Cheques and balances by Sucheta Dalal

Cheques & Balances by Sucheta Dalal

January 28, 2000

Taj story: Poison pill can sometimes boomerang

The exit of Kerkar was particularly vicious; the Tatas leveled serious charges against the man who has become a legend in the hotel industry for turning a single loss making property (the Taj, Mumbai) into an international chain

There is surely a lesson in this story about the dangers of vindictive action. It pertains to the 1995-97 period when Ratan Tata was attempting to consolidate the Tata corporate empire by ousting its powerful satraps such as Russi Mody, Darbari Seth and Ajit Kerkar. He had decided that change would not happen without a great deal of acrimony and the washing of dirty linen in public.

Predictably enough, except for the uneventful exit of the late Darbari Seth, the Mody and Kerkar exit provided plenty of grist for the news machines.

The exit of Ajit Kerkar was particularly vicious; the Tatas leveled serious charges of misdemeanor and irregularity against the man who has become a legend in the hotel industry for turning a single loss making property (the Taj Mahal Hotel at Mumbai) into a respected international chain. Building an international hotel chain during the most draconian days of the Foreign Exchange Regulation Act (FERA) obviously could not have happened without plenty of tight-rope walking and some manoeuvering on either side of the law. The war against Kerkar hence included the leakage of a regular stream of documents to the press pointing to financial irregularities during his time.

The only direct allegation was regarding the non-repatriation of dollar deposits by an airline which had offices in the Taj premises in Mumbai. The money ($4.91 million) paid by Singapore Airlines was parked in the Taj group’s Hong Kong subsidiary for three years instead of being immediately repatriated to India. The Indian Hotels board, including Ratan Tata, had then claimed that they knew nothing about the overseas deposits and other FERA violations and later refused to grant approval for the annual accounts June 1997. One assumed that the controversy had ended with Mr Kerkar’s exit and the Tatas’ confession of irregularities to the Reserve Bank of India (RBI). In fact, the Tatas announced that once the Tata Sons directors had exercised their fiduciary responsibility in having the forex deposit repatriated to India on August 6, 1997, the RBI had condoned the FERA violations.

The story was supposed to end right here - with the bad guy Ajit Kerkar discredited and ousted and the good guys Ratan Tata and Krishna Kumar taking charge of the glittering hotel empire and setting it right. Unfortunately real life stories do not always stick to scripts written by corporate chieftains. The Tatas are beginning to find out that the allegations made against Kerkar continue to haunt them and threaten to implicate the entire the board of directors. Here is a curtain raiser to Part-II of the Indian Hotels saga.

But let us go back to 1997. After Ajit Kerkar’s exit, Indian Hotels appointed the Chartered Accountancy firms of N M Raiji & Co and Sahni Natrajan & Bahl to go over the Taj group’s transactions with a toothcomb. The firms submitted their report to Indian Hotels on February 9, 1998 which listed at least seven serious FERA irregularities and ended with a report on their scrutiny of board minutes between 1994 and 1997 to check if the Indian Hotels board was informed about the various acts of commission and omission reported by the accountancy firms. Their conclusion: except for a transaction pertaining to the securitisation of loans advanced by State Bank of India and Bank of India to St James Court Hotels Ltd, none of the other issue had been brought to the board for consideration.

The findings include: 1) an amount of $0.5 million advanced to one Salim Assiyabi; 2) payment of $4,63,076 in favour of Conil Investment & Trade Inc from which part of the money was diverted to J Henry Schroders Bank for the purchase of GDRs of Oriental Hotels Ltd. This was allegedly not reflected in the Indian Hotels books “with some help through false certificates obtained form J Henry Schroders Bank”; 3) transfer of $2 million in the account of Piem Hong Kong, with a shortfall in the subsequent refund of that amount; 4) opening of an ABN Amro loan account with State Bank of India, London; 5) the creation of security of Indian assets for an overseas loan taken for St James Court from State Bank and Bank of India 6) Acquisition of Cedar Bay Trading Ltd a single share bearer company by Taj Honk Kong to park the GDRs mentioned above; 7) diversion of funds to Cox & Kings and investments by Piem Hotels Ltd in Piem Hong Kong and investment by Oriental Hotels Ltd in Oriental Hotels Hong Kong. On February 16, 1998, R K Krishna Kumar, Managing Director of Indian hotels wrote to C Harikumar of the Exchange Control Department of the Reserve Bank handing over the findings of the two CA firms and seeking appropriate authorisation in some cases and ex-post facto approval in respect of others. He also offers to cooperate with the RBI’s actions. However, the RBI is not known to have pursued the matter any further. Instead it quietly handed over the Chartered Accountants’ report to the Directorate of Revenue Intelligence (DRI).

It is here that the story takes an unusual turn. Unlike the RBI, the DRI refused to adopt a soft line towards Indian Hotels it even does not accept the RBI decision to condone its irregularities. In fact, it refused to buy the theory that the Board of Directors was completely unaware of various transactions and wanted to know why the directors had failed to ask appropriate questions about obvious issues. Source close to the investigation tell me that a series of Taj group officials past and present, including Mr Kerkar and Mr Krishna Kumar have already been questioned and a report has been prepared in order to initiate further action.

More dangerously for the group, the DRI based on prima facie information supplied by Indian Hotels itself, is understood to have already registered the investigation under the now repealed FERA act. This means that the much milder provisions of the FEMA Act will not apply to the investigation.

It is almost certain that Indian Hotels will object to being hoist by its own petard and will certainly try and pin all the irregularities on Ajit Kerkar and his team, but the DRI’s question still does not have an answer. It is - in all the years that the Indian Hotels Ltd was relentlessly expanding its operations in India and abroad, why did the venerable board of directors not ask questions until it embarked on its plan to oust Ajit Kerkar. It will be most ironical if the Tata action to expose and discredit Kerkar boomerangs on the itself.