Gurugram: On November 20, banks that had loaned money to CG Power and Industrial Solutions Limited (formerly Crompton Greaves Limited), which used to be headed by Gautam Thapar, agreed to a one-time loan restructuring programme paving the way for the Murugappa group to take over the well-known power equipment manufacturer.
Once among India’s high-profile, jet-setting corporate captains, why is Thapar a beleaguered man today? He has been ousted from the company he once headed. He cannot leave the country. Why? What happened? Did a bunch of powerful players conspire to remove him as chairman of CG Power?
How did this multinational company that produces a range of electrical equipment and which, until not very long ago, also used to manufacture and sell popular domestic products like bulbs and fans, come to such a sorry pass?
In the debt loan restructuring process, a consortium of 14 major banks has taken a “haircut” of Rs 1,100 crore in CG Power that had a total debt of Rs 2,161 crore. In banking parlance, a haircut refers to a reduction applied to the value of an asset––in this instance, close to half.
A few months earlier, in August, Tube Investments India (TII) Limited, which is part of the Chennai-headquartered Murugappa group, agreed to invest Rs 700 crore for a 56.61% stake in CG Power. Of this amount, the company’s lenders would receive an upfront payment of Rs 650 crore, part of the remaining debt would be converted into debentures and CG Power’s property would be sold.
SUDDEN SACKING
After a tumultuous meeting of the company’s board of directors on August 29, 2019, it was formally announced at 3.00 a.m the following morning that Gautam Thapar had been removed as chairman of CG Power. Was he sacked because major financial irregularities were unearthed by the company board? Or did representatives of entities associated with prominent corporate players, such as private equity bigwig KKR India, the engineering giant Larsen & Toubro and a firm set up by the telecommunications tycoon Sunil Bharti Mittal (head of Bharti Airtel), act “in concert” to oust Thapar from his company with the covert intention of controlling it?
What follows is a detailed report of what took place behind the scenes in CG Power based on documents, extensive interviews and electronic mail messages exchanged with over 20 informed individuals, most of whom spoke to us on condition of anonymity. Our investigation lasted more than two months.
Why did most of those we interacted with communicate with us on the specific condition that they not be named? Reason: the allegations and counter-allegations relating to financial fraud, siphoning of public funds and a corporate “coup” are currently being investigated by the country’s regulator of the financial markets, the Securities and Exchange Board of India (SEBI), the Serious Fraud Investigation Office (SFIO) in the Union Ministry of Corporate Affairs (MCA) and the Enforcement Directorate.
ANNUAL GENERAL MEETING OF CG POWER
In the annual general meeting (AGM) of CG Power held on October 19, 2020, the company’s shareholders declassified Thapar as a “promoter.” Thapar and his promoter group firms currently hold a negligible quantity of shares in the company.
Ashish Kumar Guha is the current chairman of CG Power. Sudhir Mathur, who became a whole-time executive director of the company in May 2019, has been reappointed in the position. We contacted both of them but they declined to answer our questions.
The development at the AGM took place less than a week after the Competition Commission of India (CCI) approved the offer made by TII Limited to invest Rs 700 crore in the company. (The CCI is a regulatory body in the Union government that is meant to promote and sustain competition, eliminate practices that have an adverse effect on competition, protect interests of consumers and ensure freedom of trade in markets.)
KEY PLAYERS
Here are brief profiles of some of the dramatis personae in the CG Power story.
- The 120-year-old, Rs 38,000-crore Murugappa group is a widely diversified multinational conglomerate including companies such as Carborundum Universal, Cholamandalam Financial Holdings, Cholamandalam Investment and Finance Company, Cholamandalam MS General Insurance Company, E.I.D. Parry (India), Shanthi Gears, Wendt (India), besides TII. The group claims market leadership in abrasives, auto components, transmission systems, bicycles, sugar, fertilisers, farm inputs, plantations and so on.
