Promoters, PE investors' row raises key issues

The tussle between promoters and private equity investors in companies such as of Lilliput Kidswear and KS Oils have dug up again same issues of lack of corporate governance as well due diligence among the PE fund managers.

Early this month, Delhi-based Lilliput Kidswear had approached the Delhi High Court seeking to prevent its private equity investors-Bain Capital and TPG to exit from the company by selling their stakes. According to the company promoter-Sanjay Narula, the PE investors have tried to defer the proposed initial public offer (IPO) of Lilliput. The PE investors reportedly raised doubts about company's audited financial statements.

Richard Rekhy, head of advisory- KPMG India said, "The PE investors who are in a hurry to invest need to do more due diligence before closing the deal. They should really understand the company, auditors, policy they follow etc. PE investors should never ignore even the minute points that come out of diligence." With doing proper integrity due diligence, PE firms should know the integrity of promoters as well, he added.

In a similar incident, US-based hedge fund QVT filed a suit against Zenith Infotech, where PE investo-Summit Partners invested, following defaulting on foreign currency convertible bond (FCCB) repayment. QVT wanted to block Zenith's deal with Summit. Officials of Summit Partners did not respond to BS queries.

KS Oils also witnessed a fight between promoters and PE investors following promoters allegedly fudged up company account. A few PE investors have also stepped down from board of KS Oils.

According to Sunit Mehra, managing partner, Hunt Partners, a global executive search firm, lack of corporate governance is another issue which creates difference between promoters and investors. He said, "In India, we see a drop in governance even though the company law board stipulates some of the best regulations in the world. There is a clear disconnect between governance and compliance, which affects investor confidence globally, and the situation may worsen if the issues are not contained.”

Devinjit Singh Singh, managing director, The Carlyle Group, said, "Obviously, such incidents have an impact on PE industry, which will force foreign investors to be more conscious over corporate governance in portfolio companies. However, we are consistent with our diligence process and always wanted to work with right promoters who always follow the agreement with us."  

A recent KPMG-CII study on corporate governance said, "Recent scandals in corporate India have raised questions not only about the practices adopted by companies to solicit business but also about the standards of accountability in public administration including within the government machinery and institutions."

A CEO of domestic PE fund blames both PE investors as well as promoters for these issues. "Over ambitious promoters as well PE investors who wanted to see quick growth of the company are culprits." According to him, though such incidents happen across sectors, retail industry is more prone to such disputes. "Retail is one of the fast growing industries and every one wanted to tap that potential. Highly leveraged balance sheets remain the root cause for such disputes," he added.

A similar case is still going on at Madras High Court among retail chain-Subhiksha, its PE investor-ICICI Venture, and lender-Kotak Mahindra Bank. ICICI Venture had to write off its 23 per cent in Subhiksha, following Subhiksha defaulted loans, purchase payments and even staff salaries, which caused shutting down its nationwide network of 2,000 stores, a few years back.

Interestingly, ICICI Venture was not allowed to check company's audited accounts since 2007. In 2009, Kotak Mahindra bank, lender to Subhiksha filed a winding up petition at the Madras high court seeking to recover its dues from Subhiksha. Though no final verdict did come, Madras HC has recently lifted the stay on inspection report by the Ministry of Corporate Affairs on Subhiksha.

Mehra, added, "In situations like Subhiksha or Lilliput, beyond a point the independent directors are helpless, especially if the organisation continues to provide inaccurate data in board meetings. Solutions could include more effective implementation of penalties against organisations who default."