What went wrong with the Veritas report

Its 2012 report on Indiabulls has led to the arrest of one of the two authors and the closure of its India business

On November 18, Nitin Mangal, a chartered accountant, was doing invigilation work for an examination in Indore when he learnt that some policemen from Gurgaon had come looking for him at the local police station. A week later, he surrendered before the Gurgaon Magistrate Court because "if you are wanted and there is no anticipatory bail, the only option is to surrender". The court sent him to police custody for six days. This week, he was refused bail and remanded to judicial custody for two weeks. Mangal's problems began after he assisted Canada-based Veritas Corporation's Lead Analyst Neeraj Monga in preparing a report called Bilking India which raised several accounting and governance issues based on the public filings of Indiabulls Financial Services, Indiabulls Real Estate and other group firms.

According to Veritas, the "analysis was based entirely on a fulsome review of publicly available information" related to Indiabulls. The report ran into 24 pages and included an additional 80 pages of supporting documents. It was initially released to its six clients in August 2012. Though Veritas had written scathing reports against other Indian companies earlier, the response it got from Indiabulls left it totally stumped. Indiabulls issued a public statement slamming the ethics and practices of Veritas. "If Veritas wants to rate Indiabulls companies as 'sell', it is its opinion. However, if it wants to spread malicious headlines and intentionally use blatantly incorrect data without seeking any clarifications from the company to fulfil its agenda of profiteering, as demonstrated by the points above, then we strongly protest and will ensure that Veritas face the legal consequences."

Indiabulls also filed two criminal complaints alleging extortion and criminal defamation in Gurgaon and Mumbai. One of the key pieces of evidence cited in these complaints was an email allegedly sent by Monga to Prashant Periwal, an executive at UK-based hedge fund Altima Partners, in which it was communicated that Veritas' research services were available for annual subscription at $50,000. He allegedly also offered to hold back the wider publication of the report by a day if Periwal decided to subscribe to the report. The mails gave rise to suspicion that Veritas was giving its hedge fund clients an early look into its reports in order to help them make money by short selling the stocks. There were short build-ups in the futures & options segment in the days between the initial release of the report to clients and its publication.

While recent reports have pointed out how Veritas' call was right on Kingfisher and DLF, ironically, two years after the 'sell report' on Indiabulls, the company's stocks continues to trade at high levels. The share price of Indiabulls Housing, the flagship, has gone up from Rs 250 to Rs 468 on Thursday. CARE has upgraded its credit rating on the company from AA+ to AAA. "What is the credibility of such a research?" asks a Veritas critic.

Veritas, in its $11-million settlement claim filed in Ontario, alleged that Indiabulls twisted this mail out of context. Following the criminal complaints, two Veritas clients, Star Consortium and Treeline Investment Management, have cancelled their subscriptions. The other clients, however, have said they would consider remaining customers if Veritas released additional reports. Veritas, in the settlement claim filed in Ontario on September 3, said that the "substantial legal and reputational risks arising directly, as well as the serious reputational damage that had already been done as a result of the defendants' actions, have prevented Veritas from continuing the India Research Services for the foreseeable future."

Indiabulls believes Monga is trying to avoid proceedings in India and the suit filed in Ontario has been an afterthought. "Neeraj Monga has after over two years filed a statement of claim against Indiabulls Real Estate before the Superior Court of Justice, Ontario, claiming $11 million as damages for defamatory press release. The action has been initiated knowing very well that any such move in India is now barred by limitation of time which is one year," says a company spokesperson.

Since these developments, Monga who had a stake in Veritas has moved out and floated an entity called Antya Investment Research. Monga declined to comment on the recent developments and an email sent to Veritas Chief Executive Anthony Scilipoti also did not elicit any response. However, Veritas' legal counsel forwarded a statement that quoted Scilipoti as saying: "Veritas is outraged by the unjust incarceration of Mangal, an innocent Indian citizen, for co-authoring a research report on various Indiabulls companies." The statement said: "Allegations made by Indiabulls in relation to our research report and sell recommendation are completely without merit. It is our hope that Mangal will be released promptly from custody where he is being held without charge and will be allowed to go home to his family."

Adding to trouble
The settlement claim filed in Canada by Veritas almost two years after the publishing of the report seem to have brought fresh troubles for Mangal. Five days before the fateful Tuesday when he was sent to police custody, Mangal's lawyer had represented him in a counter-suit proceeding in the Delhi High Court. The suit was filed by Indiabulls to stall proceedings initiated by Veritas and Monga in the Ontario court.

Mangal had moved the Punjab & Haryana High Court for anticipatory bail in the case filed in Gurgaon. The court rejected the bail plea in 2012. Though the state counsel sought custodial interrogation, nothing happened for almost two years.

In March 2013, the Bombay High Court, which had taken note of the Punjab & Haryana Court order, granted him anticipatory bail. The order, downloaded from the court website, said, "As is spelt out from contents of the complaint, it is an attempt at extortion. The act of extortion was not complete and no payment whatsoever was made." The court further observed that public companies such as Indiabulls should be open to criticism and analysis.

In October 2012, Monga had written to top officials of market regulator Securities and Exchange Board of India (Sebi), including its chairman UK Sinha, complaining about the governance and accounting issues Veritas had talked about in the report. An email sent to Sebi spokesperson seeking details of action taken on this report remained unanswered. Amit Dube, lawyer for Mangal, says, "It has become a battle between David and Goliath. What is baffling is the silence of Sebi. It is not implementing its mandate under the Sebi Act. It should act." Dube is likely to move the court for Mangal's bail this week.