The Tatafin controversy, which is now more than a year old, is turning murkier by the day. In the most recent round of the battle between the current top management of the group and a small bunch of erstwhile trustworthy directors, Dilip Pendse has gone on record to say that Ratan Tata was aware of the violations for which he is being made the scapegoat. It may be time therefore to revisit the controversy.
 
Tata Finance Ltd (TFL) was a non-bank finance company (NBFC) belonging to the Tata stable. Even as recently as March 2000, Tata Finance was predominantly involved in the hire purchase business, with financing of purchases of commercial vehicles and cars accounting for more than 85 per cent of its business. This was a natural outgrowth of the presence of the group in the automobile sector, and close to a third of Telco's sales were reportedly being financed by Tata Finance.
 
By this time, however, the lure of quick profits that the financial sector seemed to offer, had resulted in plans to convert Tata Finance into a financial supermarket with interests in housing finance, foreign exchange transactions, merchant banking, credit cards and retail banking. To that end it had tied up with T D Waterhouse Inc, a securities firm, and American Express and created or acquired a number of subsidiaries. These moves, under the leadership of Managing Director D.R. Pendse were seen as the beginning of the refashioning of what was already one of the largest NBFCs in the country into a universal bank in keeping with worldwide trends.
 
Unfortunately, Tata Finance's newfound aggression put it on a path where it chose to violate regulatory norms in search of size and quick profits. The path involved, among other initiatives, the transfer of large sums of capital to subsidiary or related companies such as Nishkalp Investment and Trading Company Ltd and Inshahallah Investments Ltd (IIL). Of these the link with Nishkalp proved the most damaging. Using funds borrowed from Tata Finance, Nishkalp made investments in the stock markets. This seemed to have worked in the financial year 1999-2000, when Nishkalp made a profit because secondary markets were doing well. But that profit turned into a large loss in 2000-01, when most of Nishkalp's trade proved to be loss-making.
 
While the exact nature of Nishkalp's investments is not known since it is a private limited company, its impact on Tata Finance became clear when the latter's accounts for 2000-01 (financial year ending June), showed a loss of Rs. 395.6 crore as compared with a profit of 56.8 crore during 1999-2000. According to reports, the net loss was on account of a one-time extraordinary provision of Rs 315 crore against transactions in the form of loans or investments in affiliates. This was in addition to a provision of Rs 72 crore made towards non-performing assets and diminution in the value of investments. The extraordinary items and contingencies included provision for exposure to Nishkalp of Rs 266.67 crore, a provision for exposure in associate companies of Rs 44.04 crore and provision for estimated permanent diminution in the value of long-term investments of Rs 24.97 crore.
 
The problem is not just that TFL had burnt its fingers by engaging in immature transactions that were in part violative of regulatory norms. The image of the Tata group has also been tarnished by the facts that it tried: (i) to use the company IIL, in which Tata Finance held a 48 per cent stake and its internal auditors were directors, to trade in TFL shares with funds provided by TFL and other Tata companies, in gross violation of SEBI guidelines; (ii) to hold a couple of individuals from within its top management stable as individually responsible for the actions of TFL, despite the firm's direct connection with Tata Sons, the apex holding company of the group, and (iii) to de-subsidiarise Nishkalp in order to cover up the consequences of these actions from the regulatory authorities and ordinary investors.
 
At the end of March 2000, IIL had TFL internal auditors Dinesh Bahlk and Anu Bahl as its directors. It held 23.57 lakh TFL shares valued at over Rs. 24 crore, and was undertaking share investment activity with a paid up caital of Rs. 200 crore plus funds obtained from various Tata companies. Despite this TFL did not disclose, as required, its links with IIL or the latter's financial position in the public documents relating to the rights issue made at the end of March 2001. Clearly, Tata's as a group were withholding information.
 
However, the effort to 'nail' Pendse, the then Managing Director for these and other violations was rendered easy by evidence of insider trading in TFL shares. On March 30, 2001, the eve of the opening of a Rs. 93-crore rights issue by TFL, J.E. Talaulicar, the Chairman of Nishkalp and a director on the board of TFL, offloaded1 lakh shares of TFL owned by him and his family members at a price of Rs. 69 per share, when the prevailing market price was Rs. 36 per share. Since the subsequent declaration of losses by TFL saw a collapse in its share values, Talaulicar was clearly using inside information to protect and make a large profit on his investments. Talalulicar held that the transaction was arranged for him by Pendse and reported the same to an internal committee of the group set up in August 2001 to investigate the matter when this and other transactions by TFL and its directors were being subjected to public scrutiny and scrutiny by the regulatory authorities.
 
The involvement of Pendse in this operation, which was reportedly not revealed to the TFL board, provided grounds for the Tata management to argue that whatever happened in TFL was the result of his actions, which were kept secret from the rest of the board. Even if this improbable argument is accepted, Tata's cannot hide the fact that they initially tried to suppress the consequences of these actions for TFL's financials, by desubsidiarising Nishkalp. While shareholders were suffering losses because of the collapse of TFL share prices as a result of Nishkalp's activities, Nishkalp ceased to be a subsidiary of TFL on June 30^th, 2001. The company had been acquired for Rs. 40 crore by Ewart Investments. Interestingly, Ewart had been financed by Tata Finance to undertake the acquisition! The point is that once Nishkalp ceased to be a subsidiary of TFL, its financial position need not impinge on the accounts of TFL. The action, which could not have occurred without the concurrence of the board of TFL, was clearly aimed at clearing up the balance sheet of the company and concealing the financial position of Nishkalp from TFL's shareholders.