- CG Power provides “end-to-end solutions” for utilising electric power and is engaged in the manufacture and sale of transformers, switchgear, circuit breakers, network protection and control gear, and power automation products, among other equipment. It is a supplier of electrical machinery used by the Indian Railways. It had lit up the headquarters of the Brihanmumbai Municipal Corporation. It used to be a flagship company of the Thapar-led Avantha group, a multinational conglomerate that includes companies such as Ballarpur Industries Limited (BILT), BILT Graphic Paper Products Limited (BGPPL) and Avantha Power. Avantha Holdings Limited (AHL) is the investment holding company of the group that had a revenue of $2.5 billion (around Rs 17,500 crore) in the financial year (FY) that ended on March 31, 2019.
- In the course of 2015 and 2016, the Avantha group hived off or demerged and then sold all its shares in Crompton Greaves Consumer Electricals Limited to international private equity firm Advent International (based in the US) and Temasek Holdings (owned by the Singapore government) for Rs 2,000 crore. Crompton Greaves, arguably the best-known venture of the Avantha group, produces and sells a host of household electrical goods. How this demerger impacted the group’s fortunes and the role of KKR India in it, will be detailed later.
- Larsen & Toubro (L&T) is one of India’s leading engineering, construction and financial services conglomerates. Founded by two Danish engineers who took refuge in India, L&T has a presence in more than 30 countries, in infrastructure sectors such as hydrocarbons and power, in process industries and in defence equipment. The L&T group, with an annual turnover in excess of Rs 1,47,000 crore, has over 180 subsidiaries, joint ventures and associate entities.
- Sunil Bharti Mittal has been listed as India’s sixth richest man by Forbes with a net worth of $11.6 billion. He heads a telecom conglomerate (Bharti Airtel) that has a presence in 18 countries in Asia and Africa. His group also has interests in insurance, real estate, education, malls, hospitality and agri-businesses. Airtel is India’s second-largest telecom company. In June 2016, Mittal became chairman of the International Chamber of Commerce.
- An associate of the US-based international private equity firm Kohlberg Kravis Roberts, KKR India Financial Services Limited is currently registered with the Reserve Bank of India as a “non-deposit taking, systemically important” non-banking financial company (NBFC).
LOAN RESTRUCTURING
According to stock exchange filings by CG Power and TII, the former company’s lenders have agreed to a one-time loan restructuring, paving the way for its takeover by the Murugappa group. The deal to restructure the loan was finalised on November 20 subject to “satisfactory fulfilment of conditions” and precedents contained in a securities subscription agreement, that included a one-time settlement by banks, restructuring of funded facilities, conversion of debt into various financial instruments and sale of property.
TII aims to make CG Power debt-free over the next five years. S Vellayan, TII’s managing director told The Hindu earlier that CG Power had a total debt of Rs 2,161 crore, out of which TII benefited from a haircut of Rs 1,100 crore of original debt as on March 2020. CG Power has a restructured term loan of Rs 650 crore, “very low-coupon” NCDs (non-convertible debentures) of Rs 200 crore and a Rs 150 crore “balance-sheet item” to be adjusted against the sale of company property. Vellayan added that as acquirers, TII and the Murugappa group were looking at both reducing CG Power’s debt and infusing equity capital into the company.
MAJOR FINANCIAL SCAM?
It was reported in August 2019 that CG Power was involved in a financial scandal involving banks and NBFCs such as YES Bank, Standard Chartered Bank, IndusInd Bank and Aditya Birla Finance Limited. The story subsequently became murkier. The company’s board of directors stated that it discovered “significant accounting irregularities,” including understatement of liabilities such as advances to related parties and unrelated parties to the extent of Rs 1,990 crore and Rs 2,806 crore, respectively.
To examine allegations of wrongful diversion and siphoning of funds, the board of CG Power and its “risk and audit committee” appointed a law firm, Vaish Associates, which, in turn, engaged the services of well-known financial consultancy bigwig Deloitte, to assist it. On August 26, 2019, the company’s board submitted a copy of a preliminary investigative report by Vaish Associates along with its impact on CG Power’s financial statements to the country’s statutory regulator of financial markets, SEBI.
