The Times - Bombay Mix: fuelling India’s boom in the wrong way

A deal to relocate a German oil refinery to the Hooghly river has not gone as planned

Robin Pagnamenta, Mumbai

On paper it must have sounded like a great investment.

As western enthusiasm sizzled about India’s red-hot economy back in 2007, a group of Indian

businessmen sounded out City investors about an unusual project.

The promoters of Cals Refineries, a company listed on the Bombay Stock Exchange, were

seeking $200 million to dismantle an old German oil refinery near Munich, pack it into crates

and ship it to be rebuilt at a new site on the river Hooghly, near Calcutta.

The deal seemed to make perfect sense. With demand for oil products still booming in India

while sagging across most of Europe where stiff new environmental rules were forcing refineries

out of business, several leaped at what looked like a lucrative opportunity to tap into the

nation’s bubbling growth story.

However, fast forward seven years and the project has descended into a far less profitable

affair.

This Thursday, lawyers for RP Capital, a boutique London emerging markets fund which invested

$77 million in the scheme, will appear in Mumbai at an appeal held at Sebi, India’s stock market

regulator, against the men behind Cals Refineries in India.

While the refinery at Ingolstadt in Bavaria continues to rust away with not a pipe or a screw

removed, a vicious legal battle is looming as international investors allege they were duped in an

elaborate fraud.

RP Capital has also launched legal action in the UK High Court to recover the money it alleges

was fraudulently siphoned off into companies with no link to the refinery project to line the

pockets of its promoters. Further hearings are due this autumn.

However, while the nine defendants in the case have rejected all of the allegations against

them, RP Capital claims the proposed new refinery at Haldia was little more than a “phantom

project”, a complex scam designed to defraud investors of $300 million, which involved the use

of global depository receipts issued with the assistance of a bank in Portugal.

Like most Indian legal cases, the affair is unlikely to be resolved any time soon, but there is a

valuable lesson here for foreign investors in India as sentiment towards the country heats up

again after the election of Narendra Modi as prime minister and as its stock market is in the

throes of another boom.

While the Securities and Exchange Board of India, shares a similar name to its counterpart in the

US, in terms of market supervision the two countries are worlds apart.

In April, Sebi published a detailed and strongly worded report on Cals Refineries, which it

accused of “very grave violations” designed to “defraud investors . . . at every stage of its

execution”.

Yet despite this damning indictment, the company’s shares continue to trade on the Bombay

Stock Exchange. None of its directors have been struck off.

Indeed, the toughest punishment that India’s toothless market regulator has been able to

impose is to bar Cals Refineries, a shell company so-called because it started life as Computer

Assisted Learning Systems, from issuing any further shares for ten years.

Seven years after the alleged fraud took place, that seems absurd. However, knowing the glacial

pace of India’s legal system, it could take that long for any action to be imposed anyway.

Plenty of Indian retail investors have been caught up in the Cals Refineries mess too, but

international investors should beware. With India’s stock market up 21 per cent already this

year and excitement building around a new Indian boom, this may not be the last time that

eager foreigners run into this kind of problem in India.