The Lehman millions: Did a crooked Hyderabad company and a Hong Kong fund share the spoils of a $50-million investment?

Kyko Global said it found that the Hyderabad company was owed $22.9 million by SSG Capital and its unit Value Team Corporation thanks to a series of transactions executed by these entities. This money originated from a $50-million investment by Lehman Brothers in PISL in February 2007, an examination of documents and company records shows.  

Maheshwari, Vourloumis and Wong were not only directors of SSG Capital and Value Team Corporation but also shared a relationship with PISL since 2007. As executives of Lehman Brothers Asia in Hong Kong, they were instrumental in the 2007 investment into PISL, the documents show.

After a long pursuit of the money it was duped by Prithvi, Kyko was finally smelling blood. Kyko believes that the only way it can recover money from Prithvi is through SSG Capital.    

But SSG Capital, which bought nearly 47 percent of non-banking financial company Shapoorji Pallonji Finance earlier this year, said it has never had any dealings with Kyko Global. “SSG Capital also never had any dealings with PISL or its subsidiary PSI, other than as bondholders, and no debt is owed by SSG Capital to any of these parties. It is Prithvi that still owes SSG Capital,” the company said in a statement. 

SSG Capital is no slouch in the India financial market. It manages assets worth $4 billion. On July 2016, it raised $2 billion to invest in India and has since also bought 34.42 percent of a unit of travel company Cox & Kings, 49 percent of Asset Care and Reconstruction Enterprise as well as 24 percent of Tourism Finance Corporation of India.

With both sides in no mood to relent, a protracted legal battle is underway. It is an unusual legal drama because the differences are not over a deal gone wrong or over unpaid dues, which is typically the case with companies of this kind.

At the centre of the dispute is a Hyderabad IT consulting firm that started with lots of promise but eventually fell out of grace.

Founded by Madhavi and Satish Vuppalapatti, who are siblings, PISL was launched in 1998 as a global IT consulting and engineering solutions company. PISL listed on India’s bourses in 2005.

The company had a good run in the early years, recording a turnover of Rs 1,950 crore in 2008-09, but the tide turned around 2014-15. That year, media reports of Madhavi and Satish committing multiple frauds and duping financiers and customers of over $200 million surfaced.

Trading of PISL shares on the Bombay Stock Exchange and National Stock Exchange was suspended on September 14, 2015 because of the company’s failure to file proper financial disclosures since March 2014. PISL was delisted in August 2018.

The relationship between PISL and Kyko Global began in 2011. In November that year, PISL entered into a factoring agreement with Kyko to sell some of its customer account receivables for IT services. Under this arrangement, a company like Kyko buys customer account receivables at a discount from a business in immediate need of cash (say, PISL) and collects the original money later at a due date.

PISL authorised direct payment on those customer accounts receivable to be made to Kyko.

PISL sold Kyko account receivables of five clients — American retailer Dick’s Sporting Goods, Enterprise Product Partners, a US listed energy asset company, fintech company Financial Oxygen and telecom equipment company Huawei of China.

Kyko received timely payments until February 2013. Payments suddenly stopped with more than $17 million as outstanding.

This happened, PISL told Kyko, because its bank accounts were seized due to a legal suit by Japanese firm Sojitz Corp. But the problem would be resolved soon, it assured. The promoters also signed personal guarantees.

In May 2013, PISL sent an email to Kyko with a list of another 20 clients offering them to sign a factoring agreement on receivables of these clients in order to compensate losses of Kyko in the previous factoring agreement.

By then, Kyko had already found out that the previous five customers were fictitious. It soon found that the 20 replacement clients were also fake.

In June 2013, Kyko Global sued PISL, its US subsidiary PSI, its promoters and other senior executives of PSI under the Racketeer Influenced and Corrupt Organizations Act (RICO), accusing them of multiple frauds. But even after getting court orders, PISL failed to pay Kyko.

The Vuppalapattis, who were skipping court hearings, left the US in early 2014 for India, said people familiar with the matter, requesting anonymity. An arrest warrant was issued in the US against Madhavi, who is a US citizen and Satish, who has an Indian citizenship, in October 2014.

