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New Delhi:

New Delhi: It was a story that began in Gujarat’s Tharad town more than two decades ago, and it came to an end on 28 June when Sunil Kakkad, the fugitive founder of Sai Infosystem (India) Ltd (SIS), was arrested in Monrovia, the capital of Liberia, by Interpol.

The arrest came almost exactly a year after Kakkad fled the country, leaving 1,400 employees of the company in the lurch. Also left high and dry were banks that had loaned a little over 1,000 crore to SIS.

By then, SIS had already stopped paying its employees, although it had around 2,400 crore of orders on its books (or, at least, on paper). And Kakkad’s family had moved to Chicago.

SIS’s fall from grace was as sudden as it was steep. Mint spoke to several former and current employees on the rise and fall of the company. None wished to be identified.

In 2011-12, according to the company’s audited financial statement, SIS made a net profit of 113.81 crore on revenue of 1,618.97 crore. In 2012-13, it made a profit of 144.27 crore on revenue of 2,061.97 crore. The audited financial statement for 2012-13 hasn’t been filed with the Registrar of Companies (RoC). No financial numbers are available for 2013-14.

Employees complained to the Ahmedabad and Mumbai police, labour courts in Delhi and Ahmedabad, the Serious Fraud Investigation Office of the corporate affairs ministry and the Gujarat government. They alleged that the company’s finances were a “black box" to them.

They also started a blog, “Together We Can" (mintne.ws/1rjm6NA), in which they asked questions about how SIS managed to win big contracts from various governments and government departments.

Some of these questions were easily answered.

SIS won contracts from government departments because it bid lower than the competition, sometimes unsustainably so. And it, and Kakkad, made all the right moves.

The United Progressive Alliance’s unofficial science and tech adviser Sam Pitroda introduced Kakkad to some.

The beginnings

Kakkad started SIS in 1992 with college friend Vijay Mandora, with a sum of 5 lakh from his father.

The turning point for the fledgling company came in 1999, when state-owned telco Bharat Sanchar Nigam Ltd (BSNL) placed a 1 crore order with it. Over the next decade, BSNL would become central to the company’s rise.

SIS started by providing computer systems to, and maintaining them for, BSNL. When information technology (IT) firms that had been given a contract by the telco to build a billing system abandoned the project, SIS took over and completed it. “We prefer to be known as ICT (information and communication technology) partners for a few selected clients than as a vendor to a large number of clients," a profile on the company’s website said, naming BSNL as one of its major clients.

By the end of 2012, SIS was responsible for the roll-out of over 200 crore of BSNL projects. These included voice over Internet protocol (VoIP) or Internet telephony services in two zones, four Internet data centres across India and local area networking of 280 universities for the government’s ambitious National Mission on Education through ICT.

SIS’s revenue came mainly from these and other government contracts, said many current and former employees. Some pointed to the role of Pitroda, whom they described as a “family friend" of Kakkad.

Pitroda inaugurated BSNL and SIS Internet telephony services. He placed the first VoIP call through the system in 2012. Also, SIS subsidiary SIS Global’s office is located in the vicinity of Pitroda’s Oak Brook office in Illinois in the US.

In an interview with Mint in late 2013, Pitroda denied he was involved in the business of SIS. He admitted that his daughter Rajal Pitroda, a Facebook friend of Sunil Kakkad, started Sisam Technologies Pvt. Ltd with Kakkad’s family, but said she had resigned even before the company started operations.

Sisam would go on to win an all-India Internet service provider licence, but hadn’t started operations till March 2012, its last filing with the RoC. Sisam has the same registered address as SIS and Rajal Pitroda’s name does not appear in any of its filings with the RoC.

“It is true that our families knew each other through his (Kakkad’s) wife (Jyoti), but I don’t know anything about his government contracts. I don’t recommend (people for contracts)," Pitroda said by telephone from the US.

Pitroda said he met Kakkad for the first time after the latter’s wife and two children moved to Chicago over two years ago. At the time, he allowed Kakkad to use his office premises informally, Pitroda said.

Kakkad’s wife and two children are based in Chicago, according to Pitroda and several other people associated with the company.

Rajeev Gupta, a former senior vice-president of SIS and a former Indian Engineering Service officer, said the company won the projects on merit.

