Having completed this operation, the top management of the Tata group chose to launch its strategy of holding individuals like Pendse and Talaulicar responsible for all the transactions of TFL. It had already appointed a team from A.F. Ferguson, the reputed auditing and consulting firm, headed by senior partner Y.M. Kale to conduct an investigation into TFL, ostensibly to identify how the management systems failed and to work out remedial measures. It also sacked Pendse and lodged complaints against him with the police and the Securities and Exchange Board of India, alleging fraudulent transactions.
 
The current round of the controversy relates to the response of the Tata management to the Kale report. The report, a serious exercise running into 904 pages, not merely finds Tata Finance's corporate governance practices wanting, but identifies other members of the board, besides Pendse, who could not have been ignorant of the concerned transactions and specifically criticises some such as then TFL Director Kishore Chaukar.
 
While full details of the now-suppressed report are not available, a leak to the press suggests that it identified several questionable transactions in the form of intra-group investments that helped some companies of the Tata group such as Tata Chemicals and Telco to book profits and declare dividends. According to reports, the study suggested that the nature of a number of transactions "raise doubts as to whether these were conducted to generate book profits or merely facilitate regulatory compliance."  In its view there was need to ascertain whether under the erstwhile TFL management there was "a pattern of using circular intra-group transactions, mostly to either book profits for some of the companies in the group as and when required, or merely facilitate regulatory compliance."
 
A few examples of such transactions are available from the press. The picture that emerges is one where a large number of oddly titled firms, which fall within the Tata group, undertake transactions aimed at allowing a particular firm to record profits and pay-out dividends. Thus, a group company IECIL first accepts large inter-corporate deposits from other group companies, for which it pays out interest estimated at Rs. 0.68 crore. On March 31 2000, the money obtained through these deposits is used to buy 13.3 lakh shares of Tata Finance Ltd for Rs. 12.6 crore from Sheba Properties, a subsidiary of Telco. This allows Sheba Properties to declare a profit, against which a dividend of Rs. 6.5 crore is paid out.
 
The other set of transactions noted by the report was that when TFL reached inter-corporate deposit limits and could not access further funds from group companies through this route to finance its transactions, it would sell shares to group companies through 'ready-forward transactions', where the company sold shares today to access funds, only to buy back the shares at some later date. Thus it appears that TFL and Nishkalp provided finance in the form of ICDs to Inshahallah Investments Ltd. (IIL), which then bought shares of TFL. TFL (and Nishkalp) earned interest income from these ICDs and TFL booked profits on the sale of its shares.
 
Clearly, since there were a large number of other companies such as Tata Chemicals and Telco which benefited from TFL's activities, it is difficult to sustain the position that the Tata management was unaware of the activities of TFL. Based on its examination of transactions of these kinds, the Ferguson team delivered its indictment: "How could so many questionable transactions even be discussed, let alone actually contracted or recorded, by senior officials of such reputed companies, even on the assumption that someone wielding authority had proposed these transactions? In other words, even if the suggestion to commit irregularities had emanated from a few, how were these acquiesced to by so many? How did these not arouse widespread consternation and why did they not rush to report the goings on to the board of Tata Finance/Nishkalp Investments or even higher?" In sum, there was little possibility that the rest of the groups top management was ignorant of the developments in TFL.
 
Within days of its submission, the report is 'rejected' by the Tata management and "withdrawn" by the auditing firm, which has commissioned a fresh report based on the information collected. The leak soon makes clear that the report was not received well because it implicates more than just Dr. Pendse with knowledge of the suspect transactions. Soon thereafter, Y.M. Kale is reported to have resigned his position as senior partner of Ferguson, ostensibly on the grounds that he does not approve of the decision of the firm to withdraw the report and rewrite it. But Ferguson itself declares that he had not resigned but had been "sacked" since the firm had lost faith in him after taking account of the "inaccuracies" in the report pointed out by TFL Chairman Ishaat Hussain. Meanwhile, Pendse himself publicly declares that he has been made a scapegoat by the group to clear itself of involvement in transactions that he claimed the board was aware of and acquiesced in.
 
It is not surprising that the whole episode has set off speculation in the media, which is damaging not just because of the involvement of a Tata firm in the suspect transactions but because the group's management is seen to have extracted a toll from a forthright auditor, to save its reputation. The fact that the auditing firm involved is one of India's leading auditors only further undermines confidence in governance of what was considered the best segment of India's corporate sector. The audit firm went to the extent of claiming that, since the Rs. 2.5 crore it earned from the Tata group was an "insignificant amount" when compared to its gross annual fees, it cannot be seen as having withdrawn the report and sacked Kale under pressure from the Tata's. In fact, the Tata's took it upon themselves to declare that Kale's "cessation from his partnership", was "the result of a decision that was unanimously taken by the partners following a detailed internal enquiry." If the distance between the client and the auditor was as much as it has been claimed to be, it would have been best to leave such explanations to the audit firm.
 
There are three conclusions that emerge from the limited information we have about this episode, which is to do with the behaviour of even reputed business groups or firms like Tata and Ferguson. First the fact that the business group consists of a large number of companies, straddling different areas of economic activity, implies that a number of ostensibly "arms length" transactions between legally independent firms are actually part of the group as a single entity. This has, to an extent, been always true of the corporate sector in India. But liberalisation that has substantially diluted regulations imposed on the big business groups has possibly increased such transactions substantially. Secondly, the Tatafin episode reveals that, in the wake of liberalisation, which includes financial liberalisation, these transactions include financial transactions that allow core firms in the group and possibly the central decision-making authority to book profits and earn high returns through dividends. Those dividends may even serve to inflate prices of listed firms in the market. Finally, even the best in the auditing business in India are not independent of the clients they serve, as is indeed true elsewhere in the world as well.
 
What bothers some is that even the Tata group, with its reputation for good management and its tendency to be in a business for the long run, has succumbed to the lure of lucre that the speculation promoted by financial liberalisation holds out. Clearly, this is the way liberalisation is refashioning Indian capital. Its influence is clearly strong enough to transform even the best. Unfortunately for the Tata group and fortunately for the rest of India, they lost out on their gamble. If not, the illusion that scams are not systemic but the result of bad practices by a few rogue businessmen would have still prevailed.