Singh brothers shift gear amid headwinds

The focus is on a move to a 'cleaner and tighter structure' amid top-level exits

Within days of announcing a Rs 1,300-crore deal to sell the group’s health insurance business, once a listing aspirant, to private equity firm True North, Religare Enterprises promoters Malvinder Mohan Singh and Shivinder Mohan Singh are busy responding to former partner-turned-bitter rival Daiichi Sankyo’s petition to stall the move in the Delhi High Court. 

The Singh brothers, flamboyant entrepreneurs who have scaled up, bought and sold businesses, are in the process of an ambitious exercise to move to a cleaner and smarter structure of their key businesses that now spread across four listed firms in financial services and health care. 

As part of their “India-centric” approach, the brothers have been on a selling spree of foreign assets, many of which they had acquired in the years after they sold Ranbaxy Labs to Daiichi for Rs 10,000 crore. They want to use these proceeds to invest in the holding company and deleverage. 

“Over the last two years the group’s overall strategy has been to realign, restructure and consolidate the core businesses with a strong India-centric focus. As part of the plan, various international operations were divested to unlock value,” said a spokesperson of RHC Holding, the Singh brothers’ promoter firm that owns shares in all four listed entities of the group namely Fortis Healthcare, Fortis Malar Hospitals, Religare Enterprises and Oscar Investments.

Information based on conversations with present and former group executives, partners and other public domain information show tactically, the brothers, in their forties and greying, are dealing with Fortis and Religare differently. They are in talks to raise funds from private investors in Fortis Healthcare. “Fortis Healthcare Ltd has received board and shareholders’ approval for raising funds up to Rs 5,000 crore. The company is evaluating various strategic options to accelerate growth and maximise long-term value,” the RHC spokesperson said. Several private equity players are said to be interested in the deal, which might close soon.

The group is also reportedly in advance talks with private equity major KKR to sell its diagnostic arm, SRL Diagnostics. 

Religare, which has reported net losses on a standalone basis for the first three quarters of FY17, is a different ball game and has been going through a difficult phase. Somewhere in 2015-16, Malvinder took a call that things were not going as intended and decided to have closer control and got back on the board as non-executive chairman. The younger brother was named his deputy. 

Since getting back to the board in mid-2016 after a six-year hiatus, the Singhs are leading a complex restructuring process at the financial services firm that involves schemes of arrangements, sale of assets and a clean-up of the loan book of its non-banking finance company (NBFC) arm Religare Finvest to meet regulatory requirements.

“We are pulling back to get things in order, so that we can start growing again,” explained a top source in the group, adding that the group had enough resources to handle any adverse court decision in the proceedings against Daiichi. 

Over the last couple of years, Religare had divested its interests in asset management, life insurance and wealth management before inking the deal to sell health insurance. By the time, they are done with it, Religare will be left with two key businesses. 

“The new Religare board... has taken a strategic decision to have a sharp India-centric focus on the NBFC and securities business which will be the key pillars for the company,” the RHC holding spokesperson said. 

Though there has been speculation about the sale of the securities business, the promoters seem to be less keen to let go of the formidable network which can be used to lever other ventures. Also, since the securities arm itself in the middle of a merger process that involves court approvals, any sell-off is ruled out till the court process is over.  From over 100 corporate entities housing various businesses, the Religare structure has come down to about two dozen entities. When the restructuring is completed, these may come down further.  

“The company will continue to evaluate various strategic options to raise capital for strengthening and accelerating the growth of its key businesses,” the spokesperson said.

Shareholding and high leverage

Together, the four listed entities have a combined market capitalisation of around Rs 15,100 crore.  Fortis Healthcare is the most valuable of the lot at about Rs 10,564 crore at Friday’s closing price of Rs 204. Religare, which not very long ago had received a buyout offer of over Rs 7,000 crore, is now trading at a market cap of around Rs 3,700 crore, after a sharp drop in share prices. The financial services firm, which was trading at Rs 280 in September, has shed nearly 25 per cent of its value and closed at Rs 210 on Friday. 

While the promoter holding in Religare and Fortis remain at over 50 per cent, 85 per cent of this holding is pledged in Fortis and 86.33 per cent in Religare. Promoter entities such as RHC shareholding and Fortis Healthcare Holdings, which are major shareholders of Religare and Fortis Healthcare have significant debts on their books. 

(Click on picture for details)

Among other significant shareholders are International Financial Corporation, which has about seven per cent stake in both Fortis and Religare and the family entities of Shabnam Dhillon, the wife of Singh brothers’ spiritual guru Gurinder Singh Dhillon of Radha Soami Satsang Beas. 

The Dhillon family relationship goes beyond shareholding. Religare rents out premium office space belonging to the Dhillon family-controlled GYS Group in the National Capital Region and Mumbai. Expenses under the head “Rent, Rates and taxes’ had risen to Rs 174 crore in FY12, before cooling off to Rs 88.57 crore in FY16. 

