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Rangachary Committee report on Magadarsi Financiers
Shri N. Rangachary, Advisor to Government, Finance Department, A.P. Secretariat, Hyderabad.
Present: Shri N. Rangachary, Advisor to Government
Procs. No. Nil/Adv/07
I have been required to ascertain under G.O. Ms. No. 800 of 19-12-2006, from material made available whether M/s. Margadarsi Financiers, carrying on business in Hyderabad and who have raised huge moneys from the members of the public by way of deposits are acting in any manner prejudicial to the interests of the depositors and whether they are likely to return the deposits collected from the public.
2. I had also been required to examine whether the raising of moneys by way of deposits from the members of public by Margadarsi Financiers was in accordance with the provisions of the Reserve Bank of India Act, 1934. By an order dated 14-12-2007, I have held that the activity of Margadarsi Financiers in continuing to raise public deposits was in contravention of s.45 S of the Reserve Bank of India Act.
3. Margadarsi Financiers are apparently a Hindu Undivided Family assessed as such to Income tax in Hyderabad. Their accounts for the years ended 31 March, 2006, as audited by M/s. Satyanarayana and Co., Chartered Accountants, Hyderabad have been filed with the Income Tax Department, Hyderabad. A copy of these has been made available to me on the basis of which I proceed to make my observations hereunder, for the reasons stated below:
4. I had requested M/s. Margadarsi Financiers by my letter dated 23-12-2006 to file with me copies of their accounts for the different years and also to nominate a person from their side to assist me with explanations and information sought from time to time. The party replied stating that they were taking the issue of the appointment of the enquiry to the High Court in Hyderabad whose decision I must await. The High Court in its Order made in January 07, refused to stay the proceedings and no orders were made to indicate that the proceedings must be stayed. I wrote to the party again on 25 January, 2007 pointing this out to them and requested for cooperation. To this, a reply was received from M/s. P.H. Parekh & Co., Advocates of New Delhi, stating that they on behalf of their client intend filing a special leave petition against the decision of the AP High Court and that I must await till the matter was decided by the Supreme Court. I wrote to the Advocates on 12th February pointing out to them that the matter of receiving deposits from the public and the return of those was a very highly sensitive issue affecting public faith and confidence in the entire system of administration and hence the party must cooperate in the enquiry. To this again, the Advocates have replied that the matter was likely to come up before the Hon'ble Supreme Court on 23 February, 2007 and I must therefore wait till a decision is communicated. This issue relates to a large segment of the public where the safety and peace of more than 2,00,000 depositors is concerned who have apparently deposited with Margadarsi Financiers upwards of Rs. 2,600 crores. It is also seen from a copy of the Writ Petition filed by one of the depositors before the High Court that Margadarsi Financiers are not usually in the habit of paying the periodical interest due but pressurizing the depositors to take chits with their allied concern where the interest moneys due are adjusted as periodical contribution to the chits.
5. It is strange but requires to be stated here and none that in none of the communications addressed to me the party or the advocates had addressed themselves to the safety of the deposits and their preparedness to meet the obligations. Such an important and sensitive issue affecting the lives of many of the depositors have not been cared to be adverted to at all. The only arguments that have been advanced here are that the action in the issue of the enquiry order was malafide and was dictated by personal considerations or prejudices and that the party will challenge the provisions of the Andhra Pradesh Protection of Depositors of Financial Establishments Act, 1999. The protection offered by this Act, to the unsecured depositors — the deposits raised from the members of the public do not carry any security protection or guarantee and wholly depend on the strength and the goodwill of the borrower to be returned — is sought to be questioned by the party apparently adopting dilatory tactics not to return the moneys. In the circumstances, I feel that waiting any more for response from Margadarsi Financiers to offer any credible help in solving the issue about liquidity of the party and their acceptability will be adverse to the interests of the depositor community at large.
6. I have already indicated that certain account statements relating to Margadarsi Finance and its associate concerns have been made available to me for study. These are proper documents, prepared prima facie in the ordinary course of business, looked into by competent Chartered Accountants properly appointed and filed with the statutory authorities — viz. Income Tax Department and the Registrar of Companies. In the case of Margadarsi Financiers, account statements upto end of March, 2006 are available whilst in the case of the private limited companies, to whom substantial moneys from Margadarsi Financiers had been diverted by way of share capital and loans, the account statements relate to period ended 31 March, 2005 and in many cases to periods even earlier to that. In some cases, the companies established have become dormant and the investment of Margadarsi Financers continues. In some cases, these companies have also embarked on the activity of making intra-company loans and investments with the result that the moneys drawn from Margadarsi Financiers have flown into very many fields — some fertile, some drought — prone and many non-yielding any results.
