| NBA Press Release
|| 27 February 2007
NBA files complaint with SEBI against CARE rating of Shree Maheshwar Hydel Power Corporation OFCDs, Asks for cancellation of CARE registration
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MP Corporation files 8 cases of cheating and bouncing of cheques against S.Kumars company Entegra Infrastructures
IDBI plea to MP Corporation to waive S.Kumars loan defaults makes illegitimate and unwarranted
The Narmada Bachao Andolan through its Supreme Court Counsel Shri Prashant Bhushan has filed a complaint with the Securities Exchange Board of India (SEBI) against the credit rating agency – CARE with regard to the CARE rating of S.Kumar’s Shree Maheshwar Hydel Power Corporation Limited bonds. On the 4th of January 2007, the CARE issued a press note assigning a CARE Triple A (Structured Obligation) rating to the proposed Optionally Fully Convertible Debentures (OFCDs) issue of SMHPCL for an amount aggregating Rs. 400 crores. The NBA has complained to the SEBI that the CARE rating is in open and flagrant contravention of the Securities and Exchange Board of India (Credit Rating Agencies) Regulations, 1999, since the Chairman of the credit rating agency CARE Shri P.V. Narasimham is also the Chairman of SMHPCL. It has asked SEBI to immediately disqualify the rating, and cancel the CARE registration in the light of this flagrant violation.
It may be noted that Clause 2(1) (b) (iv) of the Securities and Exchange Board of India (Credit Rating Agencies) Regulations, 1999 defines the SMHPCL as an “associate” of CARE by the following definition:
“(b) "associate", in relation to a credit rating agency, includes a person” –“(iv) whose director, officer or employee is also a director, officer or employee of the credit rating agency;”,
Further, Clause 27 (2) of the Securities and Exchange Board of India (Credit Rating Agencies) Regulations, 1999 prohibits credit rating agencies from rating securities issued by their associates in the following manner:
“No credit rating agency shall rate a security issued by its associate or subsidiary, if the credit rating agency or its rating committee has a Chairman, director or employee who is also a Chairman, director or employee of any such entity.”
The penalties for such contravention is set out under Clause 34 of the Securities and Exchange Board of India (Credit Rating Agencies) Regulations, and the Securities and Exchange Board of India, (Procedure for holding Enquiry by Enquiry officer and Imposing penalty) Regulations, 2002, and includes suspension/ cancellation of the registration of the Credit rating agency. The NBA has asked the SEBI for an enquiry into this open contravention of the regulations that jeopardize investor interest, immediate withdrawal of the said rating assigned by CARE and cancellation of CARE registration. The NBA is also writing to the SEBI to stop the private placement of SMHPCL’s Rs. 400 crore OFCDs based on the illegitimately obtained CARE AAA rating.
AAA rating based on concealment of material facts
The NBA has also written to SEBI that the basis of CARE AAA Rating is deeply flawed and based on concealment of material facts, most of which were known to the Chairman CARE, in his capacity as Chairman, SMHPCL. CARE has professedly based its CARE AAA (SO) rating on (a) Default guarantee by PFC and (b) Structured Payment mechanism for facilitating timely servicing of OFCD dues.
However, the factual situation is that the SMHPCL is one of PFC’s largest defaulters. Therefore the extension of a default guarantee by the PFC to the SMHPCL is based on the concealment of the defaulter status of the SMHPCL. Thus a CARE AAA rating based on the PFC guarantee puts into grave jeopardy public and investor interest. It is clear that the situation of SMHPCL’s default to PFC must have been in the knowledge of the Chairman, CARE. It may be noted that this is not the first time that the Power Finance Corporation has jeopardized public money to provide an unfair pecuniary advantage to the private company – SMHPCL. Even earlier, the PFC had given a loan of Rs. 100 crores to the SMHPCL in a highly irregular manner, and the same was severely censured by the CAG of India in its Report of 2005 as a grave financial irregularity.
Secondly, no structured payment mechanism for SMHPCL OFCDs on which the AAA rating is based is in place, since the S. Kumars have reneged on the settlement for the repayment of a Rs. 77 crore loan to the MP based Corporation – the MPSIDC (Madhya Pradesh State Industrial development Corporation Limited). The State Cabinet had made the repayment of the outstanding loan of Rs. 77 crores a condition for the issue of a State Government counter-guarantee to the PFC, that would ensure a secured payment mechanism. However the repayment of the Rs. 77 crore loan has not been done. The statement in the CARE press note that the Maheshwar Project is in possession of Techno-economic and environmental clearances is also a misrepresentation since there is no CEA approval for the Rs. 2449 crores current financial package, which is 50% over the earlier capital cost approved at Rs. 1673 crores in 1996, although the same is statutorily required. The CARE note also concealed the important fact that the Union Ministry of Environment and Forests issued an Order on 9th of June 2006 to stop the work on the project due to failure of the authorities to prepare a comprehensive R&R plan based on the identification of agricultural land for the oustees, and that the matter is under litigation. Thus, there exists no security for the bond-holders and no basis for the AAA SO rating by CARE. As the Chairman of the SMHPCL, Chairman, CARE was aware of many if, not all these developments. Therefore the AAA CARE rating represents a real conflict of interest, to the point of indicating collusion, and is not merely a contravention of procedure, or a case of oversight. It may be noted that the NBA wrote to CARE on many of these issues a few weeks back, but CARE chose not to reply to them.