NewsClick had earlier reported on these developments.
On orders from SEBI, the Bombay Stock Exchange (BSE) initiated a forensic audit by MSA Probe Consulting Private Limited. The audit report came to the conclusion that then members of the board of directors of CG Power were aware of the irregularities and had remained mum on Thapar’s role. Some of these board members, who spoke to the writers of this article both on- and off-the-record, denied these allegations.
BOARDROOM DRAMA
There was high drama three days after the preliminary report by Vaish Associates was given to SEBI. On August 29, Thapar was sacked by the board of CG Power. Sudhir Mathur had passed the resolution to remove Thapar as the promoter of the company and most of the board members obliged. Ashish Guha, Omkar Goswami, Narayan K Seshadri, J Balakrishnan, all of whom were directors at that time, supported the resolution. The then chairman Thapar and directors K N Neelkant and Ramni Nirula said they would not be part of the resolution. They abstained from voting. The group supporting Thapar, including himself, were in a minority.
CG Power stated in a regular filing: “In cognisance of the current situation being faced by the company and the recent developments, including disclosures dated August 19, 2019, made by the company, the board of directors… passed by majority consent, have resolved to remove Gautam Thapar as the Chairman of the board with immediate effect.”
The following month, SEBI passed an interim order barring Thapar from participating in capital market transactions and similar restrictions were imposed on two former directors of CG Power, Madhav Acharya and B Hariharan, as well as the company’s former Chief Financial Officer (CFO), V R Venkatesh. The Securities Appellate Tribunal (SAT) later upheld SEBI’s order.
SEBI also restrained three entities in the Thapar-led Avantha group from diverting their money or disposing of their assets and directed CG Power to take necessary steps to recover the amount due to it and take legal action to safeguard the interests of investors. In March 2020, SEBI refused to lift the ban it had imposed on Thapar, Acharya, Hariharan and Venkatesh. Reliable sources say they have appealed the decision in SAT.
WHAT TRANSPIRED, ACCORDING TO GOSWAMI
When contacted, former director of CG Power, Omkar Goswami, stated the following to one of the writers of this article:
“On April 24, 2019, the board of directors of CG Power engaged Vaish Associates as per the recommendations of the (company’s) ‘risk and audit committee’ (RAC) which was subsequently approved by the board. An addendum to increase the scope of the work was made on June 20 that year. The reason why the board chose a legal entity to look at the transactions was on account of the fact that shortly before April 24, 2019, Mr (K N) Neelkant, the then CEO (chief executive officer) of the company made us aware of a series of transactions that were carried out with YES Bank that were not known to either the company’s Risk and Audit committee or the board.
(A reliable source told the writers of this article that a top official of the finance department of CG Power acted like a whistle-blower and alerted Neelkant. Another source close to Thapar did not concur with Goswami’s version of events, but more of that later.)
Goswami added:
“These transactions involved borrowings of the Avantha group under the control of Mr Gautam Thapar. These borrowings, which had nothing whatsoever to do with CG Power, were being guaranteed by a series of cheques from CG Power that were signed by the then CFO Mr Venkatesh, who was subsequently fired by the board, together with Mr Hariharan, the group CFO of Avantha and a non-executive board member of CG Power.
“Five such cheques were signed, one every three months. These cheques were, in effect, guarantees or ‘comfort’ offered to YES Bank against loans that the Avantha group had taken from the bank for its own purposes, but had been wrongly guaranteed for by CG Power. Neither the RAC nor the board were informed of this; nor were any approvals sought as it ought to have under CG Power’s rules of procedure.
“This came to the notice of the company’s RAC and the board. How so? Because the then CFO Mr Venkatesh was on home leave in Belgium, where he lived and was a citizen of. Thus, when the cheque came up for renewal for the sixth time, Mr Venkatesh was absent. So, it was brought to the then CEO Mr Neelkant, who knew nothing of this transaction.
