November 28, 1999
How to put off non- resident investors

Attending a seminar on investments opportunities in India, held at Dubai last week was indeed an eye-opener. While government and politicians sound so optimistic about support from People of India Origin (PIOs) and Non-Resident Indians (there is a big difference) the biggest and most influential Indians pour out amazing horror stories about the manner in which Indian companies have used a corrupt system to rip them off.

Investors have been cheated at two levels. The first comprises all those millions of investors who put their money into the infamous ‘vanishing companies’ of 1995-96. These include Indian and NRI investors. The second category is those NRIs and PIOs who invested bigger money in India as co-promoters of companies. They started out as directors on the boards of companies and were often responsible for influencing dozens of friends and relatives to commit big money for Indian projects. The manner in which many of them have been eased off the boards and lost their money is a lesson for all future investors.

In one classic case, the NRI group invested in a hotel venture with an international tie-up. They also provided personal guarantees to a financial institution along with the promoter family for money lent to the company. In course of time, they found themselves unceremoniously eased out of the board through and extraordinary general meeting giving complete control over management to the Indian promoter. This is a company whose auditors have apparently resigned without signing the accounts on account of the large-scale irregularities in its books and differences with the management.

The NRIs then wrote to the financial institution that since they had been removed from the board and lost their voice in the management, their personal guarantees to the company should be cancelled. They also provided evidence that the promoter group was bilking the company by providing loans to the friends and relatives through various private companies and partnership firms. Amazingly enough the promoter group obtained an injunction from the lower courts to permit the promoter to continue controlling the management with no investigation into specific charges leveled against him. Emboldened at being able to fix such an action, the promoter framed a set of counter allegations and had a criminal defamation filed against the NRIs requiring their personal appearance in the non-metropolitan court. This in fact is one of the main prayers of the defamation case. The action was aimed at warning the NRIs that if they did not write off their money and continue with the guarantee, then the promoter has the clout to have him locked up in an Indian jail on some trumped up charge.

The prospect is enough to unnerve most NRIs. Fighting for their rights, without help from the system only means throwing a lot more good money after bad. In another case, an NRI says that the promoter, who always start out being very friendly with the NRIs knew of fixed deposit (FDs) investments by them in certain banks. The promoter, simply connived with a bank official and forged documentation which allowed him to borrow against these deposits. When the investors next visited India and discovered the fraud, he was told that the FDs could not be broken. He continued to battle for his money during subsequent trips, but finally gave up. Throwing out NRIs from the board, once a company is up and running, is apparently fairly standard modus operandi. One company even engineered a fake call purportedly from a CBI officer, in the middle of a board meeting, in order to unnerve its NRI director. Whether it is a reputed cement company, or a hospital in Baroda, NRIs have similar tales to tell.

Documents reveal that the Indian promoters have several counter allegations to make, however it is difficult to even imagine that a non-resident person could posibly interfere with local management as alleged by these officials. Distance and the futility of battling a local resident in a corrupt environment allows cheats to get away, but it also kills their investment possibilities on a permanent basis. At the recent Economic Editors Conference, Commerce Minister Murasoli Maran, said that NRIs and PIOs do not hold a candle to the might of Overseas Chinese. His explanation was that Overseas Chinese are businessmen while NRIs and PIOs were mainly professionals.

Maran is perfectly correct as far as numbers go, but he probably needs to look beyond the numbers. Firstly, PIOs may have started out as professionals, but the number of hard currency millionaires and billionaires among their ranks is increasing.

 

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The author's e-mail address is: suchetadalal@yahoo.com

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