Why is India's Biggest Investment Banker in Exile?

Searing 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.

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.

The Warning and After
In 1999, the same year as his exit from Nagarjuna Finance, Nimesh Kampani joined hands with Morgan Stanley to offer a bouquet of financial services. The joint ventures quickly became a leading player in India’s market for capital issues and consolidation activity. Two years ago, the alliance ended and Kampani’s operation became an indigenous one.

During this journey, he has helped many business houses raise capital across India. He didn’t realise that one such deal would irritate someone so much that his freedom could be under peril one day. (See box in the next column)

Kampani’s real crime, say those in the know, is that he had dared to finance Ramoji Rao of the Eenadu group. Now, Rajasekhara Reddy, chief minister of Andhra Pradesh, feels some rivalry towards Rao.

In a burst of coincidences, warnings had been going out to people against having any business association with Rao. For instance, one such warning reached the world’s largest private equity firm Blackstone, which was planning to help Rao out of his financial troubles. Blackstone did not pay heed, but the deal was eventually stalled. Kampani, too, got a warning. Like a good investment banker, he stuck with his client and ignored it.

It was then, sources close to Kampani assert, the state government used the depositor protection law to issue a look-out notice for him. Worried he has been targetted personally, Kampani scurried for cover. That is when the sweltering summer of Dubai felt like Alpine comfort.
In exile, Kampani has launched a legal campaign but things haven’t gone well so far. The Supreme Court has refused to interfere with the law (it is the state legislators who must change it) and also refused him anticipatory bail.

So, what are Kampani’s options? One would be to return to India and submit to the process of law. It means short-term troubles like being jailed, but he can hope to get exonerated eventually. The other, of course, is to “cool” his heels in Dubai and wait for a positive development. Obviously, Kampani has chosen the latter.
Two reasons are behind the decision. First, there was a chance that the Congress Party could be voted out of power in Andhra Pradesh. Now we know it has not happened. The second, Kampani wanted to give himself time for reconciliation. He would hope that the sweet taste of election victory may have wiped off the bitterness of the past and the politicians in question may be open to negotiate.

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The Untold Story of a Witch-Hunt
Nimesh Kampani’s troubles are but a chapter in a long campaign against Andhra businessman Ramoji Rao, whose group had come under severe action from the government headed by Rajasekhara Reddy.
Rao’s problems had begun in 2003. Under the local depositor protection law, the government decided to examine all the records of Rao’s Margadarsi Financiers “with a view to protecting the interests of the depositors.” Rao went to court which restrained the state from attaching or freezing the assets of Margadarsi Financiers and its allied companies as long as repayments were being made.

To survive, Rao needed money fast, but help was hard to come by locally. His attempt to get investment from Blackstone was stalled. The finance ministry at last gave a go-ahead, but with a caveat that the proceeds would not be used to pay off existing depositors. Such a condition had seldom been made before.
It was at this stage that Kampani decided to fund Rao. In January 2008, Kampani decided to acquire an undisclosed minority stake in Rao’s Ushodaya Enterprises Ltd (UEL), a newspaper pu­blisher, for Rs. 2,604 crore. Investments into UEL were made through Equator, a US hedge fund. And then, Nimesh Kampani received a warning.

Searing 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.

Additional reporting by Dinesh Narayanan and T. Surendar