Allegations of Financial Irregularities in Crompton Greaves

On September 17, the regulator of the country’s financial markets, the Securities and Exchange Board of India (SEBI) passed an interim order barring Gautam Thapar, former Chairman of Crompton Greaves (CG) Power and Industrial Solutions Limited from participating in capital market transactions. Similar restrictions were imposed on two former Directors of CG Power, Madhav Acharya and B Hariharan, and the company’s former Chief Financial Officer (CFO), V R Venkatesh. 

This move has come less than three weeks after Thapar was sacked from his post by the board of directors of CG Power on August 29, for allegedly being involved in serious financial irregularities. Thapar, however, continues to be a non-executive director on the company’s board.

Crompton Greaves (CG) is a household name. It manufactures, designs and markets a range of electrical products for household as well as for industrial use. The CG group is a multinational conglomerate. Besides India, it has branches and associate companies in various parts of the world from Singapore to West Asia and Europe.

The CG group sells household electrical goods, such as light bulbs, fans, kitchen appliances and water pumps. In addition, it supplies switchgear and specialised equipment for industrial use, including for the Indian Railways. It has lit up the headquarters of the Brihanmumbai Municipal Corporation.

CG Power’s total income and net sales turnover for the financial year (FY) that ended on March 31, 2019, stood at Rs 5,575.78 crore and Rs 5,355.60 crore, respectively. While the company earned an operating profit of Rs 354.60 crore that year, its post-tax loss stood at Rs 1,403 crore. CG Power’s net worth is positive at Rs 2,191 crore, but its debt is Rs 3,856 crore. 

In a regulatory filing on August 29, CG Power had stated: “In cognisance of the current situation being faced by the company and the recent developments, including disclosures dated August 19, 2019, made by the company, the board of directors… passed by majority consent, have resolved to remove Gautam Thapar as the Chairman of the board with immediate effect.”

The SEBI interim order took suo motu cognisance of media reports alleging fraudulent transactions in the company. The Bombay Stock Exchange (BSE) has also been asked by SEBI to appoint an independent auditor or audit firm to do a forensic probe of the accounts of CG Power from 2015-2016 to ascertain if there has been misappropriation of funds. The auditors will have to verify if there has been manipulation of the company’s books of accounts, misrepresentation of facts relating to financial transactions and business operations, or wrongful diversion/siphoning of funds.

The announcement filed by CG Power in both the BSE and the National Stock Exchange (NSE) on August 20 came after a meeting of the company’s board of directors as well as its risk and audit committee (RAC). Based on what the company stated, SEBI’s interim report noted that certain employees had made the operations committee of CG Power aware of particular unauthorised transactions. It was also made aware of a letter received from a financing company, Aditya Birla Finance Limited (ABFL) on CG Power’s failure to pay interest due. Unusually, the committee was unable to trace this letter or ascertain the situation from the company’s financial data.

To examine these allegations, the board of CG Power and its RAC appointed an independent law firm, Vaish Associates, which, in turn, engaged the services of Deloitte to assist it.

The interim order by SEBI alleged that the company and the group “potentially understated” total liabilities at the end of March 2019 by Rs 1,053.54 crore and Rs 1,608.17 crore, respectively. Moreover, advances made to related and unrelated parties were potentially understated by Rs 1,990.36 crore and Rs 2,806.63 crore, respectively.

“Certain assets of the Company were purportedly provided as collateral without due authority and the Company was made a co-borrower and/or guarantor for enabling ostensibly unrelated third parties to obtain loans without due authorisation,” the SEBI interim order claimed, adding: “The moneys so obtained were immediately and without due authorisation routed out of the Company, either by itself or from its subsidiaries or ostensibly unrelated parties to certain related parties. These … transactions are prima facie prejudicial to the interests of the Company.”

These transactions “were purportedly carried out by identified company personnel (both current and past) including certain Non–Executive Directors, certain KMPs (key management persons) and other identified employees … in breach of the Rules of Procedure of the Company (ROP), and/or without proper information to or authorization of either the RAC or the Board, and/or in breach of the Companies Act, 2013, applicable SEBI Regulations and other applicable laws.”

On August 26, the company’s board submitted a copy of a preliminary investigative report by Vaish Associates to SEBI. Responses to the report were received from Thapar, Acharya, Hariharan and Venkatesh on August 29 and August 30.

We summarise here details of nine questionable transactions relating to the CG group in recent years, some of which involved shell companies of the Avantha group (promoted by Thapar) and their senior employees who allegedly took decisions without obtaining the consent of the boards of directors of the principal/holding companies. In these transactions, efforts were allegedly made by signatories of group companies to conceal the flows of money from the board. Allegations of round-tripping or movement of funds across multiple entities have also been made.

