Missing MF units lead to worry about Dalmia Bharat

Cogencis, Wednesday, Mar 13

By Rajesh Gajra

NEW DELHI – The 3.44-bln-rupee fraudulent transfer of mutual fund investments by brokerage and depository participant Allied Financial Services to its associates raises corporate governance issues relating to lack of diligence in managing current investments at Dalmia Bharat group.

Given that the investments make up for nearly 10% of the consolidated net debt of 38.13 bln rupees, the transfer of investments will also affect the financials of its listed company Odisha Cement Ltd.

Odisha Cement, which was formed from the amalgamation of listed companies Dalmia Bharat Ltd and OCL India under a restructuring exercise carried a couple of years ago, has now sought regulatory approval to change its name back to Dalmia Bharat.

On Feb 27, a Securities and Exchange Board of India order exposed the fraudulent transfer of funds and securities from clients and third party entities by brokerage and depository participant Allied Financial Services, which used them for meeting margin requirements in equity derivatives trading and for other unauthorised purposes.

The order named OCL India Ltd and Dalmia Cement East, among the entities, affected by the fraud by Allied Financial Services. The Dalmia Bharat group companies saw net mutual fund units worth 3.44 bln rupees being fraudulently siphoned off from their demat accounts.

SEBI's order did not specify exact dates or months when the fraudulent transfers took place but placed the period of inspection carried out by the National Stock Exchange of India, on which its order was based, as being between May 2017 and January this year.


According to SEBI, the gross mutual fund investments fraudulently debited from Dalmia Bharat group companies was 54.4 bln rupees, of which 51 bln rupees were returned, or credited.

Questions on corporate governance include how such large quantum of debits and credits in the demat accounts of group companies could have taken place without any one noticing.

As per depository system norms, when a demat account is debited the person or entity having the demat account receives alerts on phone immediately or on the same day.

In case a power of attorney was given to the brokerage or anyone else for operating the demat accounts then the group should have been alert to its potential misuse.

Dalmia Bharat is a large corporate group in the cement sector and a lackadaisical approach towards protecting the integrity of investments points to a weak corporate governance framework.

Further, as per Dalmia Bharat Ltd's annual report for 2017-18 (Apr-Mar), it was stated that as of Mar 31 promoters of OCL India had pledged 68% of their holding.

Promoter shareholding in OCL India was 42.61 mln shares, or 74.9% of total equity capital, of which 29 mln shares were pledged.

The purpose behind pledging the shares also comes under question.


Odisha Cement's consolidated financial investments would stand depleted by over 11% until such time that SEBI's follow-up investigation is able to lead to a recovery of the 3.44-bln-rupee units.

As of Sep 30, Odisha Cement's consolidated current investments stood at 30.75 bln rupees, according to the Corporate Fundamental Database of Cogencis.

Companies do not provide investment break-up in their half-yearly balance sheets, and so how much of the 30.75 bln rupees was in the form of mutual fund units is not known.

Odisha Cement's consolidated current investments in mutual fund units, as detailed by its annual report for 2017-18, stood at 23.98 bln rupees as on Mar 31 against total current investments of 34.08 bln rupees.

Thus, the current investments fell by 3.36 bln rupees between Mar 31 and Sep 30, and whether this was on account of mutual fund investments or other current investments is not clear.

In any case, the 3.44-bln-rupee fraud would mean Odisha Cement would have to provide for it as a non-performing asset if the recovery does not take place soon.

Odisha Cement is not a debt-free company and its consolidated gross debt as of Sep 30 stood at 71.19 bln rupees while cash and cash equivalents were 33.06 bln rupees, according to the company's investor presentation following the Jul-Sep earnings.

This means the consolidated net debt position of the company stood at 38.13 bln rupees at the end of September.

As the cash and cash equivalents include financial investments, the missing mutual fund units, worth 3.44 bln rupees, from its demat accounts would mean Odisha Cement's net debt would also be hit by that much.

The Feb 27 SEBI order said that Dalmia Bharat group had informed the regulator on Feb 7 about the fraudulent transfer of mutual funds and that it had filed a complaint with the Economic Offences Wing of the Delhi Police.

SEBI has asked the depositories and stock exchanges to freeze the bank accounts and demat accounts of Allied Financial Services. SEBI, however, did not specify whether all the funds and securities of the affected entities are lying in these bank and demat accounts.

Odisha Cement would have to hope that it will recover its missing units after the police and SEBI investigation. But it may not happen very soon and till that time the company's financials would stand partially compromised.  End

Edited by Ashish Shirke

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