“In the multi-stage open tendering process of the government that stretches over months, how can one person influence so many ministries?" he asked

Gupta now works for a company called ETCO DIGITAL Pvt Ltd. ETCO is among the companies that showed interest to the lenders to revive SIS, he said. ETCO group chairman Ramesh Shah declined comment.

The two companies aren’t strangers to each other. According to SIS employees, a Canara Bank letter of credit to SIS was used to pay off part of a loan advanced to the company by ETCO. Mint has reviewed a copy of the letter.

Another former SIS executive said the company simply played the price game. “The approach at SIS was ‘we shall see what happens’. There was no legal department and so, some of the tough terms and conditions of projects like the Mumbai CCTV project were accepted, without cushioning the costs as any other system integrator would do."

Focus on security systems

SIS won the Mumbai CCTV contract in February 2013—surprising competitors such as Wipro Ltd, and the Essar Group—with a bid of 699 crore that seemed “untenable", a competitor for the surveillance project said on condition of anonymity.

Conceived after the 26 November 2008 Mumbai terror attacks, the plan to bring the entire city under closed circuit camera surveillance is yet to materialize. Just three months before winning the CCTV contract, SIS bagged the postal department’s pan-India rural IT hardware project that would help head post offices reach remote rural district post offices under its ambitious Project Arrow programme.

These projects were in addition to the smaller ones awarded to the company by the governments of Gujarat, Delhi and Rajasthan.

The picture that emerges from all this is of a small tech company picking up any project that came its way till it eventually hit upon a lucrative area of focus.

For SIS, security was that area.

According to some former SIS executives, Kakkad’s vision was to become a leader in communications and IT for homeland security in India, if not the world.

In connection with this, in 2011, SIS acquired stakes in two companies, Delhi-based Integrated Teleinfra Providers Pvt. Ltd and Vancouver-based Emergeo Solutions Worldwide Inc. for an unknown sum. While the former is a cloud-based systems infrastructure provider, Emergeo is active in the homeland security space.

Former SIS executives said the company even tried to forge a partnership with the homeland security division of Reliance Industries Ltd (RIL).

“Sai Infosystem had approached us (with a business proposal), but we declined their offer," an RIL spokesperson confirmed in 2013.

With an order book that looked promising, SIS former executives said the company was considering an initial public offering. The valuation: a cool 14,000 crore.

Cracks surface

But even then, the cracks were becoming apparent. In September 2012, the company paid its staff only 75% of their salaries. In January 2013, payments stopped entirely.

A former executive says the company told its employees it was waiting for “some loans to be cleared".

Interestingly, the audited financials for 2012-13 showed 53 crore going towards salaries. This is more than twice the salaries bill in the 2011-12 statement — 24 crore.

The company also owes the provident fund, Employees’ State Insurance Corp. and the department of income tax. The tax department has attached the head office towards meeting dues of more than 28 crore, documents provided by employees show.

Not that the financial troubles affected the company’s ability to bag plum contracts. “(Sai Infosystem) met the financial conditions before the letter for the CCTV project was issued in February," saidVineet Agarwal, the then home secretary (special), Maharashtra government.

A department of post official who spoke on condition of anonymity insisted SIS’ financials were evaluated before its project bid was declared as the winning bid.

The postal department revoked its letter of intent in May 2013 after the company failed to provide a performance guarantee despite at least two extensions, six months after the award.

“Subsequent to your actions, the department has been caused substantial loss on account of having to revisit the entire bid process from start and is expected to incur additional expenses attributable to the passage of time,"said a 9 July 2013 show-cause notice issued by the department to SIS, blacklisting the company. Mint saw a copy of the notice.

In the case of the Mumbai CCTV project, the Maharashtra government allowed three extensions before cancelling the contract after a cheque presented by SIS for the 62.7 crore performance guarantee on 7 June 2013 bounced.

Despite these problems, neither lenders nor the board of SIS thought there was anything fatally wrong with SIS.

“They had an account with us and we knew they were a 20-year old company, not a fly-by-night operator," said an official at one of the lenders, asking not to be identified.

That a 40 crore loan was approved by Canara Bank to an SIS subsidiary, Click Telecom Ltd, in June 2013, shows that the group’s balance sheet was still seen to have some creditworthiness.

Canara Bank didn’t respond to queries sent on 16 July and in September last year.

Earlier, a consortium of public sector banks and private lending institutions led by State Bank of India (SBI) had lent the company over 900 crore, according to filings with the RoC.