7. That Margadarsi Financiers have continued to resort to taking deposits from the public even after Chapter III C of the Reserve Bank of India Act, 1934 is evident from the growth of the figures of deposits as gleaned from the Balance Sheets of the family. Before looking into this aspect, it is worthwhile noting that Margadarsi Financiers, as is evident from the Balance Sheet as at 31st March, 2000 and onwards, did not show any equity or capital of its own invested in their business and the only route for finding capital was loan capital represented by the public deposits raised.
8. The figures for the deposits are as under:-
9. The above figures are net and therefore prima facie have been adjusted for repayment, if any, of matured deposits and taking in fresh deposits. Such net annual accruals were Rs.266.19, Rs.391.56, Rs. 210.93, Rs. 421.33, Rs. 292.16 and Rs. 408.91 crores.
10. The application of these deposits in a very large measure had been to make investments in group concerns and also to finance the periodical losses.
11. The losses for the same period as mentioned in the table above plus the fresh investments made in the group companies for that period were as under:-
12. To put these figures in a clear perspective, we can see that the net fresh deposits raised by Margadarsi Financiers in the accounting year 2005-06 were Rs.408.91 crores and this sum was consumed to the extent of Rs.268.29 by way of losses and Rs. 41.85 crores of investments. In other words, more than 75% of the deposits raised in the year went towards meeting the current losses and investments, weakening the financial structure of the party in its ability to repay the deposits. It may not be wrong to assume, on the basis of these figures, that fresh borrowings go only to meet the current losses and did not add to Margadarsi's financial capacity. The other presumption that one can reasonably make in the light of these figures is that Margadarsi Financiers have been able to survive only because the current borrowings go towards repayment of dues of earlier borrowings in that the cycle of continuous borrowings has been able to keep the party floating. If any break in this chain of fresh borrowing not being in a position to finance repayment of the earlier loans were to take place, then the interests of the depositors will be vitally affected. This will certainly be the case in view of the decision taken regarding the breach of s.45 S of the Reserve Bank of India Act. If fresh borrowings are prevented from being made, the fate of the entire population of the current depositors running into more than 200,0000 will become critical.
13. A further analysis of the financial position of Margadarsi Financiers reveals the following:-
14. Out of the total deposits of Rs. 2,610.38 crores as on 31 March, 2006, Rs. 1369.47 crores are irretrievably lost by way of losses. This works out to more than 50% of the borrowings. I am taking the entire amount of losses as funds lost in view of the fact that even on the basis of details available, the loss on account of depreciation on assets was only around Rs. 2.50 crores.
15. Investments in group companies and sister concerns as on 31 March, 2006 came to Rs.988.31 crores. Most of these concerns have been formed as private limited companies under the Companies Act, 1956 in which either the entire or almost the entire share capital is held by the family of Margadarsi Financiers. This amount includes an investment of Rs. 9 crores in bonds. Thus, the investment in own business was Rs. 980 crores (approx) on 31-3-2006. Some odd figures are also found included under the caption "loans, advances and deposits". A perusal of the balance sheets of these private limited companies reveals that most of the companies had filed their account statements with the Registrar of Companies for the period ended 31-3-2005; in some cases, the companies were dormant and except for the paid up capital and accumulated expenditure to be written off, had no substantial business. Only one Company, viz., Ushodaya Enterprises Ltd., had any substantial business; apparently this company carries on the newspaper and television business of the party. The Balance Sheet of this company as on 31-3-2005, shows a loss of Rs. 917.79 lakhs for the year that has been written down against the carry forward of reserves of the company. The loss of Rs.917.79 lakhs for that year was against losses of Rs. 89.63 lakhs made for the previous year. The trend of business apparently was towards an increase of losses from year to year and I think that it may be safe to presume that for the years after March, 2006, the same will continue and neutralize the past profits that have been built by the company.
16. An examination of the Balance Sheet(s) also does not reveal the existence of any assets that could, in ordinary course of business, lead to a realization of a value more than the book value, to indicate the generation of sources to liquidate any liability. In most cases, the individual assets of the subsidiary companies like land, plant and machinery, etc. themselves had been secured to the lenders such as banks towards working capital loans etc. taken. In some cases, huge liabilities towards taxes in dispute had not been provided. Investments of Usha Kiran Finance Pvt. Ltd., which had depreciated by more than 40% of their cost had been disclosed at cost in the books.
17. Further, in my view, the investment by way of share capital and application money towards allotment of shares can only be viewed as sunk costs and not available to Margadarsi Financiers as resources available to them to discharge the public deposits. For one, these investments are not liquid and are not available. For another, the realization of the investments will either result in losses or take a very long period to achieve in view of the closely held nature of the shares which do not enjoy a ready marketability.