“This was a large cheque of Rs 210 crore. The then CEO Mr Neelkant did not know anything about it. He put it up before the RAC and the board. By then, Mr Hariharan was no longer on the board and the only other signatory of the cheque, Mr Venkatesh, was on leave. The group CEO Mr Neelkant had no idea what was going on. This was the trigger for the RAC and the board to initiate investigations through an independent legal firm.”
INGOVERN REPORT RAISES NEW QUESTIONS
A report on the trials and tribulations in CG Power was released on October 16, 2020, by InGovern Research Services Private Limited, which describes itself as a “SEBI-registered leading independent governance analysis firm assisting institutional investors that have financial or reputation exposure to public companies.” The report includes observations on the forensic audit report by MSA Probe Private Consulting Limited on CG Power between the financial year ended March 31, 2015 (FY15) and FY20. The report was released three days before the AGM of CG Power took place on October 19.
Shriram Subramanian, founder and managing director of InGovern, told NewsClick: “Since the company was going through a moment of transition, we thought we would alert minority shareholders of what was happening in the company.” However, he went on to add that what took place in the AGM was a “rather tame affair.”
A person who was present at the meeting concurred with Subramanian and told us that “all the resolutions were passed by a comfortable majority.”
As already stated, after SEBI asked BSE to commission an independent forensic audit on September 19, 2019, the stock exchange engaged the services of MSA Probe Consulting whose report was submitted to the regulatory authority on March 18 this year. This report was, however, sent to CG Power only on September 4.
The forensic audit investigated allegations of “manipulation” of books of accounts, “misrepresentation” of financial statements, “siphoning” of company funds, among other irregularities. The InGovern report points out that the “audit brings to (the) fore responses to many questions raised by InGovern, including (the) role of directors, promoters, KMP (key management personnel), (a) NBFC (non-banking financial company), banks and auditors.”
The report added: “The forensic audit investigation report overall uncovers that all transactions with promoter entities, including Avantha Holdings Limited, were done with (the) knowledge of the Board, most directors including some independent directors, key management personnel, including the legal head and former managing director and chief executive. Some of these transactions were undertaken to repay loans from banks by the holding company and other promoter group companies.”
The InGovern report also highlighted the differences in the findings of the report by Vaish Associates and MSA Probe. It stated:
“The findings in the Forensic Audit Report are at divergence with the report by Vaish Associates, which did not delve on the evidences of the past four years. The forensic audit report clearly substantiates with email and paper evidences like Board minutes, correspondence by KMP with Board members and/or banks and NBFCs that all transactions were approved by the Board, in some cases explicitly structured by the same banks or NBFCs. Funds were moved to promoter group entities and onwards to banks for clearing their overdues. The Board and independent directors need to be questioned on why they withheld all evidence and information from Vaish Associates that resulted in the first disclosure to stock exchange on August 19, 2019.”
The Mumbai bench of the National Company Law Tribunal (NCLT) had in January termed the report by Vaish Associates as “bogus” and said that it will only accept a report on CG if it is conducted independently or by a government agency.
The forensic audit report by both Vaish Associates/Deloitte and MSA Probe examined the following nine transactions:
- Aditya Birla Finance Limited –– an advance received by CG Power subsidiary Acton against sale of land at Nashik and Kanjurmarg in Maharashtra;
- Approval of a loan by Aditya Birla Finance Limited to Blue Garden Estate Private Limited;
- Issue of post-dated cheques for Rs 210 crore by CG Power to YES Bank against a loan given to Avantha Holdings Limited;
- Borrowings of Euro 44 Million by CG Singapore from Standard Chartered Bank;
- A foreign currency term loan of US$ 40 million to CG Middle East from IndusInd Bank in India and guaranteed by CG IBV;
- Outstanding advances to vendors of CG Singapore;
- Outstanding advances to vendors of CG Middle East;
- Receivable trade transactions worth Rs 108 crore; and
- A deposit of Rs 229 crore taken from Avantha Holdings Limited through fixed deposits created at IndusInd Bank.
(To be continued)
