Joel Rebello, joel.r@live:Livemint:: Fri, Mar 2 2012. 1:00 AM
The ghost of the 2001 Calcutta Stock Exchange (CSE) payment crisis is threatening to burn aRs.185 crore hole in the balance sheet of Stock Holding Corp. of India Ltd (SHCIL).
A decade-old legal battle took another turn on Thursday with the Supreme Court telling SHCIL that it would hear the dispute, but wouldn’t restrain the private bank from seizing its properties if SHCIL does not pay up by 6 March. SHCIL moved the Supreme Court seeking a stay on a Calcutta high court order that directed SHCIL and a stockbroker to pay up.
Founded jointly by financial institutions such as the erstwhile Unit Trust of India, Industrial Development Bank of India Ltd (now IDBI Bank Ltd), Life Insurance Corp. of India and General Insurance Corp. of India, SHCIL used to offer custodial services to stock market investors. In the early 2000s, its key clients were large stockbrokers.
SHCIL has been facing a claim of around Rs.185 crore from IndusInd Bank Ltd for dishonouring three cheques that the custodian had issued in early 2001 to stockbroker Harish Biyani. The bank discounted the cheques issued to Biyani—one of the key accused in the 2001 payment crisis at CSE—but SHCIL eventually didn’t honour them.
Failing to recover the Rs.24.4 crore it paid to Biyani discounting the post-dated cheques, IndusInd Bank moved the Debt Recovery Tribunal (DRT) in Kolkata in 2001 seeking attachment of SHCIL’s properties and investments, along with those of Biyani.
The bank’s claim, which over the years has swelled to Rs.185 crore with interest, was upheld by the Debt Recovery Appellate Tribunal and the Calcutta high court. Initially, though, the DRT had ruled against the bank.
Late last year, the Calcutta high court ordered SHCIL and Biyani to pay up by 6 March; if they couldn’t, IndusInd Bank was allowed to attach their properties and investments.
SHCIL moved the Supreme Court seeking a stay on the Calcutta high court order, but the apex court didn’t oblige—it said on Thursday that it would hear the dispute, but wouldn’t restrain the bank from attaching properties if Biyani and SHCIL didn’t pay up by 6 March.
“I will fight this case till I die,” said Ashok Motwani, SHCIL’s managing director and chief executive officer. “This is certainly not the end of the dispute.”
Meanwhile, IndusInd Bank expects SHCIL to pay up, according to a key official, who did not want to be named. “Our aim is to only recover what they (SHCIL and Biyani) owe us,” said this bank official. “SHCIL is a large organization and I don’t think it will force us to attach its properties.”
IndusInd Bank has fully provided for the loss on account of discounting of cheques and whatever it recovers from SHCIL and Biyani will be written back to its profits. The amount it has claimed is quite substantial—it is almost as much as its quarterly profit. Its net profit in the quarter to December wasRs.206 crore.
For SHCIL, the financial implications of the dispute are bigger. In fiscal 2011, its net profit was at Rs.64 crore, down from Rs.284 crore in the previous year. In 2009-10, SHCIL’s profit was higher because of one-off income amounting toRs.295 crore from the sale of a part of its stake in the National Stock Exchange.
IndusInd Bank holds SHCIL and Biyani “jointly and severally” responsible to pay Rs.185 crore, but “it is most likely” that it will train its guns on SHCIL for recovery.
“For Biyani, the 2001 payment crisis was a huge setback,” said a former CSE official, who did not want to be identified. “I don’t think IndusInd Bank expects to recover much from him.”
Biyani wasn’t immediately available for comment.
Biyani used the money drawn from IndusInd Bank to pare his “exposure”, for financial liability, with SHCIL, according to the former CSE official, who was among those who had investigated the crisis for the exchange.
In those days, SHCIL used to make cash advances to stockbrokers under various schemes—it used to offer variants of so-called payday loans that are small, short-term loans extended against the borrower’s next earnings.
IndusInd had initially refused to discount the three cheques that Biyani presented, but did so after SHCIL issued a letter saying that it wouldn’t in any event dishonour the cheques, this person added.
SHCIL, however, later said that the three cheques were issued under a cash on payout scheme and it was made clear to the bank that it wouldn’t honour them if Biyani didn’t receive money from CSE.
The exchange expunged Biyani’s trades in shares of DSQ Industries Ltd, describing them as collusive and intended to artificially shore up the price of the stock. He didn’t receive any money at the end of the settlement cycle for the shares of DSQ Industries which he had sold. This, SHCIL alleges, forced it to dishonour the cheques.
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