Investigation: Bengal firm Flouts Rules with Impunity

By Durbar Ganguly

Xenitis raises funds from bank by just filing draft documents

While the UPA Govern-ment is busy bailing out the economy from global crisis, will it also look at the local factors which have precipitated the crisis? Will SEBI investigate the companies which raised or attempted to raise public funding by a not-so-transparent mechanism? In fact a number of banks and financial institutions had opted for pre-issue purchase of shares in companies which had filed draft red herring prospectus (DRHP).

IFCI had gone to court to recover its money from the real estate company, Emaar MGF, which had hastily withdrawn its IPO when the subscribers refused to get enticed. Another case of similar nature is that of the SBI picking up Rs 25 crore worth stake in the aborted public issue of Kolkata-based Xenitis Infotech Ltd.

The company is a manufacturer and importer of computers and their components. It has its only production facility at Sugandha in Hooghly, West Bengal. The company, failing to establish its own brand of computers, has shifted to manufacturing parts and components of computers. It is treated as a pariah in the computer dealers' community due to its inability to honour its commitments. Things had come to a pass where it settled the dues to a service provider in western India by offering cheap laptops imported from China.

The company filed its draft red herring prospectus before SEBI on November 26, 2007. The DRHP is a document in the public domain, available at www.sebi.gov.in. The company claimed, vide pages 58 and 59 of the DRHP, that it produced a certain number of computer equipment while it had a different set of figures for paying excise. The discrepancy would be apparent from the accompanying table.

The Commissioner of Central Excise Kolkata-IV ordered a probe resulting in raids, when alerted about huge evasion of excise duties apparent prima facie from the accompanying table. Excise sources revealed that during fiscal 2007-08, the company had become merely a manufacturer of computer cabinets and SMPS having annual capacity to manufacture 9 lakh pieces of cabinets with SMPS. That capacity can be achieved only if the factory ran in three shifts per day. The factory, however, runs only in two shifts; there is no night shift, allegedly, because of prevalence of female workers. Due to the constraint in procuring raw material for cabinets like galvanised iron sheets, the dealer can manufacture no more than 20,000 to 40,000 cabinet pieces per month. At the maximum wholesale rate of Rs 750 per cabinet, the turnover of manufactured goods cannot exceed Rs 3 crore per month or at the maximum Rs 40 crore per annum.

According to Excise sources, company president Indrajit Chandra jested that they would have been over the moon had a manufacturing turnover of Rs 40 crore been achieved. The company was not much perturbed by the discrepancy shown. He affirmed that the company did not have such capacities as mentioned in the DRHP. Curiously, neither SEBI nor the banks which funded the company cared to verify the figures furnished with the Excise returns filed by Xenitis.

The DRHP was submitted for rating to CRISIL, a premier organisation engaged in the business of rating and related activities. The State Bank of India had picked up 4.42 per cent stake in this company, spending Rs 25 crore of public money after due diligence on the basis of DRHP.

The question is: How the professionals of SBI visit the factory at Sugandha in course of their due diligence and find it worthy of picking up a stake in spite of what the Central Excise found? Who is being taken for a ride here — SBI? SEBI? CRISIL? Or Central Excise? Or, do they all feed off each other at the expense of the public?

Will the spotlessly clean Manmohan Singh, holding the Finance portfolio, care to investigate?