$125 million gone: Sebi bans former owners of Chandamama from capital market for a year

The forensic audit revealed a web of companies that were created to funnel money to various parties. (Photo by Karolina Grabowska/Pexels)

Chandamama was once a favourite children’s monthly magazine, which told stories of moral values and mythologies.

Now it can tell a different kind of story—on how to make $125 million vanish.

The Securities and Exchange Board of India (Sebi) passed an order on December 19, which has effectively banned the magazine’s former owners from the securities market for a year, for siphoning off $125 million raised through foreign currency convertible bonds (FCCBs).

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The order has restrained “the Notice nos. 1 (Pankaj Kumar, Chairman, and Director of Geodesic Limited), 2 (Prashant Mulekar, Director and Compliance Officer of Geodesic Limited) and 3 (Kiran Kulkarni, Managing Director of Geodesic Limited) from accessing the securities market and further prohibit them from buying, selling or otherwise dealing in securities, directly or indirectly, or being associated with the securities market in any manner, for a period of one (01) year from the date of this order”.

Chandamama India Ltd was one of the five subsidiaries of Geodesic Ltd, and the publishing company was placed for sale by the Bombay High Court when it ordered the liquidation of Geodesic Ltd about ten years ago.

Sebi started the investigation after receiving a letter from the Company Registrar of the Bombay High Court in 2016. The letter intimated the market regulator about a High Court order in the matter of HDFC Bank Ltd vs Geodesic Ltd, in which the court had directed the market regulator and the Enforcement Directorate to take action against directors of Geodesic Ltd and their tax consultant Dinesh Jajodia.

What was the scam?

It was elaborate, going by the Sebi order.

The market regulator had appointed a forensic auditor Sarath and Associates to examine the books of Geodesic Limited (GL), and the forensic audit revealed a web of companies that were created to funnel money to various parties.

It began with the FCCB fundraising in 2008. The bonds were to be redeemed by January 18, 2013. But when the date arrived, the company didn’t redeem the bonds and the High Court had ordered its liquidation, which put the much-loved magazine too on the block.

According to the Sebi order, of the $125 million, $93.9 million was claimed to have been invested in the company’s subsidiaries Geodesic Holdings Limited (GHL), and $26.8 in GTSL; $3.52 million went towards the expenses of FCCB. But, as the whole-time member SK Mohanty noted in the order, the noticees furnished broad details of the money that went into GHL, and details about the money that went into GTSL were “conspicuously absent”.

Even in the use of money given to GHL, the Sebi order notes discrepancies—such as questionable book entry on the $20.1 million acquisition of a company; a $15 million transferred to a company for investment in government treasury bonds was accounted for unsatisfactorily, and an $8 million acquisition for which explanations were found to be “wanting and grossly deficient”. The order also questioned a $64.8 million loaned by GHL to a company named Zomo Technologies that invested the money in a fund named Absolute Diversified Fund (ADF), which then invested the money in two companies that were later liquidated. One of the two liquidated companies, named Eland Crown, had Jajodia as a director.

“Under the circumstances, the investment in ADF through Zomo by the Company appears to be a suspicious modus operandi adopted by the Noticees to siphon off Company’s funds rather than a simple investment as is being projected by the Noticees,” said the Sebi order.

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Into thin air

According to the forensic auditors, the FCCB funds, which are to be used only for furthering business activity through overseas acquisitions or investments in joint ventures or subsidiaries, were diverted to give loans to companies in which Jajodia was personally interested as a director. The Reserve Bank of India (RBI) norms prohibit such relending.

Meanwhile, the company’s business for which the money was ostensibly raised seemed to be an illusion created using fake receipts and unrealised cheques. The investigative audit found that entries to account for the use of funds were largely bogus transactions with shell companies.

“Regarding the Audited Balance Sheets of the company, it was revealed that the forensic audit of the books of accounts for the years 2010-11, 2011-12 and 2012-13 were examined in detail, and the status of sales, purchases, returns, reserves and surpluses were non-existent,” stated the forensic audit report, quoted by the Sebi order.

Sales returns were simply adjustment entries based on the ledger copies. Sales to overseas clients seemed non-existent (based on certain samples) though they were claimed on the books. Cheques from debtors to the company’s subsidiary Geodesic Technology Solutions Limited (GTSL) were never encashed and GTSL’s fixed assets were non-existent. Huge inter-corporate deposits were given but were written off. Debtors on the company’s books turned out to be shell companies. Vendors that provided software for huge bills turned out to be shell companies. Finally, there were no reserves or surpluses created because the sales booked were reversed.

By making payments to fictitious/mule companies as vendors, the funds were also transferred through various round-tripping/layered transactions to other companies in which Jajodia or his family members had an interest, according to a supplementary show cause notice (SCN). During the Sebi investigation, two people gave a statement saying that they were introduced to Mulekar through Jajodia, to issue fake bills for a commission. GL would then transfer money to six companies that issued such bills, and these six companies would then transfer the money to other parties on the instructions of Jajodia.

While such transactions had the front of being vendor payments, the forensic auditor also noticed that fund transfers were made by GL to companies connected with Jajodia, though these transfers seemed to have no commercial reason. Details of such transactions were neither observed in the books of accounts nor mentioned in the statutory auditor’s report.