OnMobile's PLEDGED SHARES STORY....

Mon, Jul 23, 2012 at 22:24

OnMobile's governance woes: What went wrong?

OnMobile is trying to put a partial failure of corporate governance behind it. However, the episode has raised questions on what exactly went wrong. CNBC-TV18' Vineetha Athrey spoke to various people within and outside the company to piece it all together.

OnMobile is trying to put a partial failure of corporate governance behind it. However, the episode has raised questions on what exactly went wrong. CNBC-TV18’s Vineetha Athrey spoke to various people within and outside the company to piece it all together.

Arvind Rao's departure as a promoter of OnMobile on the July 18 has given the company a breather, but its corporate governance troubles are not an overnight phenomenon. They've been in the making since late 2010.

CNBC-TV18 learns that in November 2010, Rao pledged a significant chunk of his shares with Kotak Mahindra Prime as security against a personal loan -- when the share price was Rs 277 per share.

Now Rao's reasons for the loan remain unclear, he has not responded to repeated queries, and Kotak Mahindra Prime has declined to comment citing client confidentiality.

However, some of this money was used to buy an additional one percent stake from the market a few days later.

The problem was that over the next few months, the market tanked and the stock price dropped to Rs 98 per share on the July 15 2011. This fall in value forced Rao to ask the board to hike the cash component of his salary from Rs 1.1 crore to Rs 3.6 crore.

Onmobile has not confirmed whether he got that hike but said,
"CEO's compensation review is an annual process and is contingent on the net profits of the company. The board cannot approve compensation of the ceo as it is contingent on shareholder approval."

Rao is also learnt to have initiated a series of related-party transactions with companies he owned -- Mobile Traffik and Riff Mobile -- without board approval.

These firms had once provided OnMobile with content but this time, sources say the attempt was to raise inflated invoices on OnMobile to book revenues in Mobile Traffik, inflate its valuation, and sell it back to OnMobile at this inflated valuation.

This failed when the OnMobile board aborted the process midway, thus preventing any financial loss.

On this, OnMobile told CNBC-TV18 said, "The special review focused on certain specific transactions that Amarchand and KPMG were asked to look into. While strong alternate controls ensured that OnMobile did not incur any financial loss, the board called for a review of the governance mechanisms and internal controls to further strengthen them.”

But that's of little succor to shareholders. To cut its losses, Kotak Mahindra Prime sold most of the OnMobile shares pledged by Rao, and now holds only around 1% in the company. To boost market sentiment, OnMobile bought a 3.52% stake from Rao and his companies but with the stock wallowing at around Rs 36 a share, shareholders are left holding the bag.