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.

Comments
Veeresh Malik
9 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
9 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
9 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
9 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
9 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
9 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
9 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
9 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
9 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
9 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
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