Sterling Biotech fraud case: Rift between probe agencies, banks wide open; company promoters tried to stall SEBI investigation

In 2007, Sterling Biotech and SIEL were under the lens of SEBI in connection with the dealings in the shares for the period from 18 August 2005 to 27 September 2005. New Delhi While the Central Bureau of Investigation and Enforcement Directorate (ED) are in hot pursuit of Sterling Biotech promoters Nitin Sandesara, Chetan Sandesara and Dipti Sandesara supposed to be hiding in Nigeria, the lenders' soft approach in dealing with the economic offenders comes as a surprise to the investigators. According to top sources, the ED and the Central Bureau of Investigation (CBI ) have managed to gather more intelligence inputs on the alleged dubious transactions and shady dealings of the Sandesaras and some key data have also been shared with Interpol for their extradition and prosecution in India. “However, the approach of the banks, mainly State bank of India (SBI), and hra Bank, UCO Bank, Bank of India and Allahabad Bank, in this entire case has been half-hearted. The agencies want to close the case by ensuring punishment as per law of the land but the banks, which were allegedly cheated by the promoters, do not seem to be keen to cooperate with the investigation and would like to settle with whatever money they can recover. We have gathered evidence that clearly establishes that Sandesaras were hiding the benami entities from the Securities and Exchange Board of India (SEBI) and even tried to exert pressure to scuttle the probe,” sources said. They added that probe into Sterling Biotech was being stonewalled since as early as 2005. The Firstpost investigation reveals that the SEBI suspected that a huge number of benami companies were floated by the promoters in 2004 and it received a list of such companies on 31 December 2004. It is also revealed that the number of shares held by the entities was adjusted by transferring the shares held by individuals and benami entities in the name of promoter group entities. In 2007, Sterling Biotech Limited (SBL) and Sterling International Enterprises Limited (SIEL), previously known as Transworld Infotech Limited (TWIL), were under the lens of SEBI in connection with the dealings in the shares for the period from 18 August 2005 to 27 September 2005. In response, the company misinformed the SEBI on 30 November 2007 that its directors and promoters had not dealt with the shares of SBL other than their holding as promoters. Subsequently on 26 March 2009, the SEBI wrote another letter to SBL seeking names of all promoters and directors of the suspected benami entities. The Sandesaras in a reply to the SEBI on 20 May 2009 said that they do not have any information on the promoters and directors of these entities. It was further submitted by the SBL that none of the promoters or directors had any dealing with these entities. However, the letter was silent on the specific query on whether any employees either the present or the past were directors of any of the companies. It is evident from the documents recently gathered by the ED that the Sandesara brothers were avoiding the question raised by the SEBI regarding the role of its employees in the benami entities. Though SBL was denying that it had any connection with the named entities, it is amply clear from the documents that SBL received at least 14 notices issued by the SEBI in 2009. “The entities under investigation by the SEBI were being managed by brokers and the daily transaction statement was also being maintained regarding purchase and sale of shares, Fand O, Margin money funding etc. The persons being shown as directors and shareholders were very much under the direct employment of the SBL, however, their salaries were being routed through one of the undisclosed entities Bigline Trading Private Limited which was later on reimbursed by the group. In spite of such irrefutable and overwhelming trail of evidence in its own records, SBL was consistently making incorrect disclosure fully knowing them to be untrue,” the documents revealed. Sandesaras stonewalled SEBI probe It also appeared that the Sandesaras were trying to stonewall the SEBI investigation by writing letters to a whole-time member to exert pressure on two assistant general manager level investigating officers working at SEBI’s Bandra office. The SBL's note of 9 July 2009 to a SEBI member said “The officers of SEBI, names of the officers are given below, Bandra Kurla Complex, Mumbai, (Tel. No. 022 – 2644 9000) have been asking for information from 2 companies viz. Sterling Biotech Limited and Sterling International Enterprises Limited , their investors for the year 2005 and 2006. The information asked is already 3 to 4 years old and there has not been any problem in those years or any other years. The action of the SEBI has created fear in the minds of investors and is affecting our business.” While listing the name of the two officers, SBL letter further requested the SEBI member to stop the enquiry and to do the needful to close the matter immediately. Documents subsequently reveal that the group had too many skeletons in the closet and the SEBI probe was just the tip of the iceberg in the entire criminal conspiracy. The Sandesara