New Delhi: The Escorts Fortis deal is in rough weather as the Delhi Development Authority (DDA) has again cancelled the lease of the land allotted to the Escorts Heart Institute and Research Centre EHIRC).

S Jaipal Reddy, urban development minister, a few days ago announced in the Lok Sabha that the EHIRC had violated the terms of allotment of free beds to the extent of 25 per cent. Further he said the institute had illegally merged with a Chandigarh-based society bearing the same name. He said the Chandigarh- based institute is not a non-profit making charitable society.

DDA had initially cancelled the 1982 lease agreement of EHIRC on 6 October 2005 saying that the institute had violated the initial condition for providing 25 per cent beds to the poor after EHIRC changed into a commercial undertaking. The DDA has directed the institute to give up the land and building.

In response EHIRC filed two petitions — a civil suit and another case under the Arbitration and Conciliation Act, 1996 — asking the court to direct the DDA not to dispossess it from the land. The Institute also offered to buy the land at the prevailing land rates.

The trouble began after Escorts group founder H P Nanda''s death, in 2000, when his son Rajan Nanda, the Escorts chairman, introduced a proposal to convert EHIRC (registered as a not-for-profit society) into a corporate entity so that it could tie up with an international partner. The board of the company on which his brother Anil Nanda was vice-chairman and managing director approved the proposal.

However, the law does not allow the conversion of a ''not for profit'' charitable trust into a ''for-profit'' corporate.

EHIRC was ultimately converted into such an entity.

EHIRC was established in 1983-84 under the Societies Registration Act as a charitable society. In 1988, it set up a specialist heart institute with donations from Escorts and its subsidiaries, and Goetze (India), among other organisations.

Over the years, EHIRC emerged as one of India''s leading heart care centres with income and reserves rising significantly.

Since it was a ''not for profit'' company its income was exempt under the Income Tax Act, 1961. Within a decade of its inception, the institute had accumulated reserves of Rs110 crore (in book value), including donations worth Rs15-crore (for which the donors as well as the society had availed an income-tax exemption), and Rs95 crore of tax-free surplus earned over the years.

However, legally the ''not-for-profit'' charitable society could not change its basic objective of charity and nor could it allow its assets or profits to be distributed for non-charitable purposes.

Identity changed
Soon thereafter a new society under the name (Escorts Heart Institute & Research Centre) came to be registered in Chandigarh, with the major difference that this was not a ''not-for-profit'' society.

Since the two societies were registered in different states, they were under the jurisdiction of two different offices of the Registrar of Societies.

Six months after the establishment of the Chandigarh EHIRC, a merger between the Delhi-registered EHIRC and the Chandigarh-based one took place. This resulted in the transfer of the assets and liabilities the Delhi EHIRC, to the Chandigarh EHIRC. Since the Chandigarh-based EHIRC was not a charitable entity, the charitable nature of the Delhi EHIRC got buried in the process. Hence the Chandigarh EHIRC, now owns all the assets and liabilities of the Delhi EHIRC, and is not restricted by the not-for-profit and ''charitable organisation'' clauses.

Following this, on 13 May 2000, the Chandigarh EHIRC applied for registration as a limited liability company with a paid-up share capital of Rs20.06 lakh. Of these two lakh shares (of Rs 10 each) were owned by G B Mathur, treasurer of EHIRC and the remaining 600 shares were owned by Rajan Nanda, Naresh Trehan and other Escorts representatives.

The company issued fresh equity worth Rs180 lakh. Of this 10 per cent equity was in favour of Rajan Nanda''s family-held companies, another 80 per cent was in favour of Escorts and the remaining 10 per cent was transferred in the name of the much venerated heart specialist Dr Trehan.

In actual fact the ownership of EHIRC, including all assets and reserves were acquired for a mere Rs2 crore. The transition from a charitable society to a ''for-profit'' company was made with due approvals of the Registrar of Societies and the Registrar of Companies at various stages.

However, the Delhi EHIRC held reserves to the tune of Rs110 crore. Rajan Nanda reportedly says, "The reserves have been spent on betterment of the hospital and expansion of healthcare services."

This year Escorts chief Rajan Nanda sold the Delhi EHIRC to the Ranbaxy-owned Fortis Group for Rs595 crore.

Brother challenges the deal
After the deal Anil Nanda who held 2.5-per cent equity in the company filed a petition against the sale alleging that the hospital was being sold, against all rules and regulations as it was initially established as a charitable institute.

In September the Court directed Rajan Nanda to maintain status quo and not transfer its ownership till the matter was decided.

A few days ago the Delhi High Court issued a contempt notice to EHIRC and two of its officials on another of Anil Nanda''s petition that accused Rajan Nanda of violating the status quo order with regard to the hospital''s sale to Ranbaxy-promoted Fortis Health Care.

Anil Nanda''s petition has accused EHIRC of "deliberately and willfully" violating the September 30 order of the court. The petition alleges that the defendants have been diluting the assets of EHIRC, Delhi society. This relates to EHIRC issuing a Rs5-crore post dated cheque towards a claim of Rs81.48 crore of the income tax department. The petition even alleged that the defendants had offered Rs100 crore to the DDA to permit them to run the hospital as a commercial enterprise.

Anil Nanda has also sought the setting up of an independent committee appointed by the court to look into the matter saying he wants to ensure that the EHIRC''s assets and funds are not misappropriated and diluted by the management.

EHIRC has been given till December 15 to file its reply.

Fortis Healthcare has been trying to come to an out of court settlement with Delhi Development Authority, and has been working on a settlement formula. The hospital occupies about 33,396-sq yards in New Friends Colony, where the going rate is given as Rs 1.5 lakh a square yard. DDA cancelled the lease on the ground that the land was, in 1982, given at concessional rates when the hospital was run by a charitable trust.

Fortis Healthcare says that its acquisition of EHIRC from Rajan Nanda''s Escorts did not require "prior consent of DDA". It said that the institute was converted from a charitable to a non-charitable trust as per the law and its subsequent conversion to a company also fulfilled legal requirements. It said that legal opinion confirms that there was no transfer of leasehold rights. In neither case was there a transfer of allotted land but only statutory vesting of land by operation of law and hence did not require the prior consent of DDA.

Fortis maintains that it was one of the several bidders to acquire a controlling stake in EHRIC, a legally constituted company duly registered under the company law. The Ranbaxy group company says it had completed the transaction in respect of transfer of monies, shares and management. The company says it has acquired a 90-per cent stake in EHIRC.