I'm Not Loving It: Big Mac's strange Indian franchisee

The strange goings-on in Westlife development and its stunning price rise does not seem to attract SEBI's attention. Why?

Why does the Securities & Exchange Board of India (SEBI) need more powers when it does nothing about the most blatant manipulation? Take the case of Westlife Development of the BL Jatia group, which now holds the lucrative franchise of American fast food giant McDonald’s in south and west India. In July 2013, the Jatias turned Hardcastle Restaurants, into a direct subsidiary of Westlife (earlier called Dhanaprayog Investments) which was a family-owned but listed shell company. But not before the price of Westlife had been ramped from under Rs10 to Rs183. Moneylife first wrote about the ramp up in June 2010. No action from the regulator.

In July 2013, we wrote about the continued astronomical rise in Westlife’s stock price and pointed out that it had just 64 shareholders and the price hits the upper circuit with just two to three shares being traded everyday. SEBI officials follow our writing; so it is hard to believe they haven’t noticed Westlife’s vertical price rise. Moneylife also pointed out that the company seemed like a habitual offender and had been pulled up twice earlier for failing to make proper disclosures. We asked why Westlife was not transferred to the illiquid stocks that come under the call auction regulation. Is one big inter-se transfer of shares among promoters per quarter enough to keep the stock outside this regulation? Nothing has changed.

In July, we also pointed out that 12 shareholders held 75% of the equity in the company. The remaining 25%, ought to be public shareholding, but four shareholders own 24.17%, according to company disclosures of March 2013—they are Cyprus-based New Leaina Investments Ltd (with a 4.95% stake), Mauritius-based India Discovery Funds (which holds 1.06%) and Rajiv Himatsingka, an NRI, who holds 15.70% and is apparently not a promoter.
The remaining 48 persons hold 0.7% of the equity. On most days, one share is traded and it hits the upper circuit. A 1:1 bonus has apparently satisfied the 25% public shareholding norm, making a mockery of that regulation.

After this ramp up, on 23rd July, the company sold 54 lakh shares (3.47%) for Rs180 crore to Arisaig, a foreign portfolio investor which means that Westlife is now valued at Rs5,000 crore. This is not the end of the story. The giant McDonald’s, say sources, has mysteriously diluted its 50% shareholding in Hardcastle Restaurants. Has it? While the regulator refuses to investigate, keep reading Moneylife for answers.

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COMMENTS

Veeresh Malik

4 years ago

Something even more strange - It is McDonalds in the US in the business of "food service retail" and it is MacDonalds in India in the business of "quick service restaurants". In addition, the linkage between McDonalds in the US and Macdonalds in India goes cold as far as EDGAR filings for McDonald are concerned in the US.

Varun Sethi

4 years ago

I agree with the author and fellow readers about malpractices like circular trading, insider's trading, non compliance with minimum shareholding norms etc. But the consolidated valuation of the consolidated entity viz westlife + hardcastle would essentially be that of harcastle as it houses the profitable operating entity (MCD franchisee) and it does not matter if it does ONLY MCD as of now. They might add up more .sr businesses in future.

If the valuation of hardcacastle is Infact the prevailing price or the price paid by the new investor Arisaig, why is someone doubting the valuation.?? It is OK from a legal standpoint also as the new investor paid the fair value per foreign investment norms.

This practice is called reverse merger and is quite prevalent globally not just India where the promoters in unlisted entity buys the public listed shell entity and unlisted entity then merges or is made the subsidiary of the listed valuation. . It is an indirect method of getting listed. Not really sure bout the corporate structure post MCD'S dilution or Arisaig investment though.

AK

4 years ago

It's hard to believe that McDonald's corp is not aware of this given these guys are a huge franchisee (all of west and south India). Won't be surprised if McD corp even has a role to play in this structure.
Going through the "parent" company (Westlife) website's about page (excerpt and link pasted below) - they don't even say what they do other than run McDonalds.. so why exactly is that a subsidiary?? At the least this calls for a thorough audit of Westlife and ideally some investigation into the practices of the corp globally as well.

http://www.westlife.co.in/web/our_compan...

