promoters of the Company were involved in insider trading, amounting to approx. INR 1000 crores.
    10. The Company had created offshore assets amounting to approx. INR 4000 crores.
    11. The promoters had bought a cricket team, playing in one premier league in another country, by using loan money which was dubiously advanced by the Company.
  • The Company and the promoters denied these allegations.
  • Based on the news article, MCA initiated an enquiry on January 31, 2019 and the Income Tax department issued notices to the Company and its promoters on February 11, 2019.
  • The ID tendered her resignation on February 12, 2019.
  • On February 13, 2019, the Company informed the Stock Exchanges that she had resigned, and cited the reason as “personal reasons”. The Company did not attach her resignation letter with the filing. The then Joint Managing Director and CEO of the Company had signed this filing, and he too resigned a day later.
  • In a media report dated February 25, 2019, it was mentioned that the reason stated by the Company for her resignation was incorrect. The ID had filed her resignation letter with the Registrar of Companies.
  • As per the media report, her resignation letter had stated that
    1. At the Company’s Board meeting held on January 25, 2019, the allegations against the promoters and others were discussed at length.
    2. She had earlier expressed her desire to resign, but deferred it on the request of the Chairman and Managing Director of the Company (one of the promoters).
    3. Her letter stated that – “You assured the members that the allegations were untrue, exaggerated and confirmed that there were no related party transactions and that all laws and regulations were complied with; further that all steps were being taken to legally refute the mala fide charges. As you are aware, the matter is now in public domain and remains a cause of concern. As an independent director, I have been diligent and relied on the report of the auditors, your assurances as Chairman as well as management presentations and representations on the veracity of the information provided and to confirm that the company followed the best practices of legal and regulatory compliance, internal controls and governance. I hope that my trust and confidence is not belied in this respect.”
    4. She also highlighted the investigations by MCA and Income Tax department
    5. However, she did not give any specific reasons for her resignation.
  • The Company did not respond to this news.
  • It seemed that neither the Stock Exchanges nor any Regulator pulled up the Company for the wrong disclosure.
    Points to Ponder –
  • Did the IDs delay the resignation?
  • Was being persuaded to stay, by the Promoter, a valid reason for not pulling the plug sooner?