This action might not be possible to undo. Are you sure you want to continue?
The Doomed Depositors
On 2nd December 1998, thousands of people from places like Shimla, Trichy, Sangli and several other Indian cities and towns converged at the New Woodlands Hotel in Chennai. All of them were investors in the collapsed Anubhav group's teak plantation schemes, and a majority of them were on the brink of bankruptcy1. They had come to Chennai in response to a letter from an advocate inviting them to come and check all the records and the balance sheet of the company. The investors could be seen everywhere - sitting on the pavements, standing around the building, walking up and down the roads - all of them tense and worried. The investors had sensed wrong doings at Anubhav when the cheques issued to some of them bounced in mid-1998. Many depositors, who went to the group's offices to collect their deposit amount after maturity, found the doors locked and lodged complaints with the police. Later, thousands of investors demonstrated in front of the company's headquarters in Chennai. But the main accused, C. Natesan, Chairman, Anubhav Group (Natesan), had already gone underground. The Anubhav group of companies was eventually found to have duped investors of over Rs 400 crore. As details about the 'Great Plantation Scam of the 1990s' were revealed in the media, Natesan's modus operandi shocked those who held the Anubhav group in high regard.
Planting the Dream
A commerce graduate from Chennai's Vivekananda College and a chartered accountancy course dropout, Natesan was a man who dreamt big. His ostentatious lifestyle, his cars, and his plush office in Chennai's up market Royapettah area were frequently cited by the media as examples of his lavish tastes. Natesan started his career in 1983 by launching a consultancy firm, 'Yours Faithfully Consultancy.' In 1984, he entered the construction business with three partners. Three years later, he closed this venture and set up the Anubhav Foundation. In 1992, Anubhav Plantations Ltd. (Anubhav) was floated as a public limited company. Over the years, the Anubhav umbrella expanded to include various other companies such as Anubhav Homes Ltd., Anubhav Resorts Ltd., Anubhav Finance & Investments, Anubhav Communications & Advertising (Pvt.) Ltd., Anubhav Royal Orchards & Exports, Anubhav Hire Purchase Ltd., Anubhav Green Farms & Resorts (Pvt.) Ltd., Anubhav Agro, Anubhav Security Bureau, Anubhav Interiors and Anubhav Health Club. By 1998, Anubhav had become a Rs 250 crore group which, apart from its teak-plantation schemes, was involved in the timeshare, finance, and real estate businesses. These companies were backed by a nationwide infrastructure of 91 offices and over 1,800 employees.
Natesan had plans to forward-integrate from teak into furniture and to get imported machinery to make it. However, his growth strategy was focused mainly on mobilizing funds from investors. The group had already raised vast sums of money from the public in the form of fixed deposits, teak units, and a combination of fixed deposits and teak units. Natesan was extremely secretive about the financial performance of his group. In the plantations business, Anubhav was the market leader. It operated through four companies: Anubhav Agrotech, Anubhav Green Farms & Resorts, Anubhav Plantations, and Anubhav Royal Orchards Exports. Natesan had associated Anubhav with the World Wide Fund For Nature2 (WWF) and thus conveyed a positive image of his company to the media and the investors. Besides the high returns, the investors were also attracted by the courteous, helpful behavior of the firm's employees. (Unlike the indifferent treatment they received from public sector bank officials). Since the interest earned on plantation schemes was treated as agricultural income, it was exempt from tax. As a result, Anubhav's schemes became very popular and attracted thousands of investors. Moreover, since the unit value of the teak schemes was very small, investors could easily afford them. Anubhav seemed to have worked out its schemes very well, including plans to service the annual payment obligations. In 1998, the land prices in the interior Tamil Nadu, where Anubhav's plantations were situated were quite low, averaging Rs 35,000 for 43,560 sft. Thus, the cost of a 300 sft piece of land offered to the investor worked out to just Rs 240.3 Adding another Rs 10 for the saplings and other expenses, the unit's price worked out to Rs 250, while Anubhav was charging Rs 6000 for it. Even if Anubhav placed this money in relatively safe investments, earning 15%, it would receive Rs 862.50 a year, falling only Rs 137.50 short of the payback liability of Rs 1000. As for the Rs 3 lakh payment after 20 years, Anubhav had estimated that each of the three trees would grow to a volume of 1.13 cubic meters, with each cubic meter fetching a price of Rs 88,286, amounting to Rs 2.99 lakh for the three trees. Thus, assuming that Anubhav's price and volume estimates were correct, it would have been in a position to fulfill its promises to its investors. Studies regarding Anubhav's cash flows also pointed out that investors could rely on these schemes. However, officials from the Revenue & Forest Department of Maharashtra (RFD-M) stated, "It will be a miracle if they can achieve it (their projections). The timber yield of trees with a girth of 60 cm and above will be merely 5.10 cubic feet per tree in 15 years, even if one uses quality soil." Industry and market watchers had always been skeptical about the Anubhav group. Sources commented that Natesan's business was highly speculative and that he had never done 'solid' asset-based business like leasing or hire purchase. A market watcher said, "You can never run this business on a sustained basis offering interest rates of 25-30%. Whatever he claims, his assets are far too small compared to his liabilities."