brothers, the ED documents said, had introduced Rs 3,0000000000 during the period of 2003-2007 through their undisclosed offshore entities. Further, investment to the tune of Rs 2,4300000000 was made in Nigeria and Rs 5000000000 in India. “These offshore entities have been used to obtain bank finance for the offshore projects of the group and also to claim import of capital goods into India in the books of SBL and SIEL for sums running into hundreds of0000000 on which depreciation has been claimed,” ED documents said. Questions are also being raised as to why the allegations of insider trading by SBL and SIEL was not pursued way back in 2011. Documents reveal there was sufficient evidence on the record to suggest that Sandesara brothers registered the benami companies with the brokers for insider trading and even credit funding was availed from the market sources through the brokers. The CBI has gathered complete information on the benami entities through which shares were purchased for the day, the broker who carried out the trade, rate, and quantity since the year 2006. The documents suggest the existence of a cartel which operated through a well-planned strategy. An internal document of SBL throws more light on insider trading. It said “Group of brokers should operate the scrip from far-flung places like Rajkot, Pune, Chennai, and Hyderabad etc. Price target to be confidential and only a few should be in the know of the same and none of the operators should know the intentions even if they are very close to management.” According to a senior investigating official lackadaisical approach of the banks in dealing with this case primarily due to suspicious involvement of its own officers, who allegedly signed off the loans in lieu of kickbacks. “A huge amount of money has been paid out which prima facie appears to be in the nature of gratification for the purpose of settling proceedings before the authorities, obtaining tenders for the supply of goods and obtaining of loans from the banks and financial institutions. Bank loans have been diverted by way of direct payment to paper companies which were projected as suppliers of capital assets for SBL projects and banks were aware of this fact,” the senior official said. The safe haven investment Sandesara brothers had allegedly been planning since early 2000 to shift the large chunk of business to the African country. The ED officials, who are trying for extradition of the fugitives said Sandesara's Sterling Global Oil Resources Limited BVI (SGORL), which started operation in 2005 and received substantial investment to the tune of Rs 10300000000 from undisclosed offshore entities — Crown House International Corp, Sterling Oil Resources LLC, Global Finance Venture Limited BVI and Richmond Overseas Nigeria Limited — remained vague about the source of funding. The money is suspected to have been moved out of India and channelised through various offshore entities before finally landing in Nigeria. A Firstpost investigation further reveals that nearly Rs 3,0000000000 was routed to Nigeria by Sandesaras within a span of 3-4 years from 2005 to 2009. Out of this amount, Rs 1,2500000000 were obtained from Bank of Baroda, UCO Bank, Allahabad Bank, Punjab National Bank and and hra Bank by Sterling Oil Resources Limited . The undisclosed offshore entities, which were used to infuse funds for the Nigerian operations, were also incorporated only from 2006 onwards, clearly indicating the very purpose of their formation. Prima facie, none of these offshore entities appear to be having any real business operations and their existence is eminently for the purpose of routing of loans. “There are almost 100 undisclosed offshore entities of the group incorporated in various countries, most of them known for being tax havens, like British Virgin Island, Seychelles, Liechtenstein, Mauritius, UAE and Panama. Though the oil exploration activities are carried out in Nigeria and the entities were incorporated in British Virgin Island and Mauritius mostly, the operating structure of the entities was found to be mostly based at UAE,” the documents revealed. The ED has received the information through Letter Rogatory (LR) that there is no operational entity by name 'Crownhouse International Corp' in UAE, however, the SBL owned by Sandesaras created fake documents to show an investment of $100 million in Nigerian operation to avail loan from consortium of Indian public sector banks. Another input received by ED from abroad shows that a further sum of $250 million was falsified and shown as a loan given by Crownhouse International UAE to Sterling Energy Oil Exploration and Energy Production Company Limited (SEEPCO). Subsequently, Sandesaras sought $ 275 million as loan from Indian Banks on behalf of SEEPCO, Nigeria. “The information clearly shows the extent of falsification of records resorted to by the group entities for the purposes of availing loans from the consortium of Indian banks. The issue of actual funding of the group companies operations in Nigeria and source thereof need to be examined in the light of fresh evidences,” documents said. According to sources, the modus operandi of the group was in the knowledge of banks, but no further enquiries were initiated before the approval of loans.