"WestLife Development Pvt. Ltd. (WDL), a diversified group, is focused on building and developing India’s Quick Service Restaurant (QSR) industry through its subsidiary Hardcastle Restaurants Pvt. Ltd. (HRPL), which operates McDonald’s restaurant in west and south India. "

Saurav

4 years ago

A clear case of insider trading and a gross violation of the public shareholding norms when one looks at the shareholding and the trading patterns. Hope McDonald's USA takes notice and investigates if it does not want to be seen engaging with an unethical company and take a hit on its brand image which is more important than any franchisee going to this extent to rake in money. It is widely known that in the case of Walmart India, the principals have ensured strict action against anyone found engaged in corruption. Hope this brand too follows suit. Will Mr. Sinha of SEBI please investigate and prevent ignorant investors from falling into this dirty trap? Hope so.

Ankit

4 years ago

What a complete mockery of the rules this is. You can see from the share price increases, to the "trading" to the dilution of stake, that something is very fishy here.

If these are the kind of practices our regulators choose to ignore - what kind of company evaluations are real? Not expected from a global giant like McDonalds - all the 'corporate imagery' goes down the drain completely

RS

4 years ago

Incredible!

Why/How can one of the largest brands in the world allow such sub par corporate governance and non transparent dealing ?!!

Who would have thought that one of the largest corporations in the world would come under the scanner for violations as serious as Insider trading, circular trading, price manipulation/rigging and non-compliance with laws in their complete spirit.

Did not we recently hear of another big American MNC being investigated by its own government for allegedly corrupt/illegal practices in foreign shores? Is this heading the same route?

What also appears to be extremely serious is what the article talks about regarding the MNC diluting its stake in the Indian partnership. At today's market cap, that stake would be worth around US$ 280 million. The MNC is a listed company in the US. It has legal and fiduciary duty to explain what it was paid for this stake sale.

Do its shareholders know what has happened?

Great work by the author in digging out all this.

Dr Hardeep Singh

4 years ago

Burger mein kuch kala hai! It seem's that SEBI's role is not that of a market regulator but that of one to ensure that markets are kept irregular! Who is SEBI trying to protect by it's inaction? Allegations of McDonald's dilution of shareholding must be answered - either by the regulator or by your continued investigative journalism (more likely the latter given SEBI's track record). Truth must prevail quickly as this looks like joining the long list of corporate scams with tacit collusion of the regulator/government. Let's find out which one of them has their hand in this till

Dr Hardeep Singh

4 years ago

Burger mein kuch kala hai! It seem's that SEBI's role is not that of a market regulator but that of one to ensure that markets are kept irregular! Who is SEBI trying to protect by it's inaction? Allegations of McDonald's dilution of shareholding must be answered - either by the regulator or by your continued investigative journalism (more likely the latter given SEBI's track record). Truth must prevail quickly as this looks like joining the long list of corporate scams with tacit collusion of the regulator/government. Let's find out which one of them has their hand in this till

R Ravi

4 years ago

Strange to read about such happenings. I am sure the truth will surface sooner rather than later. Meanwhile, one waits it with bated breadth.

Sunder Hemrajani

4 years ago

The developments at Westlife are a shocker!!This is a good example of people enriching themself through market manipulation.Obviously,the Regulator(SEBI)has gone to sleep...not surprising since most institutions which are expected to regulate have degenerated.A well researched article.

Sunder Hemrajani

Large corporate debts likely to affect Indian financial sector

NPAs of Indian banks have already moved up to 4% of total loans due to rising delinquencies in agriculture, SMEs and mid-corporates.  However, according to Credit Suisse, high over-leverage in the large corporate segment could be a potential source of additional asset quality stress for banks

Rising debt levels of top corporate houses, particularly from the Indian infrastructure sector, are expected to put a strain on the Indian financial sector, says Credit Suisse. The worsening economic condition is expected to hit the profitability of the biggest corporate houses hard, such as Reliance Anil Dhirubhai Ambani Group (Reliance ADA), GVK Group, GMR Group and Essar Group, which saw their debt levels soar by 15%, even as economic headwinds and rupee weakness persist.
 

“Corporate asset quality issues are likely to persist and we continue to remain underweight on the Indian banks despite the recent stock price fall and cautious on corporate lenders such as SBI, ICICI Bank, Yes Bank, Union Bank, Punjab National Bank, and Bank of India,” Credit Suisse said in a research note.
 