average, while Rs 35 lakh was contributed from the promoter's side, the public funds raised were usually above Rs 300 crore. Most of these companies did not even have sufficient crop insurance. Also, the offer documents of these companies did not highlight the risks involved. The lack of industry regulation made it virtually impossible for the average investor to distinguish between a fly-by-night operator and a genuine player. Table II The Risks in Plantation Schemes - A Crisil Report Over dependence on retail Inadequate equity base resulting in high funds leverage Non-disclosure of Due diligence for public raising of funds promoters' stake not done Huge asset-liability gap Erratic cash inflows No access to organized Exposed to vagaries of nature sources of funding Excessive expenditure for Inadequate cash inflows leading to low raising resources debt servicing capability Lack of standard accounting practices gives companies the opportunity to follow liberal accounting policies Source: ICMR Most of these companies were reluctant to provide information about themselves. During investigations conducted by Business India, officials at Parasrampuria Plantations refused to even talk to the magazine. However, when the magazine sent people posing as investors, the response was extremely enthusiastic. Investigations regarding the schemes being offered by various companies across the country indicated that things were definitely out of joint. Even those companies who talked to the magazine's reporters were not able to convincingly answer the questions posed to them. One major issue concerning these plantation schemes was the valuation of the teak and the teak units. Most of the companies were selling the teak trees at Rs 1500-2000 per tree. This was significantly higher than the Rs 10-15 figure quoted by NABARD, which had years of proven experience in agriculture.4 Reacting to this, the plantation companies said that forest cultivation was totally different from running private plantations, which spent a lot more on irrigation and fertilizers. In a study conducted by the Maharashtra Revenue and Forest Department (MRFD) on private plantations, the total cost of raising and harvesting a teak tree was estimated to be around Rs 400. Even if one ignored NABARD's figures, the plantation companies were still charging the investors at least four to five times more than what experts thought was reasonable. However, the plantation people rejected these estimates. Natesan said, "These estimates are incorrect. Our charge of about Rs 1500 per tree has been arrived at after reckoning maintenance, pruning, weeding, even security."
Another debatable issue concerned the future yield of timber per tree and its price. The assumptions of yield and the price of teak 15-20 years later were critical for computing the expected return on investment. A study by the Indian Institute of Forest Management, Bhopal, concluded that the yield projections of private teak companies were nearly seven times the highest known yields in a time frame of 20-25 years. Another study by Maharashtra forestry officials revealed that while young teak trees up to about six years old responded spectacularly to increased irrigation and soil nutrients, the efficacy of the inputs declined notably as trees aged beyond seven years. A MRFD official commented, "Even if one reckons sites with the best quality soil, the timber yield of trees with a girth of 60 cm and above in 15 years would be about 5.1 cubic feet per tree." Natesan dismissed these claims as being 'absurd and wrong.' He quoted the figures of Anubhav's 50-acre plantation in Bhavnagar in Gujarat, which had 65,000 teak trees. He said, "Over a period of six years, we have already obtained a yield of 8-9 cubic feet. Even though the girth of the trees would be lower at six years than at 20 years, I am very clear that my observations are correct and that Anubhav's claims are in fact conservative. We have set records by growing teak trees to 32 feet in height in only 22 months, which would have taken six years to attain under forest conditions." Anubhav claimed that the yield of its trees would be 40 cubic feet. Experts claimed that the yield norm would be 10 to 15 cubic feet of timber per tree over a 20-year time frame. They also estimated the internal rate of return (IRR)5 to be 30% for a teak plantation project. While the IRR of a project with the best quality soil (grade I) was estimated to be 32%, for inferior soil qualities, grade II and III, the figures were 23% and 13% respectively. Thus, the IRR that the plantation companies claimed to offer - 25-40% - was regarded as highly unrealistic. Regarding the price of timber upon the maturity of the schemes, most of the plantation companies claimed that they had taken the most conservative prices by assuming the future price to be the same or marginally higher than the current price. These claims were refuted by experts, who said that with substitutes such as plastic, plywood and particleboard becoming popular in the West, the demand for wood could decrease in the future. The steady increase in teak prices during 1992-98 was projected to be unsustainable because of increasing supply. MRFD studies revealed that teak prices would drop sharply after 2009. An official said, "I expect a fall in prices after the year 2009. In fact, by the year 2015, I expect the price of teak timber, particularly those of girth 60-75 cm, to decline to less than half of the price prevailing in the year 2009." Plantation companies' procedures were also flawed. These companies did not directly own the land, they only supervised the sale deed between the owner of the land and the investors. Investors were issued certificates indicating the extent of ownership and, in most cases, received only photocopies of the original sale deed. The certificates were issued under the common seal of the company, but were unstamped, raising suspicions about the commitment of the company. Most of the companies invariably linked the transferability of these certificates to transfer of land back to them. Thus, in spite of
