India Analyst Is Jailed After Negative Report Questioning Corporate Governance and Accounting: Rare Arrest Seen Causing a Chill on Market Coverage

India Analyst Is Jailed After Negative Report: Rare Arrest Seen Causing a Chill on Market Coverage


Dec. 11, 2014 11:42 p.m. ET

GURGAON, India—Complaints filed by one of India’s biggest property and financial-services groups after a negative report about it more than two years ago have landed the report’s co-author, accountant Nitin Mangal, in jail.

The group, Indiabulls , says the report, which questioned its corporate governance and accounting, was full of lies and was used for extortion purposes. Mr. Mangal’s lawyer says the report was based on public information, was accurate and wasn’t used to try to scare money out of anyone.

The day the report was made publicly available, Aug. 8, 2012, Indiabulls filed criminal police complaints in two cities, Mumbai and Gurgaon, a suburb of New Delhi. During the next several months, Mr. Mangal was interviewed by the police extensively and asked to hand over his laptop and hard drive.

In early 2013, a Mumbai court granted Mr. Mangal anticipatory bail, or protection from arrest, on the allegations in the police complaint–which includes extortion, criminal intimidation and defamation—and the investigation appeared to grind to a halt.

But on Nov. 25 this year, Mr. Mangal was arrested. A court granted him bail on Thursday and he is expected to be released on Friday, after more than two weeks in custody.

The Thursday move came after Indiabulls dropped its opposition to his release while police determine whether they will file charges in court. In India, people can be arrested and jailed based on police complaints that are considered serious, even if no charges have been filed.

If charged and convicted, Mr. Mangal faces a maximum sentence of 10 years in jail.

“Not only am I innocent but I’m being held here to pressure me to make [confessions] that are not true, which I absolutely refuse to do,” Mr. Mangal said in an interview last week in the visitors room of the Bhondsi jail in Gurgaon.

Human-rights advocates and an investor-advocacy group have denounced the arrest of Mr. Mangal, saying it could have a chilling effect on coverage of India’s stock market, which some investor groups say needs more scrutiny.

“To put someone behind bars for writing a research report is excessive,” regardless of whether a report turns out to be accurate or not, said Amit Tandon, managing director of Institutional Investor Advisory Services, a Mumbai proxy advisory firm for institutional investors.

It is extremely rare for an analyst to be thrown in jail over a negative report, though it is not unheard of for companies or governments around the world to turn to courts or police to combat critical or inaccurate reports from market researchers.

This year, a Shanghai court convicted a Briton, Peter Humphrey, and his wife-and-partner, a naturalized U.S. citizen, of profiting from personal information that they said was prepared mostly for multinational corporate clients. The couple said they had hired third parties to obtain the information and didn’t know it was illegal.

And some fraud investigators in China whose work aided short sellers hoping to profit on falling share prices say they have faced police pressure following critical reports about companies. In one case, a Canadian investigator says he spent more than a year in a Chinese jail following his investigation work for such a report.

Mr. Mangal, 34 years old, co-wrote the 2012 report while employed by Toronto-based corporate-analysis firm Veritas Investment Research Corp. with the firm’s head of research, Indian native Neeraj Monga.

Messrs. Mangal and Monga had already put out critical reports on several other big Indian names, including Kingfisher Airlines Ltd. , India’s biggest property company DLFLtd. , and phone company Reliance Communications Ltd.

Kingfisher denounced the reports; it has since stopped flying amid losses and mounting debt. Shares of Reliance, which called the report “mala fide in intent” and wrong, have risen about 40% since it was published. DLF, which called the report “presumptive and mischievous,” said it adhered to the highest standards, but has since seen its shares fall 27% and is fighting a three-year ban on raising money in the capital markets for allegedly failing to make adequate disclosures.

I’m being held here to pressure me to make [confessions] that are not true.

—Nitin Mangal

In India, where research reports rarely question companies’ management, the Veritas reports made headlines and several triggered brief selloffs of shares.

The 105-page report on Indiabulls—a $3 billion conglomerate, in which foreign institutional investors including J.P. Morgan and HSBC own 40%—was entitled “Bilking India.” It said the disclosures of two companies in the group were unreliable, and the sole purpose of Indiabulls Real Estate Ltd. was to “bilk institutional investors and retail investors for the benefit of select insiders.”

In its investigation of the report, police cited an email exchange in which Mr. Monga told a potential subscriber at a hedge fund with a stake in Indiabulls that he could delay the public release of his report if the hedge fund paid a $40,000 subscription fee.

Mr. Monga declined to comment but has denied wrongdoing in legal filings. He remains in Canada and hasn’t submitted to questioning. Mr. Mangal stopped working for Veritas earlier this year and is now working on various projects on his own in India.

Indiabulls said the email proves that Veritas was trying to get money in exchange for suppression of a negative report. Veritas denied the accusation, saying it offered only to delay by one day the broader public release of a report it had already handed other subscribers if the potential new subscriber wanted to sign up. It said the rate was in line with its regular subscription rates.

Veritas closed shop in India and in August this year sued Indiabulls for defamation, seeking $9.6 million in court in Toronto. Indiabulls obtained a stay order in New Delhi.

Soon after the Veritas suit was filed, Gurgaon police traveled 500 miles to Mr. Mangal’s home in Indore in the central Indian state of Madhya Pradesh to try to arrest him. The police didn’t find Mr. Mangal at home but he reported to a magistrate’s court in Gurgaon a few days later and surrendered.

Mr. Mangal’s lawyer, Amit Dube, said his client was arrested and jailed to intimidate him and Veritas.

“Standing up against any criminal offense is not intimidation,” said Indiabulls. The company denied playing any role in Mr. Mangal’s recent arrest and jailing.

Varun Kumar, the investigating officer in Gurgaon, said Mr. Mangal was arrested “to try to find the truth” in the complaint.

In the month after the report, Indiabulls stock plummeted nearly 20% but since then, the stock price has risen by nearly 100%, surpassing the benchmark Sensex index’s 60% increase during that time.

The robust rise of Indiabulls shares proves Veritas’s report was wrong, said Gagan Banga, managing director of Indiabulls Housing Finance Ltd., the group’s flagship company.

—James Areddy in Shanghai and Debi Nayak in Mumbai contributed to this article.



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