How group firm helped land India's largest tea producer in bankruptcy court

Seventy-three million kilograms of tea produced on estates spread across 27,360 hectares of rolling green with the help of 73,000 employees. Meet McLeod Russel India Ltd, one of the world’s largest producers, now in the middle of insolvency proceedings after defaulting on a Rs 100-crore loan.

On August 6, the New Delhi Bench of the National Company Law Tribunal (NCLT) passed an order admitting an application by Techno Electric & Engineering, a power infrastructure company owned by a former merchant banker, P P Gupta, for initiating corporate insolvency resolution against McLeod Russel.

At the heart of the matter are the four tea estates in Assam: Addabarie, Mahakali, Dirai and Rajmai. Techno had provided an inter-corporate deposit (ICD) of Rs 100 crore at 14 per cent interest to McLeod on the condition that it would be used to repay loans relating to the estates and to ensure release from encumbrances. But the title deeds were not handed over to Techno and the loan amount was not repaid by the due date.

The agreement with Tech­no dates back to September 2018, just months after the McLeod board decided to dispose of tea estates to reduce mounting debt.

Against this backdrop, the Insolvency and Bankruptcy Code (IBC) was playing out in full force with big companies being admitted for insolvency proceedings. But McLeod was different in that it was a market leader. With production of 42 million kg (FY20) in India, the company is at the top of the league table even after selling a clutch of gardens to reduce debt.

Between FY19 and FY21, McLeod sold 17 estates, mostly in Assam and some in West Bengal for Rs 764 crore (leaving it with 31 estates in Assam and two in West Bengal). In addition, there are operations in Vietnam and Uganda in Africa; it sold the profitable operations in Rwanda. But even with the sale of assets, McLeod fell short of resolving the debt problems.

McLeod’s debt in FY21 had stood at Rs 1,835 crore. Across the three main companies in the group — McLeod Russel, McNally Bharat Engineering and Eveready Industries India — the debt in FY21 is Rs 4,336 crore.

In Kolkata tea circles, the NCLT order against McLeod has caused quite a flutter. The obvious question doing the rounds is whether there is a buyer from the industry for a tea giant like McLeod.

After all, as Jayanta Roy, senior vice-president, ICRA, pointed out, the domestic bulk tea industry suffered a prolonged downturn between FY15 and FY20. “During this period, while costs went up primarily because of rising wages, prices failed to increase commensurately. Consequently, industry operating profitability declined from 11-12 per cent to around 3 per cent, leading to considerable stress on the credit profile of bulk tea players,” he explained.

Some of the major buyers have privately ruled out bidding for the company. “Auctioning McLeod under IBC will not yield good valuation,” pointed out sources close to the development.

However, the auction of tea producer Assam Company had fetched Rs 1,214 crore under IBC in 2018 with lenders realising about 80 per cent of claims. It was bought by Abu Dhabi-based BRS Ventures, which outbid its nearest Indian competitor from the tea industry by three times (but its production is about a fourth of McLeod’s in India).

How did things come to such a pass for McLeod? The answer lies in perennially ailing group company McNally Bharat Engineering. A downturn in the engineering, procurement and construction industry spiralled and the group wanted to avoid default. So, in Q4FY21, the group’s battery maker — Eveready — made a provision of Rs 629.70 crore for ICDs and corporate guarantees principally to support McNally Bharat.

To deleverage group debt, the country’s largest dry cell battery maker had even considered putting its battery business on the block. It was finally called off because it would have meant doing away with the core business.

But even as the business is in a good place, with margins at an all-time high, the trouble with the promoters remains. Promoter shares were pledged in Eveready and McLeod to raise funds for McNally. As the share price moved up, lenders invoked the pledge. Promoter holding in McLeod is at 10.07 per cent.

The Khaitan family’s current holding in Eveready is at 4.77 per cent. Meanwhile, the Burman family — promoters of Dabur India — had been buying Eveready shares for the past two years and are the largest shareholder at 19.84 per cent.

The Burmans don’t have representation on the Eveready board yet and have so far remained financial investors. But they believe that all the businesses should be run professionally (the company is managed by Amritanshu Khaitan, son of the late Deepak Khaitan). In an attempt to placate the Burman view, Eveready inducted a joint managing director two days ago.

But the ownership of McLeod could soon be out of Khaitan hands, unless lenders step in. Lenders had initiated a debt resolution process under the Reserve Bank of India (RBI) circular of June 7, 2019. McLeod had mentioned in its notes to results for the quarter ended March that the inter-creditor agreement (ICA) for arriving at and implementing the resolution plan has been confirmed and signed by certain lenders and was in the process of being approved by remaining lenders.

For a group with which patriarch Brij Mohan Khaitan was associated as a white knight in the 1960s and which he eventually acquired, this is a long drop. Brij Mohan Khaitan died in 2019. His elder son, Deepak Khaitan, in 2015. In the driver’s seat are younger son Aditya Khaitan (managing the tea business), and grandson, Amritanshu Khaitan (managing the battery business). The IBC process could be another inflexion point.