Partners spar in Dalmia arm ahead of KKR exit

Guwahati-based Bawri group has alleged financial irregularities and mismanagement in Calcom Cements; Dalmia group says arbitrator has asked both parties to remain silent; KKR also cites arbitrator's a

A bitter dispute over Assam-based cement assets between two old business families, the Dalmias and Bawris, could have expedited the exit of private equity giant KKR from Dalmia (Cements) Bharat (DCBL). The tussle between erstwhile partners has intensified over nine months and snowballed into multiple proceedings in courts and legal forums across the country.

In an unusual buyback transaction announced in January, KKR's Mauritius arm exited its five-year investment in DCBL through a cash and stock deal. As part of this deal, it now has 8.45 per cent stake in DCBL's listed parent, Dalmia Bharat (DBL).

While corporate governance experts have already expressed concern about the rationale, timing and structure of the deal, details gathered by Business Standard provide a new dimension to the transaction.

At the centre of the storm is DCBL's subsidiary, Calcom Cement India, a plant with capacity of 1.72 million tonnes (mt). The company was started in 2004 by Binod Kumar Bawri, a seasoned Guwahati-based businessman, active in policy circles of late as director of the India Foundation. The Assam government's industrial development unit held a minority stake.

The Bawri family, since been reduced to a minority, moved the Company Law Board (CLB) last year, accusing the Dalmias of deliberately running Calcom to ground. In July, CLB's Kolkata Bench passed an order asking Calcom to maintain status quo on board composition and refrain from creating any third party interest on assets till the disputes are settled.

After being heard in the Calcutta and Delhi high courts, the matter has since been referred to S Gurumurthy, senior chartered accountant and corporate adviser, for arbitration. Complaints have been filed before the Securities and Exchange Board of India, too. A petition questioning the validity of the CLB order is also pending before the Gauhati high court.

Ritesh Bawri, son of Binod and Calcom's managing director till 2012, told Business Standard, "The Dalmia group's stated policy was to run all companies to maximise group profit. In doing so, the group abused its majority position in Calcom, turning an attractive proposition that would have benefited development in the northeast into a vehicle for its own interests."

According to the shareholding agreement, the Bawris were eligible for a payout of six times the earnings before interest, taxes, depreciation and amortisation at the time of exit. They feel Dalmias are trying to wriggle out of these obligations.

Bawri alleged the Dalmias started loading operating and capital costs on to Calcom and diverted sales to their own group company, at the cost of minority shareholders. "This led to significant economic losses for Calcom." The documents placed before CLB, reviewed by Business Standard, include several allegations such as loading of project costs, diversion of sales of Calcom to Adhunik Cements, another DCBL subsidiary, and questionable related-party transactions such as inter-corporate loans at exorbitant interest rates.

In an e-mailed 'position statement', the Dalmia group spokesperson said, "DCBL had acquired 76 per cent stake in Calcom Cement. Some aspects of the agreement between the two parties are being contested before the Learned Arbitrator appointed by consensus by both the parties."

The statement added: "Pending resolution of dispute in the arbitration proceedings, the learned arbitrator has directed both parties (Dalmia Cement and Bawri Group) to refrain from any public discussions on the matter. In deference to the wishes expressed by the Learned Arbitrator and the matter being sub-judice, both parties are obliged to refrain from commenting on the issue."

Dream that soured

After KKR pumped in Rs 500 crore in 2010-11, Dalmia Bharat, led by Puneet Dalmia, had started scouting for assets in the south and east. In about a year, it found a willing partner in the Bawri family, which itself was looking for capital to scale up. People familiar with the matter say the families were brought together by Gurumurthy himself, who was named the sole arbitrator in the original shareholder agreements.

Gurumurthy did not respond to an e-mail seeking comments on the dispute, sent on Friday.

In January 2012, the first shareholding agreement was signed, under which the Dalmia group committed an investment of Rs 250 crore for a 50 per cent stake with Bawris retaining management control. However, the agreements had to be reworked since the Dalmias sought management control. A fresh deal was inked in November 2012, by which Dalmia acquired a further 26 per cent.

Things went downhill before long owing to disagreements. By the time audited accounts of FY14-15 were placed before the Calcom board, the relationship had completely broken down. The Bawris even took the matter to the KKR representative, who was on the DCBL board. But, that did not help the matters much.

"We trust the legal and regulatory system of our country to form the right opinion on the actions of the Dalmia group as they have done thus far, and take suitable action," Bawri said.

In response to an e-mail seeking comments on whether these disputes went into the decision on exit, KKR said, "KKR understands that the subject of your inquiry is in arbitration and that the arbitrator has requested the parties to refrain from any public discussions on the matter. While KKR itself is not a party, we will honour that direction."

KKR is no longer directly related with DCBL. DCBL's listed parent DBL bought KKR's 15 per cent stake by paying Rs 600 crore in cash and a further Rs 618.7 crore worth DBL shares. The transaction, which was seen to be low on transparency by corporate governance experts, sailed through with 99 per cent votes at last week's extraordinary general meeting of DBL.

Proxy advisory firms such as Stakeholders' Empowerment Services (SES) and Institutional Investor Advisory Services (IiAS) had also wondered what the rationale was for the company to get into such a transaction. "Dalmia Bharat's need of providing an exit option to one investor comes at the cost of a possible deterioration in the company's already weak financial profile, which is not in the interest of Dalmia Bharat nor its minority shareholders," IiAS had said in its report slamming the transaction.

People who watch the deal space infer a growing distance between KKR and Dalmia. Media reports suggest KKR and DCBL are bidding separately for the Jaypee group's cement assets. While KKR is bidding alone, DCBL is backed by Blackstone for the transaction, Mint had reported in January.

"These details prove our point that there is some understanding or dispute, between the two parties (Dalmia and KKR), which has not come in the public domain, which is a serious governance issue," said J N Gupta, managing director, SES.

FIGHT CLUB

• 2004: Calcom Cement founded by Bawri family
   
• 2010: KKR invested Rs 500 crore in Dalmia Cements Bharat
   
• Jan 2012: Bawris ink deal, selling 50 % stake for Rs 250 crore
   
• Nov 2012: Deal restructured, giving 76% to Dalmias
   
• July 2015: Bawris move Company Law Board, which passes status quo order Sep,2015: Calcutta HC dismisses Dalmias' petition to set aside CLB order
   
• Oct 2015: Delhi HC order directing parties to the arbitrator
   
• Jan 2016: KKR exits DCBL and picks stake in parent