The M.S.

Shoes Scandal
Project submitted for Auditing

Skiti Lakhmani (15926)

Ashima Sehgal (15933)
BFIA III
About the company
 Registered office at New Delhi

 Incorporated as a public limited company on 17th March, 1986 & obtained a Certificate of
Commencement of Business on 16th April, 1986 from the Registrar of Companies, Delhi &
Haryana

 Took over the running business of export of leather footwear carried on under the name &
style of M/S Shoes East, a proprietary concern of Mrs Urmil Suri.

 Group companies are MS Universal Exports, MS International, Pearls Intercontinental etc.

 Engaged in the business of manufacturing & exporting Footwear, Beach Sandals-Synthetic

footwear, Footwear Components & export of other products.

 The Comp. undertook exports to Holland, Germany, Spain, Italy, U.K. & other European
countries & Australia.

 The Comp. bagged export awards for year 1986-87, 1987-88, 1990-91, 1991-92 & 1992-93
from the Council of Leather Exports. It also won state Export awards from Delhi
Administration for year 1986-87, 1987-88 & 1988-89 and also Productivity Award from
National Productivity Council for the year 1989-90.

Roots of the scam

 Bagged a contract in the mid-1980s to develop at Andrews Ganj in New Delhi an integrated
four-star and five-star hotel complex at a cost of Rs.456 crores.

 Entered into a tie-up with Inter Continental Hotels for this.

 In 1985, the CBI initiated proceedings against the hotel venture on charges including the
violation of the Customs Act and the Export Import Act.

 A fine of Rs.40,000 was slapped, after which project was out of Sachdeva's hands. This left
him with the liability of a bridge loan of around Rs.100 crores, and other losses.

 The money to make up the losses was expected to come from the company's activities.
Tiff with HUDCO
 In October 1994, HUDCO invited bids for a building which could be converted into a 363-
room hotel.

 Pawan Sachdeva offered Rs 100 crore, the highest bid.

 He paid Rs 40 crore soon after and took charge of the building.

 HUDCO had awarded MS Shoes land in July 1994 for

o a 5-star hotel complex at a cost of Rs 64.1 crore

o and parking space at a cost of Rs 14 crore

o 25 shops

o a guest house block (with a restaurant and kitchen) for Rs 99 crore.

o The amounts were to be paid in a series of instalments beginning November 28,

1994.

 However, his acquisition turned out to be worthless. The structure HUDCO had built hadn't
received a completion certificate from municipal authorities. Nor were electricity, water and
sewage lines in place.

 Sachdeva refused to pay HUDCO subsequent instalments till it got the clearances.

 When he defaulted on his payment, HUDCO cancelled the allotment and tried to re-tender
the bid.

 Sachdeva appealed against this, lost the appeal, filed another appeal and managed to get a
year's time. But he was still unable to pay HUDCO its due.

 RAM JETHMALANI as Union Minister for Urban Development wanted to restore the
allotment of the hotel contract to M.S. Shoes. He said that HUDCO had not obtained the
necessary clearances on time and that was why Sachdeva could not make the payments.

 The officials of the Ministry maintained that the matter was beyond his jurisdiction and took
up the matter with the PMO.

 Jethmalani retaliated by accusing the officials of stealing the relevant papers and passing
them on t o Janata Party leader Dr. Subramanian Swamy.

 M S Shoes paid Rs 25.6 crore for the hotel project and Rs 39.6 crore for the shopping/guest
house complex, but its project got cancelled. M S Shoes moved to High Court seeking
injunction restraining HUDCO from cancelling the projects.
  It won a reprieve when the court, on December 15, 1994, ruled that time was not essence of
the contract and asked MS Shoes to pay instalment with interest.

 HUDCO challenged this order and went in appeal before the division bench. MS Shoes also
filed its own appeal against the rate of interest which it said was too high.

 HUDCO willingly gave him illegal concessions, made a demand for a second instalment (he
paid Rs 29 crore for the first), but later cancelled the allotment and ‘‘misappropriated’’ his
money. The CBI found little substance in these allegations and filed a closure report.

 He also filed another case dealing with construction of guest house blocks, restaurants,
shops and kitchens. He alleged he was made to pay up Rs 39 crore, which was
misappropriated and his allotment annulled. In this case too, the CBI has cited lack of
evidence and filed a closure report in court.

The Crackdown
 On April 6, 1995, Pavan Sachdeva was arrested by CBI officers at his Delhi office.

 Sachdeva was in Delhi to meet some executives of the Inter Continental Hotels Corporation
and fund managers from Hong Kong in a bid to salvage the hotel project venture.

 He had hoped that his foreign visitors would arrange funds to pay an instalment of Rs.40
crores, which was due to HUDCO, which had put out the bid for the project.

 The main charges centred on cheating, breach of trust and abuse of authority under the
provisions of the Indian Penal Code (IPC) and the Prevention of Corruption Act.

 It was alleged that Sachdeva, who was arrested by the CBI and subsequently released,
misled investors and rigged the market to prop up his share prices.

 The SBI officials involved, sources revealed, are general manager (capital markets) P S
Malhotra and manager Ms Netika Juneja.

 The scam had closed down Bombay Stock Exchange for three days.

 He followed it up by filing a complaint against 70 lead managers and brokers saying they
‘‘induced’’ his company to over-pitch its 1995 public issue. He alleged a loss of Rs 1.5 crore.
The CBI filed a closure report in 2002.

 In 2000, the CBI filed another case against Sachdeva for cheating Allahabad Bank by taking a
bridge loan of Rs 20 crore and then diverting the money into buying shares. This is the only
case where the trial is in progress though Sachdeva has moved the Supreme Court and
stayed proceedings.
Legal Wars
 The first case against Sachdeva was registered by the CBI in 1995—in which 11 people
including him were charged with cheating investors for the public issue of the company.

 Sachdeva reacted by filing a number of complaints. The net result of claims and counter-
claims was that as many as six CBI cases were filed either against or by the company.

 The CBI now disclosed that nothing came out of five of the six criminal complaints. In the
1995 case in which officials of the State Bank and SEBI were also implicated, the CBI filed a
closure report in 1998.

Charges Levelled
 Entered into a criminal conspiracy, to allow a gap of 90 days between public issue and a
rights issue as opposed to 30 days.

 That the company was permitted to collect 50 per cent of the subscription money on
application against the norm of 20 per cent.

 Promoters used company money to buy own shares.

 Contravention of advertisement norms:

o Complimentary terms used-impossible, incredible etc.

o Ads appeared on DD and Zee TV with extravagant claims.

o Appointed two different ad agencies.

Conclusion
 Exposed nexus between company and SEBI officials.

 Forced market to stay shut for 3 days.

 Acted as catalyst to release of Prohibition Of Fraudulent And Unfair Trade Practices

Relating To Securities Market Regulations, 1995.

 Company has been non operational since 1996

 All cases for and against Pavan Sachdeva have been closed,liabilities fixed apart from one by
Allahabad bank.

 Company has been declared sick and rehabilitation plan remains pending with BIFR.