Strap: In July SAT, too, had ordered a Cals promoter to retun $92 million with 10 years’ interest

Cals Refineries, India’s largest traded penny stock at one point, is now part of a $70-million litigation in the UK. Hedge fund RP Explorer has claimed damages from Sanjay Malhotra, the promoter of Cals Refineries, currently lodged in a Dubai prison, for “conspiracy and deceit,” arising out of the hedge fund’s 2007 purchase of securities issued by the Indian company, a report by Bonnie Eslinger of news portal Law360 revealed.

The UK case also draws reference to a recent order by the Securities and Appellate Tribunal (SAT) in India, which upheld a SEBI order against Cals Refineries for GDR scam and asked one of the promoters of the company, Gagan Rastogi, and Cals to pay $92 million with 6 per cent interest on the amount from 2009, for de-defrauding Indian investors.

SAT has observed that 25 million GDRs worth $92 million, issued by Cals, had come to rest in the Asia Texx account, which were further transferred free-of-cost to Rastogi. SAT further observed that Rastogi sold a part of these GDRs, 2.8 million, and received $8.96 million in November 2011. SEBI had concluded that GDR issuance to certain overseas investors was a sham transaction undertaken mainly to attract Indian investors, who were sold Cals shares in India. SEBI was also investigating a few infamous stock market operators for trading in the Cals Refineries stock.

Aggressively traded counter

Between 2010 and 2014, Cals Refineries, which was then priced at around Rs 0.30-Rs 0.40, was an aggressively traded counter in India’s stock market, which turned out to be offloading of stake by promoters. The stock churned average daily volumes of over 40 million shares, as Indian investors were swayed by the company’s plan to build a $1.1-billion refinery at Haldia, West Bengal, that was supposed to be operational by March 2011.

The story sold by the Cals management to the market was that they would ‘dismantle and import’ a refinery plant in 3,000 containers from Germany to Haldia, where it would be put back together again. The company had hired UK refinery engineers KBC to upgrade the plant, adding new units so they could also refine lower-quality Arab crude oil. In 2007, Cals said BayernOil sold a 30-year-old refinery plant at Ingolstadt in Germany to Lohrmann International, which in turn sold it to Cals. The plan was to pack this refinery and transport it to India.

“I still hold 50,000 shares of Cals Refinery as the story sold by the management promised the sun, moon and the stars,” said Mitul Jasani, a retail investor in Mumbai. The 2010 bubble in Cals Refineries burst after over three years, when SEBI said it had unearthed a GDR scam by CALS Refineries.

RP Explorer’s case is that it purchased the securities that were issued to raise capital for the acquisition and installation of a second-hand oil refinery in Haldia. Malhotra was a “promoter” for a collective of individuals behind the refinery project called “Spice Energy Group,” the hedge fund said. According Law360, RP Explorer told the court that Malhotra and others, working in conspiracy, made “false representations to induce RP to acquire the GDRs.

Malhotra is currently in prison in Dubai and did not participate in the trial, according to RP Explorer. The reason for his incarceration was not disclosed.

“According to RP, while the hedge fund was told that issuance of the securities raised $200 million from investors, in fact the entire $200 million came from an entity owned by Malhotra called Honor Finance. Further, Honor paid for those securities with a bank loan secured by the $200 million raised by the GDR issue. So, when RP Explorer invested $77 million, it was money that went to Honor, which used only some of those funds to pay back the loan, according to RP Explorer. In addition, Honor took some of the money and used it for “sham contracts” with CALs that benefited Malhotra and other conspirators, according to the fund's written trial arguments,” Law360 said.

The Serious Fraud Office in India is investigating the refinery project and CALs' GDR issue.

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