UPDATE: Updated on 22 February 2018 at 11am to include comment from Fortis Healthcare
Past actions at Fortis Healthcare Ltd about frequent restructurings and frequent resignations from directors has eroded investors' trust as well as wealth. Recently the company admitted having 'deployed' funds of Rs473 crore with companies that became promoter owned companies by terming them as 'secured short-term investments in normal course of treasury operations". While Fortis does not seem to be a stranger to utilising company funds to fund promoters' own business interests, what is happening in this company is more like a repeat of what happened at Satyam Computers Ltd and United Breweries (UB) Group says a proxy voting advisory firm.
In a note, Bengaluru-based InGovern Research Services Pvt Ltd, says, "The issue of transferring funds to a wholly owned subsidiary which in turns lends to promoter entities, in order to skirt the shareholder approval requirement, seems to be a blatant fraud. Much like the Satyam cash, the cash and cash equivalents on the books of the company seem to be non-existent. The company’s subsidiary has conveniently given the loans to related parties without seeking shareholder approval and regulatory filings."
Last week market regulator SEBI instituted an investigation on the matter and asked Fortis to furnish information and documents related with the fund transfer to wholly owned units by 26 February 2018. "SEBI has instituted an investigation and take it to a logical conclusion on the basis of Companies Act and Listing Obligations and Disclosure Requirements (LODR) Regulations. The statutory auditor has a responsibility to the shareholders and should have reported to the regulator the reason for not signing off on the second quarter (Q2) statements," InGovern says.
While 'deploying' Rs473 crore with promoter owned companies, Fortis, did not inform the stock exchanges either at the time of deploying these funds or when the entities became promoter entities. The company also failed to seek mandatory shareholder approval by routing the funds through a subsidiary, and there could be a possible violation of Indian Accounting Standards by classifying loans and advances to related parties (these promoter entities) as cash and equivalents.
Fortis has not yet published its Q2 and Q3 results giving an absurd rationale of the Board being busy in discussing acquisition of certain Religare Health Trust’s assets and that the results were to be taken up in the Board meeting on 13 February 2018. The company held a Board meeting on 13 February 2018 but the Board still could not finalise quarterly results and sought an extension till 28 February 2018.
This has also triggered SEBI to institute an investigation for which it has asked Fortis to furnish information by 26 February 2018.
Section 186 of the Companies Act, 2013 requires companies to mandatorily seek shareholders’ approval to make inter-corporate investments and advances. However, for advances to wholly-owned subsidiaries, only a Board approval is required.
InGovern says, "If Fortis had made these advances directly to the promoter entities, it would have required minority shareholders’ approval through a special resolution and there was a high probability that the resolution could have been defeated. However, by routing the advances through Fortis Hospitals Ltd, a wholly-owned subsidiary, Fortis did not bother seeking shareholders’ approval and also did not have to even make a public disclosure about the transaction. Although the 2017 annual report of Fortis mentions a related party transaction with the subsidiary, there are no details till today of the ultimate beneficiaries. The link to the subsidiary’s financial statements in the company’s website throws up the statements of another subsidiary namely Fortis Hospotel Ltd."
The company stated that it ‘deployed’ funds in secured short-term investments with promoter entities in normal course of treasury operations. This should be shown as current loans and advances on the assets side of the balance sheet. However, the consolidated balance sheet of Fortis shows a cash & equivalents amount of Rs544 crore in 2017 compared to Rs142 crore in 2016. "Has the company classified the advances of Rs473 crore as cash & equivalents? If
yes, shouldn’t this be considered as a violation of the Indian Accounting Standards?" InGovern asks.
InGovern also questioned role of statutory auditors in not reporting the fraud to government as mandated under Section 143(12) of the Companies Act. SEBI (LODR) Regulations require quarterly financial results to be published within 45 days of the quarter ending date. It says, “The statutory auditors Deloitte Haskins & Sells have a responsibility to the shareholders and should have reported to the regulator the reason for not signing off on the Q2 statements. The auditors should also have flagged off the entry of advances to promoter entities as cash & equivalents in the consolidated balance sheet of Fortis. On basis of Section 143, isn’t it the responsibility of Deloitte to report this fraud to the Central Government?”