18. I, therefore, am of the view that even on an readjustment of the values of the interests in the subsidiary companies, Margadarsi Financiers will not be able to garner any resources to enable them to pay off the depositors.
19. In the circumstances of the case and on the basis of figures available, Margadarsi Financiers will not be able to meet their obligation to repay the depositors.
20. The availability of liquidity and paying capacity of Margadarsi Financiers as regards their creditors, as at the end of March, 2006, can be depicted as under:-
21. The first statement adopts the figures of assets as given in the audited Balance sheet as at 31-3-2006 in the presumption that all the assets shown and that belong to Margadarsi Financiers will realize their book values.
22. In terms of percentage this work out 51. In other words, in the best situation available to Margadarsi Financiers, it can repay every creditor (including depositors) only 49 paise in a rupee.
23. The statement that follows will depict the position where according to me the entire share investment in subsidiaries can only be treated as sunk investments and their realization will cause considerable disturbance to Margadarsi Financiers and result in losses. Further, except for one or two companies in which the investment has been made, the rest are dormant and mostly non-functional.
24. In such a situation, the position regarding creditors will be as under (even assuming full realisation of the book values of the other assets like loans, deposits, fixed assets etc.)
25. Unless the financial establishment viz., Margadarsi Financiers undertakes any of the following, it will be difficult for the depositors to recover anything substantial from them towards deposits.
(i) introduce additional funds from own sources, if the family owns any properties or assets apart from those disclosed by Margadarsi Financiers;
(ii) Unlock its equity holdings in one or more subsidiary companies which have a prospect of being looked into favourably by any investor;
26. I will also like to consider another aspect of the case — to make the matter complete — Margadarsi Financiers is a Hindu Undivided Family business, which has resorted to borrowals by way of public deposits, whose Kartha is Shri Ramoji Rao. It may be that the family still owns assets that have not been part of Margadarsi Financiers: If assets exist, so may be liabilities. In view of the fact that Margadarsi Financiers have chosen to remain non-cooperative and not provide with me any details, I am unable to examine this issue. Additionally, the only requirement of G.O. Ms. No. 800 was for me to examine the financial stability of Margadarsi Financiers whose entire transactions stand reflected in the statements filed by them with the Income tax Department which statements have formed the basis of my scrutiny.
27. Now; what remains is the consideration of the provisions of the Andhra Pradesh Protection of Depositors of Financial Establishments Act, 1999. This Act was enacted following the advice to the State Governments by the Centre to protect the interests of the members of the public who deposit moneys, in the hope of getting periodically interest, and who were facing the phenomenon of deposit collecting establishments vanishing all of a sudden and ruining many middle class depositors who by the process lose their life-savings. This Act applies to a financial establishment which has been defined as any person or group of individuals other than a corporation or a cooperative society or a state undertaking or a banking company, Margadarsi Financiers prima facie qualify to be treated as a financial establishment. Deposit has been defined by the Act as a deposit of a sum of money either in lump sum or instalments for a fixed period, for interest or return in kind.
28. It is not disputed that Margadarsi Financiers solicited from the members of the public fixed deposits, cash certificates etc. for a fixed period and interest was offered to the depositors. Hence, Margadarsi Financiers qualify to be treated as a financial establishment covered by the Act.
29. Under s. 3 of the Act, powers have been given to attach property on default in respect of deposit. Such action is possible "if the Government are satisfied that such financial establishment is not likely to return the deposits in cash or kind after maturity or in any manner offered upon in cases where among other things, where the Government have reason to believe that any financial establishment is acting in a manner prejudicial to the interests of the depositors or where the Government has reason to believe that a financial establishment is likely to default in the return of deposits.
30. One of the factors that is to be taken into account is, therefore, the financial stability of the financial establishment which prima facie will affect the ability of the establishment to return the deposits to the public.
31. A recital of facts in the preceding paragraphs leads to the conclusion that Margadarsi Financiers, as it stands today, will not be able to refund the public deposits in full because of their legal inability to raise any more deposits the funds of the establishment having been irretrievably lost by more than 50% by way of business losses and the greater part of the balance having been invested in illiquid assets. Unless, the establishment is able to inject funds either by way of fresh borrowings (which they cannot raise as deposits from public) or realize any part of their businesses by way of sale or infusion of equity, the public deposits are incapable of being refunded. To that extent, therefore, I hold that the financial establishment, namely, Margadarsi Financiers is likely to default in the return of deposits on maturity and its present activity of utilizing the deposits raised to fund its ever-mounting losses and for reinvesting in subsidiary companies will amount to their acting in a manner prejudicial to the interests of the depositors.
Advisor to Government