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PACL: Anatomy Of A Fraud Foretold

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A post on ‘Yahoo Answers’ about the beleaguered Pearl Agrotech Corporation Ltd says it all. The anonymous comment – rather an answer to a query seeking explanation as to how PACL managed to dole out high interest rates on deposits – gives you an insight as to what astute investors thought about the company and its investment schemes.

The anonymous writer states (comment paraphrased): “This is a fraud company… Sebi and RBI banned this company from collecting money from investors. This company has changed names a few times... Moreover this company has bought lands in India - Pakistan border - where the former conducted nuclear tests.”

The writer, who seems to have followed the company closely, adds that the Andhra Pradesh police have seized Pearl Agrotech Corporation (PACL) offices in Guntur and Vijaywada.

While Businessworld could not verify any of the startling allegations made by the writer, it is amply evident that PACL was into some business that was not wholly legal. That probably is the reason why capital markets regulator Sebi has asked PACL to return Rs 50,000 crore to investors who have participated in their investment scheme since 2005.

As per company submissions to Sebi, PACL has raised public funds worth Rs 49,100 crore, to deal in real estate – mostly buying land, holding them for a definite period and then selling it to make decent profits. The company also had schemes which allowed investors to take possession of the land (as units) bought with their deposited funds. For those interested in agriculture, PACL had options where it would sell or lease out lands to scheme participants for cultivation and commercial farming. In the modern-day parlance, PACL acted like a boutique agriculture and agro-investment company.
Investors - who did not want land units - were promised returns (interest) in range of 12 – 15 per cent on an average.  PACL also believed in providing end-to-end solutions. So to process and market its (agriculture) produce, the company had forward-integrated subsidiaries such as Pearls Masala, Pearls Soaps and Pearls Seeds.

As per company submissions, PACL has agricultural and commercial land assets worth over Rs 11,700 crore. While it is not clear whether PACL actually honoured its commitments to investors (it claims to have repaid 1.2 crore investors out of the total 4.60 crore), the regulator is not comfortable with the functioning of the company.

“By its own admission, PACL does not have enough land bank compared to the amount mobilised by it from the customer. I note that PACL had 4.63 crore customers as on March 31, 2014 who have not been allotted land. The outstanding dues to such customers as on March 31, 2014 is Rs 29,420.65 crore and the value of total lands in the form of 'stock –in-trade' as on March 31, 2014 is Rs 11,706.96 crore. PACL does not have assets corresponding to the amounts of monies raised by it from public,” the regulator noted.

The regulator has asked PACL to return the money collected from investors (with promised returns) within three months, besides winding up business operations immediately.

A Collective Investment
Right from the start, Sebi has been wary of companies that pooled in public funds for making collective investments. The apprehensions of the regulator stems from the plantation scheme scam of the ‘90s – where public funds were pooled in invest in teak and manjiam trees. The schemes went bust in a few years but companies that floated such schemes made away with public deposits in excess of Rs 7,000 crore.

“This not only caused huge losses to the investors who lost their life savings to such unscrupulous entities, but also eroded the confidence of the general public in financial savings,” said a recent Sebi circular.

“It was noticed that the promoters of such entities had themselves invested a minimal amount in such ventures and raised a majority of the funds for the plans/ schemes from ordinary small investors,” the Sebi circular added.

This was the thought process that worked behind the setting up of CIS pool (collective investment scheme) – which mandates every pooled investment scheme to be registered under Sebi. The conflict with Sahara Group strengthened the regulator’s resolve to clip the wings of companies that provided fancy and ‘too-good-to-be-true’ investment opportunities. In the Sahara case, Sebi asked the Indian company to return public deposits (including interest) worth Rs 24,000 crore to over 3 crore investors.

Collective investment management companies are incorporated under the provisions of the Companies Act, 1956 and registered with Sebi under the Sebi (Collective Investment Schemes) Regulations. Even existing CIS (which were prevalent before the framing of CIS rules) cannot launch new schemes or raise money from the investors (even under the existing scheme), unless a certificate of registration is granted to it by Sebi.

In other words, after notification of regulations, an existing collective investment scheme -- even after obtaining provisional registration as well as after obtaining credit rating -- cannot mobilise funds from the public unless a certificate of registration is granted to it. PACL has allegedly flouted various CIS norms, including registration of its schemes.

Pearls Agrotech first came under the regulator’s lens in 2002. The regulator had then directed the company to align its schemes as per CIS norms. The company challenged Sebi at the Rajasthan High Court and secured a verdict in its favour. In 2011, Sebi moved Supreme Court challenging PACL’s claims. The Apex Court roped in the services of IT department and CBI to conduct an enquiry into the workings of Pearls Agrotech.

In February 2014, CBI registered a case against the promoters of Pearls Agrotech on alleged charges of misappropriation of public funds.  This strengthened the position of Sebi, which directed the company to wind up operations.

“The business/activities/schemes/plans offered and operated by PACL are Collective Investment Schemes. The natural consequences of such findings would be to inter alia direct PACL and its directors and promoters to refund the monies, which have been collected in an unauthorised manner, with promised returns to investors,” said the Sebi directive to PACL.

The Story Of Nirmal Singh Bhangoo
Not much is known about the antecedents of Nirmal Singh Bhangoo, the lead promoter of Pearl Agrotech Corporation Ltd. According to company website, PACL started operations in 1996, with a “clear mission” to engage in carrying out real estate business – which involves development of group housing projects, townships, construction and development of commercial projects and sale & purchase of land for profit.

According to media reports, Bhangoo’s first business venture was a company that manufactured and traded magnetic pillows, which are used by people who suffer from neck and back problems. He soon diversified into real estate and allied sectors such as hospitality, tourism, media and education.

In 2009 – 10, Bhangoo entered the Australian market by starting Pearls Australasia, the Australian property arm of his company. The ‘chairman’ (Bhangoo likes to be called chairman, states some media report) is reported to have struck major real estate deals in that country since then. The Punjab-born businessman charmed the Aussies when he donated houses to flood-hit families down under a few years ago.

All these goodwill – generated over years of careful planning and image management – may not help Bhangoo if he fails to repay investor deposits. Only a positive SAT (Securities Appellate Tribunal) order will serve his cause.
PACL has said that it will approach SAT for relief against the Sebi order. If SAT upholds Sebi’s views, it may well be the end of road for Nirmal Singh Bhangoo and his company Pearl Agrotech Corporation.

Write to Shailesh@businessworld.in