Credit Suisse have analysed ten top corporate groups namely: Adani Enterprises Group, Essar Group, GMR Group, GVK Group, Jaypee Group, JSW Group, Lanco Group, Reliance ADA Group, Vedanta Group and Videocon Group. The debt levels of these companies have collectively increased by an average of 15%. Biggest borrowers Lanco Group, Reliance ADA Group and GVK Group saw their borrowings increase by as much as 24%. Jaypee Group saw their loans increase 19%.
 

“The increasing stress is visible with some loans of Lanco, Jayprakash Associaties and Reliance ADA having already come up for restructuring,” said the report.
 

According to the report, Lanco Infratech have begun talks to restructuring Rs7,500 crore of debt, while Punjab National Bank have restructured Rs3,200 worth of Jayprakash Associates’ loans (part of Jaypee Group). Reliance Power has already restructured some of its debt as it expects its 3,960 megawatt (MW) power plant to commission this fiscal.

 

It is pertinent to note that debt level of some of the companies have even outpaced capital expenditure. This shows that companies are conservative about putting the debt into good use while cash flow continues to be a concern. The infrastructure sector has been badly hit in the last few years as government’s decision paralysis has left many projects stranded, many with high debt outstanding. Nonetheless, it is surprising to note that banks have still issued loans, Credit Suisse said.
 

According to the report, some of the companies have big repayments coming up in 2014, some of them dollar-denominated repayments. With the rupee under stress, the ability to repay loans in US dollars is likely to be constrained. Many companies have external commercial borrowings (ECBs) maturing in 2014. This includes Essar Oil ($200 million), Essar Steel ($260 million), Reliance Communications ($500 million), Reliance Infrastructure ($250 million) and Vedanta Aluminium ($407 million).
 

However, the debt servicing levels are poor and have been deteriorating. The report states: “With rising debt levels, interest cover for most of the groups has declined further.
Aggregate interest cover for these top ten groups has dropped from 1.6x to 1.4x. Yet, it is also discomforting to note that much of the interest has been capitalised as projects are under construction. Once projects are commissioned, the interest expense will hit the balance sheets very hard.”
 

For instance, the report notes that Reliance Power could face some issues in servicing debts. The report says, “Reliance Power has a P&L interest of Rs580 crore, whereas its capitalised interest is Rs1,470 crore, which would bring down the interest cover from 2.4x to 0.7x at the current profit levels.”
 

Much of the banks’ non-performing assets (NPAs) have not yet accounted for large corporate loans, which remain low. However, if the infrastructure companies do not deliver, the damage inflicted on financial institutions’ balance sheets could be bad. The report says, “Indian bank NPAs have already moved up from 2.5% to 4% of loans, most of these has been on account of rising delinquencies in agriculture, small- and medium enterprises (SMEs) and mid-corporates. Large corporate NPLs are still low. A study of these ten groups reveals, the over-leverage in the large corporate segment is high and is a potential source of additional asset quality stress for banks.”
 

However, the key to servicing debt is whether the projects of infrastructure companies will be commissioned (to boost cash flow, to service debt) this fiscal or not, before they go belly up and spill damage to the financial sector. The report says, “With over 13,000 MW of power capacity from these groups scheduled to be commissioned the current year will be critical.”
 

Moneylife had already written an in-depth cover story on public sector bank and the same can be accessed here

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COMMENTS

Ramesh Poapt

4 years ago

OH MY GOD! ab kaha jaye hum...!

Sensex, Nifty near support zone: Monday closing report

While the downtrend in Nifty is strong, watch if it holds Monday's low for the first sign of stability

The market fell further on Monday as the rupee hit a new lifetime low of 63.22 against the US dollar. The Sensex closed at the lowest since 12 April 2013, while the Nifty closed at the lowest since 11 September 2012. The statements made by  prime minister Manmohan Singh on Saturday to revive faith in the economic scenario was not of much help. The market may try to form a base here. Watch if today’s lows hold.

 

The Sensex opened in the negative at 18,587, which was the same level when it hit its days high and started falling gradually.  During the last hour of the session, it hit its low of 18,139, its lowest since 13 September 2012.  It revived later closed at 18,308 (down 291 points or 1.56%). Nifty opened in the negative at 5,498 and it hit its intra-day low of 5,361 towards the end of the session. This was Nifty’s  lowest since 5 October 2012. It later rallied and closed at 5,415 (down 93 points or  1.69%). The National Stock Exchange saw a volume of 61.90 crore shares, lower than last trading session.

