Updated on 1 August 2018 to add clarifiction submitted by the company to stock exchanges.
The directors and promoters of BK Birla group company Kesoram Industries have allegedly indulged in large-scale insider trading in the process short-changing minority shareholders hundreds of crores. The trail of such wrongdoing was recently alleged by a shareholder Janardan Kothari at the annual general meeting (AGM) of Kesoram Industries on 13 July 2018. Moneylife has reviewed the documents shared by Mr Kothari and pieced together the alleged modus operandi of this episode. The company’s stand at the AGM was that, “We will not take the question of related party and that it can be discussed separately”.
As of 31 March 2015, Kesoram held 27.46 lakh shares of Century Textiles. On 22 March 2016, Kesoram sold all these shares to Camden Industries for Rs141 crore in a bulk deal. In FY17-18, Kesoram invested another Rs400 crore in Cygnet Industries, its wholly owned subsidiary. Cygnet Industries used this amount to buyback 27.46 lakh shares of Century Textiles from Camden Industries in three transactions on 5th, 11th and 12 December 2017; for Rs355 crore. Thus, it is alleged that Camden Industries made a clean profit of Rs214 crore.
Then Cygnet Industries sold these 27.46 lakh shares of Century Textiles to Pilani Investments, a promoter entity of Kesoram, in two transactions on 7th and 14 June 2018, for Rs255 crore and in the process realised an allegedly loss of Rs100 crore.
In this entire round tripping, Camden Industries allegedly made a profit of Rs214 crore but Kesoram shareholders lost Rs100 crore through Cygnet Industries. Also during FY15-16, Kesoram had through a slump sale, sold its spun pipes and chemical business to Camden Industries for Rs400 crore. These businesses were again bought back by Kesoram in FY17-18 for Rs422 crore.
The important question that arises is who is the owner of Camden Industries? Camden Industries neither is a subsidiary of Kesoram nor it is a promoter entity of Kesoram. But so many critical sale and repurchase transactions are taking place regularly between Kesoram and Camden Industries. At the annual general meeting (see video) Mr Tridib Kumar Das (CFO of Kesoram Industries) said that, “There position is that it is not a related party”.
However, little digging throws up many interesting connections. Camden Industries was incorporated in 2015 and its registered office was on the second floor of Birla Building in Kolkata. Further, following details were found on the website of MCA and Zubacorp.com. Camden’s directors include:
1. Suparna Hingorani:
a) Director in Vidula Chemical, in which Kesoram holds 44,750 shares and has a common director with Cygnet Industries- Deepak Kumar Sharma.
b) Director in Precious Services Consultancy; which has two common directors with Cygnet Industries- Gautam Ganguli, the company secretory of Kesoram and Sharmila Nath. Precious Services Consultancy has its registered office in Birla Building.
c) Director in SNP Investment & Trading; which has a common director with Cygnet Industries- Deepak Kumar Sharma. It also has its registered office in Birla Building.
2. Keshav Chhetri: Also a director in Vidula Chemical.
3. Debashis Biswas:
a) Director in MSK Travels; which is a related party of Kesoram.
b) Director in Kundra Investments; which has its registered office in Birla Building.
Incidentally, the email ID of Manav Investment and Trading, promoter entity of Kesoram is shared by Kundra Investment, Precious Consultancy and SNP Investment. Sharing the same email suggests that the four supposedly unrelated companies may be linked and related with each other.
There in enough circumstantial evidence to point out, as to who is the ultimate beneficiary owner of Camden Industries. On paper, Camden’s entire equity capital is owned by its employees and directors. Moneylife found out that the entire shareholding is owned by seven persons; with six people owning 14% each and remaining 16% owned by the seventh person, just enough to satisfy the minimum number of shareholders required to form a public company.
The clinching evidence as discovered by Mr Kothari to finally prove that Camden, Kesoram and Manav Investment are all related is:
1. The board resolution dated 17 December 2015 of Camden Industries has authorised Mr Das (CFO of Kesoram Industries) and Gautam Ganguli (Company Secretary of Kesoram) to finalise and execute agreements on behalf of Camden Industries. This proves that Kesoram Industries and Camden are related because Kesoram’s key managerial personnel are authorised to act on behalf of Camden Industries.
2. Manav Investment through its board resolution on 7 March 2016 had provided corporate guarantee and pledged its investments to IndusInd Bank in connection with a term loan of upto Rs400 crore being availed by Camden Industries.
3. In the Director’s Report section of Manav Investment’s Annual Report for FY15-16, it is clearly mentioned that the company has made given a guarantee to IndusInd bank for Rs200 crore against Camden Industries.
4. Camden Industries in its prospectus for private placement offer on 21 March 2016 for bonds worth Rs430 crore has mentioned that the payment of obligations will be secured by the first ranking exclusive mortgage of immovable property of Kesoram Textile Mills, promoted by Kesoram Industries. The same was again stated in prospectus dated 16 March 2017 for private placement offer of bonds worth Rs340 crore.
5. Kesoram Textile Mills in its annual report for FY16-17 has mentioned under the heading of contingent liabilities that it has provided guarantees, securing non-convertible debentures (NCDs) of Camden Industries by mortgage of its land in Kolkata.
This clearly shows that Kesoram Industries, Manav Investment & Trading and Camden Industries are related parties. It is also clear that Camden Industries has made huge illegal profits at the expense of Kesoram’s minority shareholders.
Further, Mr Kothari has alleged that similar transactions have taken place around the same dates in shares of Hindalco, Grasim, Ultratech Cement, and Century Enka and only a detailed audit can reveal about profits made by Camden Industries at the cost of minority shareholders of Kesoram Industries.
“SEBI should investigate the violation of the insider trading norms by the directors and promoters of Kesoram Industries to protect the integrity of the Indian capital markets and to save the minority shareholders of Kesoram Industries. The role of Deloitte Haskins & Sells, the auditor of the company also needs to be thoroughly examined by the regulators to determine whether their supposedly ‘true and fair view’ and opinion was independent of influence of the management and promoters or was there any collusion?” Mr Kothari says.
We sent an email to senior officials of Kesoram Industries seeking their comment on these issues. We will update this article with their comment as and when we receive it.
After we wrote this article, NSE & BSE in a notification dated 16th July, had sought clarifications from the company on the allegations made by. The company submitted its response to the exchanges on 25 July 2018 (https://bit.ly/2LOfbwb), in which they mentioned the following key points:
1. The promoter group in last five years alone has infused around Rs665 crore in the company through right issues and preferential allotments. And thus they have not short-changed the minority shareholders.
2. Over 2012-2018, the company had suffered losses of Rs3,200 crore and had accumulated huge debt, and in order to save the company from becoming sick, the management had to monetise assets. They did this by selling their spun pipes and chemical business, and also liquidating a part of investment portfolio (Century Textiles). These transactions where carried out at prevailing market prices and in accordance with SEBI regulations.
3. Camden Industries is not a "related party" of the company in terms of provisions of the Companies Act 2013 and SEBI Regulations 2015.
4. In December 2017, the company's debt had declined and the financial position of the company had stabilised. Thus the company decided to reacquire its business divisions and investment portfolio from Camden and the same was done at prevailing market prices.