CG Power stock crashes 20% after probe reveals fraudulent transactions

Such deals were executed by senior personnel: Audit report

An internal probe initiated at CG Power and Industrial Solutions (CG Power), a company promoted by Gautam Thapar’s Avantha group, has unearthed multiple fraudulent related-party transactions, the company informed the exchanges. CG Power said it would start a detailed forensic investigation into the matter. The company’s stock crashed close to 20 per cent to Rs 14.80 soon after the revelations. 

At a 12-hour-long board meeting, which started on Monday afternoon and ended in the early hours of Tuesday morning, members of the company’s board discussed a risk and audit committee (RAC) report, which listed various irregularities. These included understated liabilities and advances at both the company and the group level. The report also said the net worth of the company had also been understated owing to unauthorised write-offs.

In addition, the report flagged  dubious transactions carried out by various means such as inappropriate netting off, using alleged unrelated third parties, routing transactions through subsidiaries, promoter-affiliated companies, and other connected parties.

In its regulatory filing, CG Power said certain aspects of the company were purportedly provided for as collateral without due authority. The company was made a co-borrower or guarantor ostensibly for enabling unrelated third parties to obtain loans without due authorisation. The company also said these findings will impact financial results reported for the last three financial years. 

“The financial results for the previous quarters of FY19, FY18, and FY17 could be affected as a consequence of these adjustments. The opening balance of FY19 and earlier years may have to be restated,” the report said.

Earlier this year, lenders invoked shares of Thapar who now holds zero stake in the company. 

Avantha group was on an acquisition over-drive between 2005 and 2013. Most blame these acquisitions for the group’s eventual downfall. In 2015, as part of the group’s attempt to reduce  financial stress, Thapar demerged the electrical consumer business from then Crompton Greaves, which became Crompton Greaves Consumer Electricals and the erstwhile Crompton Greaves became the present CG Power and Industrial Solutions. Thapar's stake in Crompton Greaves Consumer, which also houses the brand, was sold to private equity (PE) funds Advent International and Temasek Holdings for Rs 2,000 crore in 2015.

The probe report noted these transactions were carried out by identified company personnel including certain non-executive directors, certain key management personnel and other identified employees. “The company’s net worth was potentially understated because of unauthorised and inappropriate write-offs and charges debited to the profit and loss statement of year ended March 2018 and April 2017,” said the report. In FY2018, CG Power’s net worth was stated at Rs 2912 crore and consolidated debt was at Rs 3647 crore. In FY2019, CG Power’s net worth was at Rs 2191 crore and consolidate debt was at Rs 3856 crore.

As of June 2019, PE firm KKR holds 21.63 per cent, and mutual funds have 24.8 per cent. Bharti Group Chairman Sunil Mittal, too, has 8.3 per cent stake in the company through Bharti (SBM) Holdings.

In a bid to resolve financial woes at CG Power, a new committee was set up in March 2019 to oversee the company’s operations. Soon after, an interest payment failure letter and a bank’s request made to the managing director to replace a cheque, which was to expire, set off the operations committee to dig further into the company’s books. 
 

“To make further assessments in this regard, an independent law firm was appointed to conduct an investigation on certain transactions by the company,” the company said in a late night statement to the BSE on Monday. Following investigations, the law firm submitted its first report on August 5 to the RAC, which met a day later on August 6. According to the RAC report, the company’s total liabilities were potentially understated by approximately Rs 1,053.54 crore and by Rs 601.83 crore as on April 1, 2017. For the group, they have been understated by Rs 1,608.17 crore as on March 31, 2018, and Rs 401.83 crore as on April 1, 2017.