Emperor’ New Clothes!

Stitching a Woolly, Wily, Wanton Scheme!

A company which is on the verge of scoring a century, possessing a brand that is a household name, that became noted for exiting its former chairman, who also acted as its brand ambassador, due to a family dispute a la a coup in the Mughal or the Mauryan court, has often taunted its investors with contentious corporate decisions!   

With a bank debt in excess of Rs 2000cr and having seen a major dent in the profits due to asset write offs in the last two years exceeding Rs1000cr, the signs of some crafty scheme coming was in the air.

And the company has not disappointed!

The company has circulated a postal ballot notice dated 9^th May2023 seeking the approval to borrow Rs 2450cr from a related party by issue of debentures. The story of how the related party found the amount to lend will unfold below.

Raymond Limited (RL) is publicly listed in which the promoters (Gautam Hari Singhania and family) own 49.11%. The net worth of RL as on 31March 2023 was Rs2252.49cr

RL holds 47.66% in an entity named Raymond Global Consumer Trading Ltd (RG). The promoters hold directly a little over 50% and the rest is accounted by small holders.  

RG with a net worth below Rs 10cr has little active business operations but holds 100% of the equity of another entity named Raymond Consumer Care Ltd (RCCL). The net worth of RCCL as on 31 March 2023 was Rs 140.62cr.

It is from RCCL that RL seeks to borrow the sum of Rs 2450cr as given in the postal ballot notice.

The witchcraft behind the said amount materializing in RCCL may soon surface in Netflix as a movie!

On 28^th April the media reported that the Raymond group was selling its consumer care business to Godrej group for Rs 2825cr. Piecing the first part of the puzzle, it is reasonable to assume that it was RCCL that sold the business and, in the process, has garnered the Rs 2825cr which it is ready to lend to RL.

But RCCL accounts as on 31March 2023 discloses no such valuable business or asset(except stock and debtors) and its small turnover is constituted by  trading in goods made by a third party.

So, some device must be on the anvil to create a saleable asset in RCCL.    

That device happens to be a composite scheme of arrangement involving RL, RCCL and RG.

The scheme has 1^st April 2023 as its appointed date and involves the demerger of a clutch of business owned by RL (defined as life style business) into RCCL and merging RG into RCCL.

As a result of this RCCL would house the life style business hitherto carried on by RL. The demerger would be accomplished by RCCL issuing shares to all the shareholders of RL in the proportion of 4 shares of RCCL for every 5 shares held in RL.

The second limb of the scheme envisages RG merging into RCCL. As explained earlier RG is an investment arm and currently holds 100% of RCCL. However, the shares of RG are held both by RL and the promoters.

The scheme is structured in a manner that the shares held by RL in RG is defined as a component of the life style business under demerger. As RG itself is extinguished when it merges into RCCL the shareholding of RL in RG stands absorbed in RCCL and gets finally extinguished.

Because of the above quirk in the structure, the effective holding of the promoters in RCCL post the implementation of the scheme would be 54.88% as against their holding of 49.11% in RL.

In getting to this lopsided holding structure the two valuers appointed for the task of valuing the business (M/s KPMG and M/s BDO) have brought their share of expertise by adopting an inexplicable valuation model.

The demerged business in the hands of the transferor (RL), has been valued by the composite weighted average method of assets, income and market multiple.  However, in the valuation of RCCL , only asset basis has been adopted. As explained already, RCCL & RG have no major business in their fold and the substratum is constituted only by the business being transferred under the proposed scheme.

The two sides of the same coin have been valued differently!

A fact that may not fail to arouse the curiosity of accountants is that the actual increase in the net worth of RCCL post the scheme is only Rs 8cr and the reduction in the net worth of RL is just Rs5cr. This is difficult to reconcile with the notion that the demerger involved a very significant business with assets.

While the company has submitted a nearly 1000-page document to BSE for seeking its approval, the most salient information, being the details and the values of the assets/business transferred (demerged) is not found!

The valuation report was issued on 27^th April 2023, the audit committee, committee of independent directors and the board of all the companies approved the scheme on the same day. In fact, the annual accounts for RL were approved only on 9^th May 2023, though this has no bearing on the valuers doing their report earlier as they have gone by convenience than convention!

With even the betrothal pending, the child was delivered on 27^th April, as Godrej bought the business for Rs2825 cr on 27^th April 2023 itself and the money credited to RCCL’ account.

It shall pique the curiosity of any worthy professional to figure out the type of documents that supported the transaction given that RCCL has sold assets yet to reach its domain. According to the scheme documents it is the transferor (RL) who has the right to act as a trustee for the transferee, while the opposite seems the reality.

Even if the professionals fail to display eagerness, GST and tax officers may not!

Many questions arise on governance in the present case. The minutes of the audit committee, committee of IDs or of the  board approving the scheme has not even a whisper about the sale of the consumer care portfolio which had already taken place on the same day when the scheme was approved.

The big question is how could RCCL decide to sell the assets without the demerger being completed and the new shareholders (of RL) being issued the shares as per the swap ratio fixed. RCCL at this juncture has just a single shareholder, RG, and carrying out the sale with only its approval is making a mockery of the law.

The act of selling a part of the assets that currently belong to RL without the scrutiny of the public shareholders is a gross violation of law and the spirit of corporate governance.

In other words, the RL public shareholders have been ousted from their locus on the transaction in the guise that the sale was done by RCCL, and at the same time their right to get the RCCL shares and become members is to await the completion of the scheme process and hence they get no right to vote on the resolution as RCCL shareholders!

The transaction structure has resulted in the cash that should have directly come into RL being trapped in another entity which has a higher promoter holding with an ability to progressively squeeze out the public

RL would have only real estate business after the demerger.

Just over 14months back, the board of RL wished to do exactly the opposite. It proposed a scheme to demerge the real estate business to Raymond Lifestyle Limited! The appointed date being 1^st April 2022.  That scheme pending in NCLT has been withdrawn on 27^th April 2023 when the current scheme was approved.

Why did they reverse the plan? Isn’t the board obliged to explain the rationale for the change especially as all the cash goes to another entity with a higher promoter holding?

On its part Godrej has disclosed the acquisition in its announcement for the Q4 results dated 10^th May 2023 as below-

Subsequent to 31st March, 2023, the Group has acquired consumer care business for a consideration of Rs 2,825 crores from Raymonds Consumer Care Limited. No impact of the said acquisition has been given in these financial results as this is a non-adjusting event.

The article may get unwieldy discussing the questions that arise from a governance angle on Godrej’ part, but watch out for updates as more details come into the public domain on this transaction!