While this was a setback for Kyko, it managed to buy the personal computer of Madhavi in an auction on March 20, 2014, ordered by the US district court to pursue its investigation into PISL. On June 30, 2016, the court ordered PISL and PSI, among others, to pay $101 million to Kyko, accounting for interest charges and legal expenses.

Thanks to the ruling, Kyko is entitled under US laws to obtain information from individuals and can seize cash, assets and real and personal property to claim its due amount. Kyko has also been given the control of PISL’s wholly-owned subsidiary, PSI.

Kiran Kulkarni, CEO of Kyko Global, told CNBC-TV18 that all PSI assets are in the company’s possession. “That is how we came to know that SSG Capital is shown as a debtor on the financial books of PSI.”

According to Kulkarni, all documents and emails of Prithvi were obtained legally. Forensic audits were launched on these with the knowledge of the US court, he said.

Besides Kyko and Sojitz, PISL and its promoters have been accused of multiple frauds during 2007-2011 by also Germany’s Deutsche Bank. The common thread running through these cases: fictitious clients, unpaid dues and siphoning of money.

SSG Capital was founded a year after Lehman Brothers collapsed.

Under the terms of the deal with Lehman, PISL had allotted zero coupon foreign currency convertible bonds (FCCBs) of $50 million to the American firm’s European unit, Lehman Brothers International. The investment was accompanied by a restrictive usage clause, which meant that the FCCB proceeds could be utilised only for overseas acquisitions.

These bonds, whose due date was in February 2012, were listed on the Singapore Stock Exchange. They carried a redemption value of $76.4 million, including interest.

According to the annual reports of PISL, the company had utilised around $15 million from the FCCB proceeds to acquire three companies and the remaining $35.4 million was lying in an escrow account as on March 2009.

The FCCBs were about to change hands. Between July 2009 and September 2010, SSG Capital purchased all the FCCBs of PISL of face value $50 million from the administrators of Lehman Brothers and a few other owners for about $15.5 million.

The bonds were bought in two tranches by SSG through its units Value Team Corporation and SSG Capital Partners.

Soon after, Prithvi and SSG Capital entered into a deal, according to Kyko, which it said it discovered by examining an exchange of emails in the personal computer of Madhavi. Through three Memoranda of Understanding (MoUs) — found in the email trail — they restructured the FCCBs, said Kyko.

Under the restructuring plan, SSG Capital gave two options to PISL. One, cash buyback of bonds at a discounted rate. Two, conversion to equity.

PISL agreed to buy back bonds worth $22.5 million (of the total $50 million) from SSG through the first option. For the remaining FCCBs of face value $27.5 million, the company agreed to convert these into equity shares at Rs 75 per share and at an agreed exchange rate of INR/USD 46.

In all, to convert FCCBs of face value $27.5 million, PISL agreed to issue nearly 23 million equity shares to SSG Capital (See Bonds restructuring Plan).

All the three MoUs contained an addendum, which said in consideration for the commitment to the restructuring plan, PISL shall provide SSG Capital and Value Team Corp with a non-refundable deposit of $22.9 million within 10 days of signing the addendum dated September 6, 2010.  The addendum also said SSG Capital’s commitment to the restructuring plan shall be subject to its timely receipt of the full deposit of $22.9 million.

Varun Dhingra, an investment banker and co-founder of InnerWave, a boutique investment banking firm, said if he were in the place of PISL, he would have gone for conversion to equity. “Why would I choose to pay the bondholders in cash when they have already given me an option to convert the FCCBs into equity? That too, when a company is in stress. Moreover, even if the other party (SSG Capital) was not aware that PISL has committed any fraud, the promoters of PISL knew what was going on and they could have chosen to convert the FCCBs into equity,” he said.

SSG Capital denied any wrongdoing, saying all the transactions with PISL and associate companies are legal. “The actions SSG Capital did take on the bonds occurred only as bondholders on the terms of the bond documents or pursuant to restructuring and settlement agreements,” the company said in a statement.

Soon after SSG Capital became the new owners of the FCCBs, a shell company named Prithvi Solutions Asia was incorporated in Hong Kong in August 2010. It had a paid-up capital of HK$1.

The company also had only one shareholder – Prithvi Solutions Inc — which subscribed to only one share worth HK$1. The company’s sole director was Satish Vuppalapatti, who is also the promoter and CEO of PISL.