 

All the major indices on the NSE except for India Vix (up 8.25%) and Nifty Dividend which ended flat, closed in the negative. CNX Nifty Junior was the top loser, down 2.42%.

 

Except for Metal (up 1.68%); IT (up 0.24%) and Realty (up 0.22%) all the other indices ended in the negative. PSU Bank (fell 3.38%); Bank Nifty (fell 3.24%); Auto (fell 3.19%); Dividend Opportunities (fell 2.75%) and Pharma (fell 2.62%) were the top five losers.

 

Of the 50 stocks on the Nifty, 14 ended in the in the green. The major gainers were Tata Steel (up 4.97%); Jaiprakash Associates (up 4.38%); Jindal Steel (up 2.74%); Reliance Infrastructure (up 2.43%) and Hindalco (up 2.08%). The top losers were Axis Bank (down 6.32%); IndusInd Bank (down 5.86%); IDFC (down 5.48%); Ambuja Cements (down 5.42%) and ICICI Bank (down 5.31%).

 

Prime Minister Manmohan Singh on Saturday told us that India wasn't headed for a crisis despite its large current-account deficit and said the country has plenty of foreign-exchange reserves. There is no comparison and no question of going back to the situation India faced in 1991, when the country was on the brink of defaulting on its debts.

 

In an attempt to ease concerns that the country was moving toward capital controls, economic-affairs secretary Arvind Mayaram told reporters on Friday that India doesn't plan to impose controls on money being repatriated by companies, such as dividends and royalties. His comments came after the Reserve Bank of India (RBI) on 14 August 2013, reduced the amount of money that Indian residents and companies can send abroad.

 

The increased effort on the part of RBI has not helped the currency sliding down to record low today. The currency fell to 63.22 against the US dollar, breaching the previous low of 62.03 hit on Friday. Finance secretary Arvind Mayaram told a newspaper that the government was not looking for now at taking further steps to tackle the rupee's fall, but wanted to watch the impact of its recent measures. Today rupee closed at historic low of 63.13 against the US dollar.

 

US crude oil futures for September delivery continued to surge fueling concerns of increase under-recoveries of state-run oil marketing companies.

 

US indices fell on Friday despite improving economic data. The Commerce Department reported housing starts climbed at an annual rate of 896,000, less than the 915,000 estimated. The Labor Department reported productivity rose at a slightly better-than-estimated 0.9% annual rate in the second quarter.

 

The Federal Open Market Committee (FOMC) on 21 August 2013, will issue minutes of its recent policy meeting held on 30th and 31 July 2013. The minutes of FOMC meet may help provide clues about the future of Fed's bond-buying program.

 

Except for Shanghai Composite (up 0.83%) and Nikkei 225 (up 0.79%) all other Asian indices ended the negative. Jakarta Composite a big bull market for four years now, fell the most (5.58%).

 

Japan's exports jumped by the most since 2010 in July, aiding Prime Minister Shinzo Abe's efforts to drive an economic recovery even as rising energy costs boosted the trade deficit. Exports increased 12.2% from a year earlier after a 7.4% rise in June, the Ministry of Finance said in Tokyo today. But imports climbed 19.6%, leaving a trade deficit of 1.02 trillion yen ($10.5 billion), the third biggest on record in data back to 1979. The seasonally-adjusted deficit widened from June to 944 billion yen.

 

Thailand cut its 2013 growth forecast as the country entered recession for the first time since the global financial crisis, with rising household debt limiting central bank scope to support the economy. Gross domestic product unexpectedly shrank 0.3% in the three months through June from the previous quarter, when it contracted a revised 1.7%, the National Economic and Social Development Board said in Bangkok today.

 

Back home, Siemens has won two contracts worth Rs144 crore to construct 38 new substations for improving power distribution in Bangladesh. The projects involve installing new and improving existing distribution facilities in the rural region west of Jamuna river. The stock rose 1.43% to close at Rs434 on the NSE.

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COMMENTS

Nilesh KAMERKAR

4 years ago

If you can stomach some volatility and can put away funds for the next 5 to 10 years. Invest in equities NOW.

It is time to be greedy . . . when others are fearful.



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