paying for the land, investors did not get absolute title to the land and were in no position to transfer their rights to the land along with the timber. In this entire procedure, plantation companies held all the cards. The certificates issued under teak tree schemes were not delivered to investors until three months after the payment of the final installment. The concerned company took these certificates back three months prior to the closure of the schemes. In the interim, if the investors defaulted, the company had the right to hold back the certificate. But if the company defaulted, the investor could do very little legally since the certificates were with the company. According to estimates, more than 4500 plantation companies had raised over Rs 25,000 crore from the public during the 1990s. The laxity of the concerned regulatory authorities was a major factor behind these scams. In the early 1990s, setting up a finance company was very simple as there was no supervisory authority for sole trading or partnership firms, nor did they fall under any regulatory framework. This gave them a competitive advantage vis-a-vis the other nonbanking financial companies (NBFCs). Though there was a limit on the number of depositors these sole trading or partnership companies were allowed to have, there was no ceiling on the amount of deposits they could collect. As per the Partnership Act, a partner in one company could be a partner in numerous other partnership firms.6 Further, the RBI did not have the powers to fix a ceiling on the interest offered by these firms on deposits. Thus, these finance companies offered unbelievably high interest rates as well as enormous cash incentives, gifts and prizes to entice depositors. Nobody could scrutinize the deployment of funds by these firms as they neither released any balance sheets, nor submitted regular reports to the RBI. As agricultural companies did not come under the RBI's purview, it was easy for these schemes to flourish. In November 1997, the Union Ministry of Environment and Forests set up an interdepartmental group to examine the veracity of the claims made by various private plantations. Their findings were later examined by an inter-ministerial group, which included the environment, law and finance ministries. SEBI was invited by the Ministry of Finance to work out a comprehensive regulatory framework for the industry. Following the public uproar over the failure of companies such as the DSJ Group and the Parasrampuria Group, SEBI appointed a committee under the chairmanship of S.A. Dave (former chairman of UTI and SEBI's first chairman) to frame a comprehensive set of regulations. SEBI then issued a set of directives regarding mandatory registration and credit rating. Only 540 companies complied with the registration requirement. SEBI then appointed chartered accountants to audit the books of the top 50 of these companies and thereafter issued show cause notices to 11 of them for non-cooperation. Companies that did not file for registration were barred from raising fresh funds from the public till they complied with the directives.
Meanwhile, in the absence of precedents, the rating agencies primarily took into account the sustainability of the business through its per-year yield and the ability of the company to be able to raise revenue independent of fresh collections. The ratings also factored in the solvency and operational capabilities of the management and the ability of the company to realize high yields over the years. Almost all the companies failed the test and were assigned a grade point of 5 (indicating very high risk) by various rating agencies. Anubhav was the only company that received a grade point of 4 (unsatisfactory grade) from Duff & Phelps (Duff & Phelps' said that in the absence of a past model and lack of any standardized policy in the balance sheet, the rating took into account projected cash flows, keeping in mind the nature of the risk involved.) Of the rated companies, 22 were placed in the non-investment grade. Needless to say, by the time these measures were put in place, the damage had been done and the money invested by the investors had vanished forever. With the stock markets performing badly and banks cutting back on interest on deposits, plantation schemes appeared very attractive for investors impatient for returns and willing to take risks. An investor commented, "Why do people invest in these kinds of firms? Because people want to make more money, fast. What do we get from the nationalized banks as interest? A mere 5-7%! Whereas Anubhav was paying 21-24% interest. Why can't the government pay better interest?" Explaining why these schemes were so attractive to the public as well as the finance companies, Natesan commented, "We offer 24% for all deposits of three years and above. This is not high when compared to the interest charged on loans by banks. I borrow from banks at 18%. When I do that, I have to offer security for a similar amount. That pushes up my effective cost to 36%. Therefore it still works out cheaper when I offer high interest to my depositors." Following the failure of major players such as Anubhav, a majority of the plantation companies vanished overnight. Court proceedings continued for years against the accused from various companies, even after Natesan was released on bail.
NOTE: ICMR regularly updates the list of free cases. To view more free
cases, please visit our site at frequent intervals.
This action might not be possible to undo. Are you sure you want to continue?
We've moved you to where you read on your other device.
Get the full title to continue reading from where you left off, or restart the preview.