Why is India's Biggest Investment Banker in Exile?

earing heat and a crisis-ridden economy make Dubai a very unattractive place to spend this summer in. Only the most desperate who find their own territory too hot will go there. And now when Indians are celebrating the triumph of democracy through a free and fair election, there is one Indian who has been denied the comfort of freedom on the flimsiest of charges and driven to the unfriendly weather of the emirate. It is indeed an irony that the man in question is one who proved to the world that there can be a successful home-grown investment bank in India — a service to the nation, if you will.

Nimesh Kampani, merchant banker to the mighty, faces arrest in India. The windmills of Indian justice have ground and crushed many innocents, but one would have hardly expected such an influential banker to share their fate. After all, the richest on the land like Ambanis and Tatas are his friends. He is a billionaire himself. The biggest fund-raising deals of recent years have all passed with his signature. The founder of JM Financial is among the most respected businessmen in the country.

Image: Sameer Joshi / Fotocorp
Missing in Action?

But today, the state government of Andhra Pradesh is hunting him for a possible arrest in an old case involving a non-banking finance company that defaulted on its public deposits about seven years ago. The regime, which has returned to power in the recent elections, is using Kampani’s temporary association with that company nearly a decade ago as a ruse to corner him. And Kampani is running out of legal options to defend himself from what he believes to be a witch-hunt.

“Nimesh is known to me for 35 years. I consider him to be a great merchant banker, but above all a gentleman,” says Bhupen Dalal, chairman emeritus of Cifco, an investment management company. This pretty much reflects the sentiment with which corporate India has reacted to the Kampani episode. Most of his friends are shocked, but unable to help him out in a craftily built case of cheating that has raised a larger question: How long will business remain a hostage to petty politics?

Kampani’s crime? He was an independent director on the board of Nagarjuna Finance Ltd., headquartered in the scam-smelling city of Hyderabad. In 1999, he resigned from the post and three years later, the company defaulted on repaying deposits worth Rs. 100 crore. It is at best a case in which the police could have sought Kampani’s cooperation to investigate the real actors and causes behind the default. But they went far ahead, using a particularly lethal provision in their depositor protection law to seek his custody.

Neither Nimesh Kampani nor the representatives of the state government spoke for this story. Many emails and faxes to AP officials went unanswered. But insiders who have been following the behind-the-scene manipulations in this case say the motive of the political masters is to injure his reputation and cause him discomfort, rather than solve the Nagarjuna default case. So, a scrutiny of the merits of the case as well as the curious happenings that led to this episode become unavoidable.

Fixing Liability
Dalal points out Kampani had made his exit from the finance company before the defaults began and argues the investment banker is not liable for what happened later. This surely sounds logical, because Kampani couldn’t have caused or avoided the defaults that happened three years after he left.

However, in southern India — where vanishing finance companies are a common occurrence — state governments have armed themselves with wide-ranging powers to arrest anybody involved in the management of such companies, including past and present directors, executive or independent. A look at the relevant provision of the Andhra Pradesh Protection of Depositors of Financial Establishments (APPDFE) Act, shows how potent such powers are. The law allows the state to punish “every person responsible for the management of the affairs of the financial establishment… with imprisonment for a term which may extend to ten years and with fine.”

While it is possible that fraudsters could mismanage companies and quit them before the beginning of defaults just to evade prosecution, it is also equally true that innocent people could be subjected to a witch-hunt by politicians using such laws. That’s why savvy money managers in Mumbai challenged a similar law in Maharashtra. The Bombay High Court has stayed its operation.
The other question is how far an independent director can be aware of the finances of a company? After all, he would depend on the data furnished by the management. “When provident funds do not get paid, or when auditors give misleading statements, can independent directors be blamed?” asks Hemendra Kothari, another leading investment banker. ”If you want good corporate governance through the participation of independent directors, all such ridiculous laws need to be changed immediately.”
The Nimesh Kampani case has coincided with the biggest scam in corporate India’s history. Satyam. That case, too, has originated in the same city, Hyderabad. That fraud involves more than Rs. 7,000 crore, but till today, the company’s independent directors during Satyam’s fraud years (Harvard University professor Krishna Palepu and venture capitalist Vinod Dham among them) have not been arrested.

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