In the past too Fortis had transferred company cash to fund promoter’s personal business. Here is the list compiled by InGovern on similar transactions carried out by Fortis…
In 2010, Fortis Mauritius, 100% subsidiary of Fortis acquired 25% in Parkway Holdings Singapore
Fortis raised $100mn through FCCBs. In the same month it gave Rs.395 Crore loan to Fortis Mauritius
In second round, RHC Healthcare submitted bid to increase Fortis Group shareholding in Parkway Holdings
RHC Healthcare was 49% owned by Fortis Mauritius and 51% by Fortis Promoters
Gradually, the promoters came to own 100% of shareholding in RHC Healthcare
RHC Healthcare then underwent name changes twice to finally become Fortis Healthcare International (“Fortis International”)
During 2010-11, Fortis promoters bought 6 overseas assets through Fortis International
As per Fortis Healthcare, Fortis International paid $580mn for the acquisition
In 2011, Fortis acquired Fortis International for $665mn
Here, a question is what happened to the loan of Rs.395 Crore given to Fortis Mauritius?
Fortis International’s annual returns for FY2011 showed a pending loan of $121mn from a related company
Was this amount the loan given by Fortis to Fortis Mauritius and then possibly by Fortis Mauritius to RHC Healthcare to fund the second-round bid for shares of Parkway Holdings?
If this loan was indeed out of Fortis Healthcare’s FCCB proceeds of $100mn, it was a clear case of FCCB funds being diverted to fund promoters’ private businesses
Also, Fortis International was paying only 4.4% interest on that loan while Fortis was paying 5% interest on FCCBs
Frequent Restructurings – Running Fortis or Playing Lego?
According to InGovern, frequent restructurings create confusion and sometimes, are catalyst to destruction of shareholders’ wealth in any company. “A look at the recent history of Fortis will show that its promoters love restructurings and have treated the company like a game of Lego,” it added.
High turnover of independent directors without proper rationale
InGovern says, there has been a high Independent Directors turnover in Fortis Board and none of them were accompanied with a proper and logical explanation. “As can be seen below, there have been cases of Directors resignations in the past year only and some of these directors resigned almost immediately after announcement/ conclusion of a restructuring by the company,” it says.
Fortis also announced Lt. Gen. Tejinder Singh Shergill will be its new Independent director from 12 February 2018. “The disclosure to stock exchanges nowhere stated that he already serves as an Independent Director of SRL Ltd, which is a subsidiary of Fortis,” InGovern points out.
Rinse and Repeat at Religare Enterprises
According to InGovern, the issue of diversion of funds from the company is not limited to Fortis alone. The auditors of promoter group’s Religare Enterprises (Religare) have also qualified its Q3 financial statements for similar issues.
“Statements by the company auditors makes it clear that the modus operandi of Religare been the same as of Fortis in the matter of movement of funds to Group companies. Instead of advancing loans themselves, both Religare as well as Fortis have routed the funds through subsidiaries; Fortis through Fortis Hospitals Ltd and Religare through Religare Finvest Ltd. This has helped them avoid seeking shareholder approval. Also, Religare has tried to keep these irregularities under radar by not conducting any impairment study on Religare Finvest Ltd,” InGovern says.
Here is the statement from Fortis Healthcare:
"We refer to the report released on 21st February 2018, by InGovern Research Private Limited making certain insinuations which we believe are misleading and done with questionable intent. We take exception to any comparison with Satyam and UB Group as we believe that it's a highly unfair allegation. We also believe that there are some factual inaccuracies in the aforesaid report and independent statements and pieces of information have been intertwined out of context which may mislead the reader and create a wrong perception thereby harming the reputation of the Company. It is clearly suspect that the report instead of providing a fair view has instead stated events that have taken place as way back as 2010 and then without reaching out for any clarification and understanding from the Company used its own discretion and judgement in arriving at conclusions that are inaccurate and misleading. This reflects an irresponsible form of report writing which is not in the best interest of any and all stakeholders.
We are considering to undertake appropriate action against the publisher of the Report. In light of the aforesaid facts and circumstances, we urge you to not publish the report in whole or in part or make any references to it.
The Company has and will continue to fully co-operate with all regulatory authorities and continues to furnish all information as required by them".