Rediff Sued

On April 10, New York-based law firms Lovell & Stewart and Sirota &

Sirota filed a class action lawsuit (Suresh Khanna vs. Rediff.com India) on

behalf of all those who purchased Rediff’s 4.6 million American Depository

Shares between June 14, 2000 and April 4, 2001. The complaint, filed against the

company’s directors and lead underwrites of the issue, alleged material

misrepresentations and omissions in the prospectus that Rediff filed at the

federal Stock Exchange Commission for its IPO on June 14, 2000–violations of

several federal securities laws. By April 25, two more such suits had been filed

against the company, the first Indian dot-com to list at a US bourse.

The consequence of the misrepresentations and omissions, the suit alleges:

artificial inflation of the ADS. The share which listed originally at $12 was

traded above $25 before plunging to its present lows of under $5. The complaint

seeks to recover losses suffered by purchasers of the shares during this period.

The complaint alleges that Rediff failed to disclose that many significant

advertising contracts would terminate by December 2000; that it failed to

disclose that its Internet business had been experiencing difficulty with its

e-mail software; that it failed to disclose that one of its directors, Richard

Li, had falsely claimed that he was a graduate of Stanford University, that the

company, without any prior disclosure to the investing public, invested millions

of dollars in securities of two Indian Internet companies. And finally, that it

omitted to disclose that any mergers would involve a substantial drain of IPO

proceeds which would increase Rediff’s "burn rate" for corporate

funds and accelerate the need for additional financing.

The first suit came just ten days before Rediff announced it fourth quarter

results, where it has narrowed its loss from $2.9 million in quarter ended March

31, 2000 to $2.6 million in the last quarter. Later, it also announced the

completion of the acquisition of New York-based India Abroad Publications–its

third acquisition in the US–for which Rediff paid $10 million dollars. In

March it had completed acquisition of another US-based company, Value

Communications and its 20% equity stake in Apnaloan.com.

Rediff’s chairman Ajit Balakrishnan has been quoted on various occasions

since his company went public that it had enough money "to last up to a

decade". From the $63 million it had raised in the June IPO, it had $57

million in January 2001. And the burn rate, which analysts use to measure a

loss-making company’s ability to last, had in fact reduced from $1 million a

month to $1.5 million per quarter.

One of the suits alleges that a statement made by Balakrishnan in October on

the company anticipating "strong growth…indicating strong

fundamentals" was wrong: the revenues for the quarter ended March 31 had

increased 113% to $1.5 million, its revenue for the fiscal increasing 193% to

$5.6 million.

The errors and omissions may have a serious effect on Rediff if the

plaintiffs win the case. The SEC is known to be tough on its regulations,

compared to India’s own regulator SEBI which may let off defaulters with petty

fines.

Rediff has dismissed the complaint as being without merit and has retained

legal counsel to defend the cases "vigorously".

Bijesh Kamath in Mumbai