A senior official at one of the government banks said on 16 July that on 24 October 2013, SBI had reached out to all other lenders in the consortium—Allahabad Bank, Corporation Bank, IDBI Bank Ltd, Bank of Baroda and State Bank of Bikaner and Jaipur—to jointly initiate recovery proceedings under a single umbrella.

Following this, on 22 January, the consortium hired an external agent to help in the recovery process, the official said. This attempt failed, and on 27 March 2014, legal recovery action was initiated by SBI on behalf of the entire consortium. Following this, in April, notices were issued to SIS and advertisements placed in newspapers. SBI declined to comment.

A spokesperson for Cisco Systems Capital (India) Pvt. Ltd said in an emailed response on 17 July that SIS was a customer of the non-banking finance company, which offers loans and leases, and “we have initiated legal proceedings against them in 2013".

A spokesperson for Srei Infrastructure Finance Ltd did not respond to an email query sent on 16 July.

“We have exposure to this company, having financed IT equipment with full security. We are taking necessary measures to recover our assets and dues," a spokesperson for the infrastructure lender had said in an emailed statement on 30 September 2013.

Kakkad had always kept the financial information close to his chest and tightly controlled who knew what.

“I had a feeling the company was not very transparent," said Kamlesh Gandhi, who was on the board of SIS till 2010. “No corporate is completely transparent, but for corporate governance to work, companies should share details of their plans. I don’t recall any specifics being circulated for the two board meetings I attended."

Harsh Gupta, a retired Indian Administrative Service officer and former chief secretary of Himachal Pradesh, was among the first of the directors to resign, in May last year. He cited the sub-judice nature of the case and declined to comment.

The other independent director, Prem Behl, chairman of trade shows company Exhibitions India Group, also declined comment.

‘Last nail in the coffin’

One school of thought is that SIS stretched itself too thin, bid aggressively, and then realized it could not meet the terms of contracts.

Another is that the company simply couldn’t manage its cash flows. This is a common problem for companies that get most of their business from state-owned entities.

Gupta of ETCO favours the poor cash management argument. “One of the reasons is that the company put in a lot of investments to qualify for the big bids. The working capital situation became so poor because of this. When tenders got cancelled, it was like the last nail in the coffin."

It isn’t clear what happened to the project finance that the company raised from banks, the last being the June 2013 loan from Canara Bank.

Employees alleged in their complaint to the corporate affairs ministry that this money could have been diverted to other companies controlled by Kakkad.

Mint could not independently establish or confirm these claims.

The notes to accounts by SIS accountants pointed out that the company had a high level of related party transactions in 2012-13. Auditor comments on the company’s accounts said it had given interest-free loans of 14 crore to related firms.

Employees claimed funds were transferred in April and May last year from the SIS account to one group company, Power Infocontrol and Services Pvt. Ltd, for no identifiable business reason. One director of this company lives at the same address as Kakkad, filings with the RoC showed.

Isoft Technocare is another company to which transfers had been made without a recorded business reason, former employees Bhavik Patel, Mahesh Solanki and Rahul Deo Singh said in their complaints to various investigative agencies and the finance ministry. Mint has seen copies of the complaints.

Nobody is certain if one or all of these reasons led to the company’s failure.

Lenders to SIS are now looking for ways to complete existing projects to salvage some of their loans and prevent the further encashment of default guarantees, said Gupta of ETCO.

Employees, however, are wary of being cheated of their dues. They say they have been excluded from the recovery process. “You can’t imagine what it is to go without salary for nine-ten months," a former executive had said in September last year. “We tried to accommodate, but we now seem to have ended up paying for our loyalty," he said.

Speaking over the phone from the US in September last year, Pitroda had blamed the poor due diligence capability of India’s banking and government systems for the collapse. “I introduce (innovative people) to key people (in government) but they have to do their own due diligence," he had said.

Kakkad’s brother Samir Kakkad, arrested last year, was later released on bail. “He continues to be out on bail," said Gujarat deputy commissioner of police Virendra Singh Yadav, who is investigating the case.

Last week, the plane carrying Kakkad from Liberia landed in Ahmedabad.

A report in The Times of India quoted Yadav as saying that Kakkad had fled from India to Dubai and then to Ghana and then to Liberia, where he was caught by Interpol.

Shauvik Ghosh in New Delhi and Maulik Pathak in Ahmedabad contributed to this story.

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