Raymond: Emperor's New Clothes!
A company, which is on the verge of scoring a century, possessing a brand that is a household name that became noted for removing its former chairman, who also acted as its brand ambassador, due to a family dispute a la a coup in the Mughal or the Mauryan court, has often taunted its investors with contentious corporate decisions!   
 
With a bank debt exceeding Rs2,000 crore and having seen a major dent in the profits due to asset write-offs in the last two years exceeding Rs1,000 crore, the signs of some crafty scheme coming were in the air.
 
And the company has not disappointed!
 
The company has circulated a postal ballot notice dated 9 May 2023 seeking the approval to borrow Rs2,450 crore from a related party by the issue of debentures. The story of how the related party found the amount to lend will unfold below.
 
Raymond Ltd (RL) is publicly listed, in which the promoters (Gautam Hari Singhania and family) own 49.11%. The net worth of RL as on 31 March 2023 was Rs2,252.49 crore.
 
RL holds 47.66% in an entity named Raymond Global Consumer Trading Ltd (RG). The promoters directly have a little over 50% and smallholders account for the rest. 
 
With a net worth below Rs10 crore, RG has little active business operations but holds 100% of the equity of another entity named Raymond Consumer Care Ltd (RCCL). The net worth of RCCL as on 31 March 2023 was Rs140.62 crore.
 
It is from RCCL that RL seeks to borrow the sum of Rs2,450 crore as given in the postal ballot notice.
 
The witchcraft behind the said amount materializing in RCCL may soon surface on Netflix as a movie!
 
On 28th April, the media reported that the Raymond group was selling its consumer care business to Godrej group for Rs2,825 crore. Piecing the first part of the puzzle, it is reasonable to assume that it was RCCL that sold the business and, in the process, has garnered the Rs2,825 crore, which it is ready to lend to RL.
 
But RCCL accounts as on 31 March 2023 disclose no such valuable business or asset(except stock and debtors) and its small turnover is constituted by trading in goods made by a third party.
 
So, some device must be on the anvil to create a saleable asset in RCCL.  
  
That device happens to be a composite scheme of arrangement involving RL, RCCL and RG.
 
The scheme has 1 April 2023 as its appointed date and involves demerging a clutch of businesses owned by RL (defined as lifestyle businesses) into RCCL and merging RG into RCCL.
 
As a result, RCCL would house the lifestyle business hitherto carried on by RL. The demerger would be accomplished by RCCL issuing shares to all the shareholders of RL in the proportion of four shares of RCCL for every five shares held in RL.
 
The second limb of the scheme envisages RG merging into RCCL. As explained earlier, RG is an investment arm holding 100% of RCCL. However, the shares of RG are held both by RL and the promoters.
 
The scheme is structured in a manner that the shares held by RL in RG are defined as a component of the lifestyle business under the demerger. As RG itself is extinguished when it merges into RCCL, the shareholding of RL in RG stands absorbed in RCCL and is finally extinguished.
 
Because of the above quirk in the structure, the effective holding of the promoters in RCCL post the implementation of the scheme would be 54.88% as against their holding of 49.11% in RL.
 
In getting to this lopsided holding structure, the two valuers (KPMG and BDO) appointed for the task of valuing the business have brought their share of expertise by adopting an inexplicable valuation model.
 
The demerged business in the hands of the transferor (RL) has been valued by the composite weighted average method of assets, income and market multiple. However, in the valuation of RCCL, only an asset basis has been adopted. As explained above, RCCL and RG have no major business in their fold, and the substratum is constituted only by the business being transferred under the proposed scheme.
 
The two sides of the same coin have been valued differently!
 
A fact that may not fail to arouse the curiosity of accountants is that the actual increase in the net worth of RCCL post the scheme is only Rs8 crore, and the reduction in the net worth of RL is just Rs5 crore. This is difficult to reconcile with the notion that the demerger involved a very significant business with assets.
 
While the company has submitted a nearly 1000-page document to BSE for approval, the most salient information, the details and the values of the assets/business transferred (demerged) are not found!
 
The valuation report was issued on 27 April 2023, and the audit committee, the committee of independent directors and the board of all the companies approved the scheme on the same day. In fact, the annual accounts for RL were approved only on 9 May 2023, though this has no bearing on the valuers doing their report earlier as they have gone by convenience than convention!
 
With even the betrothal pending, the child was delivered on 27th April, as Godrej bought the business for Rs2,825 crore on 27 April 2023 itself, and the money was credited to RCCL's account.
 
It shall pique the curiosity of any worthy professional to figure out the type of documents that supported the transaction, given that RCCL has sold assets yet to reach its domain. According to the scheme documents, it is the transferor (RL) who has the right to act as a trustee for the transferee, while the opposite seems to be the reality.
 
Even if the professionals fail to display eagerness, goods and services tax (GST) and tax officers may not!
 
Many questions arise regarding governance in the present case. The minutes of the audit committee, the committee of independent directors (IDs), or the board approving the scheme has not even a whisper about the sale of the consumer care portfolio which had already taken place on the same day the scheme was approved.
 
The big question is how RCCL could decide to sell the assets without the demerger being completed and the new shareholders (of RL) being issued the shares as per the fixed swap ratio. RCCL, at this juncture, has just a single shareholder, RG, and carrying out the sale with only its approval is making a mockery of the law.
 
The act of selling a part of the assets that currently belong to RL without the scrutiny of the public shareholders is a gross violation of law and the spirit of corporate governance.
 
In other words, the RL public shareholders have been ousted from their locus on the transaction in the guise that the sale was done by RCCL, and at the same time, their right to get the RCCL shares and become members is to await the completion of the scheme process and hence they get no right to vote on the resolution as RCCL shareholders!
 
The transaction structure has resulted in the cash that should have directly come into RL being trapped in another entity which has a higher promoter holding with an ability to progressively squeeze out the public
 
RL would have only real estate business after the demerger. 
 
Just over 14 months back, the board of RL wished to do precisely the opposite. It proposed a scheme to demerge the real estate business to Raymond Lifestyle Ltd! The appointed date being 1 April 2022. That scheme pending in the national company law tribunal (NCLT) was withdrawn on 27 April 2023, when the current scheme was approved.
 
Why did they reverse the plan? Isn't the board obliged to explain the rationale for the change, especially as all the cash goes to another entity with a higher promoter holding?
 
On its part, Godrej has disclosed the acquisition in its announcement for the fourth quarter (Q4) results on 10 May 2023 as below-
 
Subsequent to 31 March 2023, the group has acquired a consumer care business for a consideration of Rs2,825 crore from Raymonds Consumer Care Ltd. No impact of the said acquisition has been given in these financial results as this is a non-adjusting event.
 
The article may get unwieldy discussing the questions that arise from a governance angle on Godrej's part, but watch out for updates as more details come into the public domain on this transaction!
 
(Ranganathan V is a CA and CS. He has over 43 years of experience in the corporate sector and in consultancy. For 17 years, he worked as Director and Partner in Ernst & Young LLP and three years as senior advisor post-retirement handling the task of building the Chennai and Hyderabad practice of E&Y in tax and regulatory space. Currently, he serves as an independent director on the board of four companies.)
Comments
kumaranubhav3
9 months ago
The fact is when a similar note was published in moneylife w.r.t financial irregularities the stock was around 900 rs and it is quite a time since then . Now it is 1500 Rs approx. So, may be market is missing something or you are .
ksambaiah
Replied to kumaranubhav3 comment 9 months ago
Price raise makes wrong right? Points raised here are valid or not?
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