Maheshwari, Satish and Madhavi exchanged emails regarding the incorporation of Prithvi Solutions Asia in Hong Kong and opened a bank account for the company. The mail trial shows Maheshwari asking for documents required to open the bank account. CNBCTV18.com has reviewed all these emails.

Kyko discovered that the balance $35.4 million was released from the escrow account, according to CEO Kulkarni. Much of the money was transferred to affiliate companies of PISL, he said, adding that this was in contravention of the restrictive usage clause.

On August 31, 2010, Satish sent a letter to investment firm BNY Mellon’s London Branch, the trustee of the FCCBs, requesting release from the escrow account as per the new MoUs signed between Prithvi and SSG. On October 29, 2010, the account of PISL was credited with $35.4 million from UCO Bank, based on instructions from BNY Mellon.

From hereon, the money passed through a slew of bank accounts (see The Money Trail).

Finally in November 2010, Value Team Corp received $18.9 million in total while SSG Capital Partners secured $4 million at the end of this chain of transactions. The promoters of PISL kept the remaining $12.5 million to themselves.

Thanks to this arrangement, SSG Capital made $22.9 million — a gain of $7.4 million — from its investment of $15.5 million in the PISL bonds in just four months. PISL, which otherwise would have had to cough up $76 million to SSG Capital as the new owners of the bonds, ended up paying only 22.9 million.

It is this $22.9 million that Kyko argues belongs to PISL and wants SSG Capital to pay up. The promoters of PISL were keen to get the FCCB proceeds released from the escrow account as soon as possible so that the money doesn't get seized, considering multiple fraud cases launched against them, according to Kyko.

The nature of PISL’s payment of $22.9 million to SSG Capital is not clear (see Anatomy of The Deal). Was it to buy back some of the bonds? Or was the payment a consideration to commit to the restructuring plan, as stated in addendum? Was this arrangement to make a quick buck by bypassing regulatory approvals?

SSG Capital did not answer these questions.

“We are unable to comment further given this matter is now in front of the courts. We can say that we are acting against these baseless claims forcefully and proactively,” SSG said in a statement.

Multiple attempts to contact the Vuppalapatis proved futile. Emails sent to their last known email addressed did not get a response. They are hiding in India, according to former Prithvi employees who did not want to be named.

SSG received money from Prithvi in November 2010. A month later, it launched its first fund worth $100 million.

Manish Jain, a corporate lawyer, said the dates of all the agreements signed are very crucial. “For instance, the addendum said that the SSG’s commitment to the restructuring plan is conditioned upon its timely receipt of the payment by PISL. The deadline for the payment was within 10 days of the date of the addendum i.e. September 6, 2010. But the money trail shows that the payment was made in November 2010.”

Jain, a managing partner at JLJ Law Offices, said that means the addendum must have become null and void because the payment was not made before the deadline.

As per the MoUs signed, the restructuring plan was subject to PISL taking necessary regulatory approvals. PISL’s proposal to issue share warrants to liquidate FCCBs was rejected by FIPB on March 6, 2013, the company said in its 2012-13 annual report.

Aditya Cheriyan, partner of law firm Khaitan & Co, said asking for a ‘non-refundable deposit’ in order to restructure the bonds is not at all usual.  “Having said that, every restructuring agreement is unique regarding the terms and conditions both the parties agree upon but any payment rather than the payment of coupons (interest) or the redemption payment on maturity of the bonds has to through RBI after taking necessary approvals.”

SSG Capital’s due diligence before buying FCCBs of PISL between 2009 and 2010 also leaves much to be desired. At least three international audit firms walked away without signing PISL’s balance sheet in 2009.

On its own due diligence of Prithvi, Kyko’s Kulkarni said his company knew about the auditor resignations. “But since 90 percent of PISL's business was conducted in the US, as part of our due diligence, we reviewed the audit reports of PSI and another US-based subsidiary, Prithvi Catalytic Inc, by the US auditors, PK Ram & Associates," he said.

It is now over to the courts to decide who gets the millions that Lehman Brothers invested in a Hyderabad company that itself has collapsed under the weight of questionable financial transactions.