Padam Bahl, a senior chartered accountant (CA) and an independent director in Religare, is also a director of Verne Developers, a company controlled by the Dhillon couple. Bahl chaired the audit committee and nomination committee of Religare, according to the 2015-16 annual report.  Religare sources maintain Bahl was on board in his capacity as an experienced CA and that the Dhillon family is a purely financial investor and do not have any direct involvement in the management. 

Big write-offs

Among the larger accounts of Religare Finvest (RFL), which positioned itself as an SME financing entity, were Kingfisher Airlines, Deccan Chronicle and ABG Shipyard. The firm had lent against pledge of promoter shares. But, the collapse of share prices of these entities had left the collateral insufficient, leading to Finvest eventually taking a hit. 

In November, a little over three months after the brothers came back, they took a Rs 800-crore write-off due to these troubled accounts. Though recovery efforts continued, the board of Religare Finvest on November 14 approved a “one-time write-off of the entire amount of Rs 519.92 crore in the profit and loss account pursuant to non-receipt of dues towards assignment of certain loan accounts by RFL”. In addition to the above, the board of RFL have further approved write-off of an entire amount of Rs 273.75 crore overdue in other accounts related to the same transaction, the company told the exchanges.

By the end of January, sources say, the new management has ensured that there is enough collateral to cover the loan book. 

Borrowers dealing in shares

On March 21, Adept Lifespaces, a little-known Delhi-based realty company bought 2.1 million shares worth close to Rs 50 crore in Religare Enterprises. The bulk deal data reported on the bourses showed the selling entity was Green Line Buildwell. Both these entities had the same registered address. 

When Business Standard visited the company’s registered address at 106, first floor, Surya Kiran Building in KG Marg, near Connaught Place on Tuesday, we found the office of another company called Best Healthcare operating there. All three companies have common directors — Pramod Kumar Ahuja and Rajveer Singh. They are also linked through shareholding as Adept and Green Line own 38.2 per cent stake each in Best Healthcare, while Best owns 158,000 preference shares in Adept.

The spokesperson and senior group executives did not comment on the Adept transaction and questions related to the relationship with the company/directors. 

Charge documents filed with the ministry of corporate affairs showed that Best Healthcare has received debenture investments of Rs 100 crore from ANR Securities. Shimal Healthcare had investments of Rs 80 crore in debentures of Best Healthcare. The Singhs are directors in Shimal Healthcare along with a senior group executive Hemant Dhingra, who is also on the board of ANR Securities, along with two board-level executives of the group, Preetinder Singh Joshi and Sanjeev Kumar Singhal. 

Adept, which was earlier known as Adept Creations, had raised Rs 150 crore from Religare Finvest in 2012, which it has since repaid in 2014. As of March 2016, Adept had raised inter-corporate loans, which are unsecured loans, totalling Rs 121 crore.  An email sent to Adept’s official email ID on Wednesday did not elicit any response.

Both Green Line and Adept had loan transactions with Modland Wears, which in turn had borrowed from multiple group entities including Religare Finvest, Shimal Healthcare, Oscar Investments and Fortis Health Management at various points of time over the past five years.

Group sources maintain that it is not unusual for businesses to have such a larger ecosystem of suppliers, customers and people with social acquaintances and that this should not be an issue as long as deals are at arms’ length.  Transactions such as this have caught the eye of the regulators in the past and they have expressed discomfort. 

RBI missive and the clean-up

Last year, the Reserve Bank of India (RBI) directed Religare Finvest to unwind its exposure through inter-corporate loans/deposits (ICDs). The ICDs were largely unsecured loans given to corporate entities based on guarantees. Religare sources said the ICD book had been created under the previous management and cleaning up this exposure was top on the agenda of the Singh brothers when they came back on the board of Religare last year. The brothers got due-diligence done of the loan book and have been working towards meeting the RBI deadline to clear the books of ICDs. This segment needs to be brought down to zero over a “year, year and a half”.

“The ICDs are not RPTs (related party transactions),” assured the Religare source, adding, “We are confident of meeting the deadline given by RBI.” A corporate law expert said, “When you lend to a shareholder, that becomes a related party transaction. But, if your borrower or a lender buys your share, that is not a related party transaction. One needs to analyse the entire set of transactions between these entities and juxtapose these various announcements over a period of time to form a view.”

Management churn

Apart from the changes in the structure, there is a lot of top-level churn that has happened over the past year. Last March, Religare’s long-time chief executive, Sachindra Nath, stepped down to pursue his own interests. 

Sunil Godhwani, a satsangi and the chairman of Religare during the period the promoters were not on board, was initially renamed whole-time director and CEO, is now just a director. Religare has had two new CEOs since, though there is some stability at the top of individual verticals such as NBFC, securities and investment banking. 

On April 11, Lynette Joy Hepburn Brown, an independent director on the Fortis board, tendered her resignation citing personal reasons including frequent long travel from Australia, where she is based.  On April 12, Ravi Mehrotra, a non-executive director on both Fortis and Religare, tendered his resignation. Sources said Mehrotra resigned to focus more on the group’s health trust manager, which incidentally was sold by Religare to Fortis in February last year for $15 million (Rs 100 crore).