Aug 03, 2012 at 12:39pm IST

Why Arvind Rao and OnMobile went down a dark road

On November 23, 2010, Arvind Rao, the 53-year-old co-founder and CEO of OnMobile, bought approximately 6 lakh shares of his company from the open market, representing a little over 1 per cent of the company's total shares. Rao already owned over 10 per cent of the company's shares.

At Rs 277 a share, he had to pony up nearly Rs 16.5 crore to acquire them.

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He still did it because he felt OnMobile, his baby, was severely undervalued. Since its blockbuster IPO in early 2008, OnMobile shares had climbed to over Rs 700 before falling.

Why Arvind Rao and OnMobile went down a dark road

Incubated within Infosys in 2000, OnMobile had arguably the best pedigree in the Indian business world.

Rao felt it was just an aberration—the market hadn't realised the value of his baby. The world was at the cusp of the mobile revolution; billions of people around the world had yet to experience phone services beyond voice; and OnMobile was just getting started on its international journey.

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Incubated within Infosys in 2000, OnMobile had arguably the best pedigree in the Indian business world. In the parochial world of Indian mobile telephony, its customer list covered almost every operator, attesting to the value of its services. With over 100 million subscribers for its services, including for the once wildly popular ringback tune, it had grown rapidly from just over Rs 2 crore in income in 2002 to over Rs 500 crore by 2010. At 20-plus per cent, its profit margins were a source of envy and puzzlement to many, given the razor thin margins prevalent in the mobile value-added services (VAS) industry. Under Rao, OnMobile had gone international, generating nearly a third of its revenue from over 50 other countries.

So he went ahead and borrowed money to buy the shares, thinking nothing of the interest it entailed or the fact that he'd need to put up nearly half his existing shareholding as collateral.

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That would turn out to be the worst decision he ever made.

OnMobile's shares continued to fall from those levels, while Rao's interest payments ballooned.

Consumed by the downward spiral of his baby and his worsening personal debt situation, his characteristic energy and enthusiasm waned, visible to most of his senior colleagues.

In an attempt to provide a floor to OnMobile's share price, Rao managed to push through a controversial share buyback plan totalling Rs 25 crore last year, despite serious reservations from other board members.

Motivated by OnMobile's growth all these years, he had never paid much attention to his salary, most of which went towards the monthly rental on his sea-facing apartment in Mumbai and his BMW 7-Series, both paid directly by the company.

He requested the board for a significant salary increase, arguing (rightly) that his Rs 1 crore salary was substantially below what the market would pay the CEO of a Rs 600-plus crore international company. But they would have none of it.

After that, he requested a personal loan, which too they denied.

Finally, left with no option—at least the way he saw it—Rao took the 'shortcut'. Just that once.

The Dominoes

In November 2011 OnMobile's finance department received a set of bills from a vendor they hadn't dealt with before. The bills amounted to nearly Rs 12 crore—a large enough sum to set alarm bells ringing. They had been forwarded directly by Arvind Rao.

Rajesh Moorti, the CFO who had joined the company in 2006 and played a critical role in its successful 2008 IPO, had resigned a few weeks earlier. The company's board hadn't made any serious efforts to ascertain why.

Now finance departments are adept at spotting irregularities, so the bills duly got flagged.

According to sources who were directly privy to what followed but chose to remain anonymous due to the nature of the incidents, the matter escalated to the attention of Mouli Raman, the CTO and co-founder.

On December 8, Rao was inexplicably divested of his role as chairman of the board. He continued to remain CEO and MD even as HH Haight, the 78-year-old head of Argo Global Capital, a venture capital fund that was OnMobile's largest shareholder, became the new chairman.

The bills would remain stuck for another two weeks till Moorti left; they then got cleared.

But the dominoes had already started falling.

Two long-time independent board members—Sridhar Iyengar and JR Varma—resigned on January 24 and 25, respectively, a few days short of a scheduled board meeting on January 28.

Iyengar, a former CEO of audit firm KPMG India, headed the compensation committee while Varma, a highly regarded professor of finance at IIM Ahmedabad and a former full-time member of SEBI, headed the audit committee.

No reasons were given for their sudden and near-synchronised resignations.