S.Kumars reneges on repayments of Rs. 77 crore loan to MPISDC
Loans amounting to Rs. 48 crores had been taken for the Maheshwar Project by the holding company of the SMHPCL called Induj Enertech Limited, (now known as Entegra Infrastructures) and also another S.Kumar’s group company between 1997 and 2000 under an ICD scheme from the MPSIDC (Madhya Pradesh State Industrial Corporation). It may be noted that these monies in turn had been borrowed by the MPSIDC from around 180 small and large institutional and non-institutional bond-holders including many employees Provident funds, IDBI, Mumbai Central Cooperative Bank, etc. When the two S. Kumars based companies failed to pay back the monies, despite making profits, and refused even to respond to the notices of the MPSIDC, the Corporation declared them willful defaulters, and attached the movable and immovable properties of the Maheshwar Project in 2002. In 2004, on the advice of the Advocate General of the State, the Economic Offences Wing of GOMP, began criminal proceedings, and filed a FIR against the Directors and promoters of the S.Kumars group - on grounds of cheating, fraud, criminal conspiracy under Sections 420, 406, 407, 120 B of the Indian Penal Code. The legal proceedings are ongoing.
On the 16th of September 2005, a settlement of the outstanding loan was made between the State Government and Induj. The Rs. 103 crores outstanding loan was reduced to Rs. 77 crores and the rate of interest reduced from 14% to 8%, concessions that have drawn objections from the Government Auditors, and for which the CAG has asked for an explanation. The settlement was based on security created by personal properties of Warij and Mukul Kasliwal, shares of Induj, the pledging of Rs. 29.37 crores of SMHPCL shares to MPSIDC, and issue of post-dated cheques for the re-payment of principal and interest in installments.
However, after accepting the terms and conditions, Induj Enertech failed to submit or pledge Rs. 29.37 crores of the SMHPCL shares as security. They also failed to honor the post-dated cheques that they had given the MPSIDC as repayment against the MPSIDC loan to secure the settlement. Since April 2006, 8 cheques of Rs. 2.3 crores each given by Induj Enertech, have bounced due to insufficient funds/ closing of the account. In response, the GOMP has filed 8 cases against the Entegra Infrastructures under Section 138 of the Negotiable Instruments Act and Section 420 of the Indian Penal Code.
In the circumstances, the NBA calls on the Government of Madhya Pradesh to immediately attach and auction the properties of the Directors of the S.Kumars group pledged as security against the settlement, and to file a FIR on charges of cheating and fraud against the S.Kumars for not pledging the SMHPCL shares. The NBA is also writing to the BSE and NSE to de-list the shares of Entegra Infrastructures in light of its willful defaults, and legal cases pending against them, and take other action as it thinks fit. IDBI plea for S.Kumars loan waiver illegitimate and unwarranted
In an further expression of their impunity, after having dishonored their cheques and failed to pledge their shares thus nullifying their earlier settlement, the S. Kumars is now seeking to pressure the MPSIDC to further waive Rs. 29.37 crores of the outstanding loan due to them, through an unlikely advocate - the IDBI, which is itself burdened by the S.Kumar group’s defaults. Through its letter dated 10th of November 2006, the Chief General Manager IDBI Bank has written to the MPSIDC, enclosing a letter from Entegra Infrastructures dated 14th August 2006 proposing the waiver of Rs. 29.37 crores out of the loan due to the MPSIDC. The IDBI has asked the MPSIDC to consider the S. Kumar’s proposal.
The MPSIDC owes a large amount of money to the IDBI, and there is no doubt that the IDBI wields a great deal of influence with the MPSIDC. However the interest of the IDBI should be that the MPSIDC recovers all its monies from the S.Kumar’s group so that the IDBI and the other creditors of the MPSIDC may be paid back. Therefore the request of the IDBI bank for the waiver of a large chunk of the MPSIDC loan is wholly illegitimate, unwarranted, and seems designed to privilege the private corporate interest of the S.Kumar’s group over public interest. It is exactly because of this sort of illegitimate waivers have been repeatedly given to a few powerful corporate groups that huge NPA’s have accumulated in the country. While ordinary and middle class people are losing their savings in scam and scam, a few delinquent industrialists and their friends in the government, bureaucracy and financial institutions continue to flourish and be honored as pillars of society and captains of industry. It is clear that all such vested interests have to be held accountable through public and institutional action, and the nexus exposed. The NBA is filing a complaint with the RBI to take action against the IDBI for putting illegitimate pressure on the MPSIDC to jeopardize public money.
RBI directives require that willful defaulters/groups/concerns facing criminal proceedings and charges of economic offences should not be given any further public monies or access to the capital markets. Nor may the State Government give them any guarantees based on public money. Therefore the NBA calls on all financial institutions and banks including LIC, GIC, IDBI and BHEL not to jeopardize any further public monies in the high-cost, and destructive Maheshwar Project held by a company/group which is a repeated offender and willful defaulter. The NBA also warns the Power Finance Corporation that it will expose the various and continuing illegal actions of the PFC taken to provide pecuniary advantage to the private corporate - SMHPCL, which have resulted in the jeopardy of public money.