THE JVG SCANDAL

Case code- FINC007

Published-2002

"My only mistake was that I shot my mouth off without really doing anything. Naturally,
the media made me out to be a joker."

- Vijay Kumar Sharma, Chairman, JVG Group, in 1998.

THE DOOMED DEPOSITORS

In October 1997, the Reserve Bank of India (RBI) banned all non-banking financial
companies (NBFCs) of the JVG Group of companies - JVG Finance, JVG Leasing and
JVG Securities - from accepting deposits from the public. This was after an investigation
revealed that these companies had been accepting deposits in excess of their stipulated
limits.

Soon after, JVG downed the shutters of several of its offices in small towns of
Maharashtra, Uttar Pradesh and Bihar, claiming it had detected huge irregularities in the
operations. The closing of the offices created a panic among the depositors and strong
voices were raised against the group in the media. In November 1997, JVG hurriedly
rented an office in Gurgaon (Haryana) to accommodate irate investors. Hundreds of
investors and agents camped on the grounds of the office. The agents (or the field-
workers), who raised deposits from investors on behalf of JVG, were extremely worried.
They said they could not go back to their local offices without collecting the dues fearing
the wrath of the investors. More and more depositors and field workers teemed over the
next few days with hopes of getting their money back

The situation seemed rather bleak with rumors of the JVG group being in deep financial
crisis. At this point, JVG Chairman V.K.Sharma (Sharma) dropped another bombshell on
the investors. He claimed that a majority of the certificates were fake and hence they
would not be paid back. For many depositors who had invested as little as Rs 500 and
who could not even dream of taking the dispute to court, it meant kissing their
investments goodbye.

JVG GROUP - THE BACKGROUND

From being a small-time contractor earning less than Rs 2500 a month, Sharma went on
to run a group, which on paper had an annual turnover of Rs 1000 crore, in just seven
years. Known for his lavish lifestyle - his farmhouse in Delhi, his fleet of expensive cars
and the helicopter he had taken on lease to tap deposits from small towns in north India
were talked about quite often.A graduate from Kurukshetra University, Sharma began his
career as a materials supplier to Swadeshi Polytex in 1979. Between 1985 and 1989,
Sharma supplied construction materials and equipment to contractors. In September
1989, Sharma launched his first company JVG Finance. Over the next few years, the
company brought over 3000 small firms under its control. Sharma also launched JVG
Steels, JVG Departmental Stores, JVG Foods, JVG Petrochemicals and many other
companies. In 1992, Sharma acquired San Tosha Resorts and India Cero Oil, an oil
extraction unit from the Dalmias in 1993.

However, most part of the JVG empire was created largely from public fixed deposits. In
the early 1990s, Sharma opened branches of his finance companies in various towns and
villages. He followed it up with heavy advertising on the interest rates, which were as
high as 30%. Investors flocked to buy the company's schemes and the deposit base soon
crossed Rs 1000 cores. The JVG group's turnover increased from Rs 102 cores in 1994-
95 to Rs 700 cores in 1995-96. Sharma was a man with strong political connections - he
was close to politicians from Bihar and was involved with the Dalit Sena headed by the
then railway minister Ram Vilas Paswan. It was reportedly through these connections that
he was able to make JVG Department Stores one of the largest suppliers of commodities
to the Government of India.

Sharma had grand plans for making JVG a Rs 12000 cores empire by 2000. He
announced that he would invest over Rs 4000 cores in diverse areas such as power,
cement, hotels, steel, textiles and aviation. JVG went ahead with its plans although it
came in for a lot of flak in the media. Soon, JVG launched the 'Avatar' brand of detergent
and washing bars in an attempt to enter the FMCG segment. Sharma wanted to set up
mega townships in Gurgaon, Patna, Mumbai and Hyderabad, and to acquire the hotel and
cement interests of the Delhi-based Jaiprakash Industries, the steel units of Rathi Alloys
and the aircraft of ModiLuft[1]

JVG had acquired Orkay's polyester yarn plant and a part of its office space in Mumbai in
March 1997 through a tripartite agreement with financial institutions led by IDBI and the
Mehras who controlled Orkay. As per the agreement, JVG agreed to pay the Mehras Rs
98 cores in cash and take on the Rs 130 cores liability to the various FIs. JVG paid off Rs
14 cores to the Mehras in March 1997. According to the schedule worked out by the FIs,
JVG agreed to pay the second installment in the first week of September 1997. Although
JVG could not meet the deadline, it was allowed to run the plant on job-work basis from
September 1997. The understanding was that JVG would pay up by the end of
September. However, JVG failed to meet the end-September deadline as well and Orkay
sought the intervention of IDBI to take possession of the plant. Production at the plant
was suspended in October 1997. Following this, the agreement between the Mehras, JVG
and the FIs became null and void.