In January 2021, India Pesticides Ltd (IPL) issued 3,71,380 shares at Rs33.7 per share amounting to a total of about Rs1.25 crore to two individuals, Arun Kishanlal Bagaria and Madhu Arun Kumar Bagaria, who are relatives of one of IPL’s directors, Rahul Arun Bagaria. Rahul Bagaria was appointed as a director on the board of IPL in January 2021.
Just four months later, at an initial public offering (IPO) price of Rs295, the value of these shares has increased to about Rs10.96 crore reflecting a close to nine times returns for the individuals within a span of months. The individuals are directors of Bagaria & Co Pvt Ltd (BCPL), which was listed as an ‘Advisor to the Offer’ in IPL’s draft red herring prospectus (DRHP) filed with the Securities and Exchange Board of India (SEBI).
However, IPL’s red herring prospectus (RHP), which was filed subsequently, dropped the mention of BCPL. Moneylife found that BCPL also serves as a statutory auditor of the fraud-hit Manpasand Beverages Ltd since October 2019, which has witnessed multiple auditor resignations in the past.
All glaring facts in the offer documents have been unearthed by an anonymous blogger and Twitter user who goes by the name, Leading Nowhere (@leading_nowhere) in a blog post
and a Twitter thread
The huge discount to the IPO price at which the shares were allotted to the Bagarias along with their conflicted relationship with IPL gives rise to the question if any quid pro quo was involved in this transaction. This also raises the question as to how IPL was able to successfully obtain valuation reports for the two transactions, despite the wide variation in IPL’s implied valuation in the two transactions.
IPL underwent a high churn in its board of directors between October 2020 and February 2021. Kuruba Adeppa and Sanjay Khatau Asher joined the board of IPL as directors in December 2020 but soon resigned from their positions in February 2021.
Mr Asher is a lawyer specialising in securities law, corporate law, mergers and acquisition law and finance law and serves on the boards of several Indian corporates such as IndusInd Bank Ltd, Sudarshan Chemical Industries Ltd, Deepak Nitrite Ltd, and Ashok Leyland Ltd.
Mr Adeppa’s LinkedIn profile mentions that he is a vice-president at IPL. The departure of the two directors, especially that of Mr Asher, within 15 days of the approval of the allotment of preferential allotment serves as a key red flag.
IPL’s chief executive officer (CEO) and chief financial officer (CFO) cumulatively earn a remuneration of only Rs22 lakh per year, points out the blogger. For a company the size of IPL, such measly managerial compensation is highly unusual. IPL witnessed a high increase in working capital in FY20-21 due to which it was able to convert only 50% of its profit before taxes (PBT) into cash-flow from operations (CFO).
Also, about 45% of IPL’s receivables as of FY20-21 are over three month old. Low cash conversion into profits by IPL could point towards aggressive revenue recognition by the company.
IPL has leased its research and development (R&D) facility from group company, Swarup Chemicals Pvt Ltd, which is engaged in the production of similar products as IPL.
The anonymous blogger has highlighted other red flags such as the company’s involvement in litigations regarding misbranding of its products, dispute regarding its trademark, payment of Rs1.2 crore each in professional fees to family members and an extremely low spend on R&D by the company.