1: Sale of a CG property in Nashik, Maharashtra to Blue Garden Estate Private Limited (BGEPL)

Property belonging to CG Power was sold without the approval of its owner, the Maharashtra Industries Development Corporation, to BGEPL, which took a loan of Rs 200 crore in 2016 from ABFL to pay CG Power for its property. CG Power had to pay an interest of 15% per annum on this advance. This money was, however, passed on interest-free to Avantha Holdings (Rs 145 crore) and another company, Acton Global Private Limited (Rs 53 crore). Both BGEPL and Acton had paid-up capital of just Rs 1 lakh each, in other words, they were akin to shell companies An amount of Rs 53 crore from Acton then moved to Birla Sun Life Mutual Funds.What was worse was that these transactions were not recorded in the financial statements of CG Power.

2: Sale of Kanjurmarg property to BGEPL

One of the transactions involves a sale of a property in Kanjurmarg (a suburb of Mumbai) to BGEPL that obtained a loan worth Rs 190 crore in early-2017 from ABFL. On February 17, 2017, Rs 190 crore was remitted from BGEPL to CG Power and from various bank accounts, the money found its way to Acton, which then transferred the money back to ABFL.

The funds were advanced against liabilities of BILT Graphics Paper Products Limited, part of the Avantha group. (BILT stands for Ballarpur Industries Limited promoted by the Thapar family and which is one of India’s leading manufacturers of paper.) The transfer of Rs 192 crore from CG Power to Acton was done without board permission -–this is apparently irregular as any disposal of a fixed asset exceeding Rs 50 crore in value has to be sanctioned by the board of directors, a reliable source told NewsClick.

The senior employees of CG Power, who were also Directors of BGEPL and were involved in the deal, included Atul Gulatee, treasury head, Raman Rajagopal of the Avantha group, Venkatesh, the former CFO of CG Power, Anirudh Chopra, an employee of CG Power and Regional Financial Controller, CG Holdings, Belgium.

The report by Vaish Associates pointed out that Acharya received Rs 5.85 crore between February 2017 and August 2017 from Acton and BGEPL. Crompton Greaves Power Solutions had paid Rs 1 crore to Gulatee between July 2016 and June 2017. These transactions do not find place in CG Power’s audited financial statements.

The SEBI interim order stated: “Funds diverted from CG Power were fraudulently transferred to its promoter company Avantha Holdings and entities related or connected with the company, Avantha International, Acton, Ballarpur International, Mirabelle and Solaris without the knowledge of the company and without any approval from its board.”

3: Cheques Issued in Favour of Yes Bank

CG Power had issued a “letter of comfort” on November 4, 2015 and paid Rs 210 crore by cheque to Yes Bank for a credit facility of Rs 500 crore granted by the bank to Avantha Holdings. (A letter of comfort is a letter issued to an entity, usually by a bank or financial institution, guaranteeing financial support.) The board of CG Power was made aware of this letter only in April 2019, when Yes Bank requested for the renewal of the validity of the cheque.

4: Borrowing of 44 Million Euros by CG International Holdings Singapore Pvt Ltd from Standard Chartered Bank

A transaction relating to CG Power’s subsidiary in Singapore, which availed a loan of 44 million Euros (currently equivalent to roughly Rs 346 crore) from Standard Chartered Bank has been questioned. The funds were disbursed on February 14, 2018, and the entire amount was remitted to AIA BV – a private investment entity belonging to Thapar, which is technically not part of the CG group – as an interest-free loan although CG Singapore had taken the loan from the bank at an interest rate of 2.25% per annum + Euro Interbank Offer Rate per annum.

The interim order of SEBI records that the loan had been advanced for certain specific purposes, such as meeting the working capital requirements for CG group companies, but had been diverted. This entire transaction was in violation of CG Power’s rules that states that two signatories have to be from different teams, one from the operations team and the other from finance. On January 31, 2018, Hariharan was added as a signatory to CG Singapore 15 days before the transaction took place. Both the signatories, Venkatesh and Hariharan, were from the finance team.

5: Term Loan of $40 Million to CG Middle East from IndusInd Bank, India

A term loan of $40 million was advanced to CG Middle East, a wholly owned subsidiary of CG Power from IndusInd Bank in India. The parent company of CG Middle East is CG International BV, which received the entire money in October 2017 from where the funds travelled to CG Power, then to its wholly-owned subsidiary CG Power Solutions Limited (PSOL) and thereafter again to Solaris Industrial Chemicals Limited, which, in turn, is part of the Avantha group. CG Power’s board of directors had no clue about this transaction.

CG Power’s Middle East subsidiary availed of the credit facility at an interest rate of 4.5% + 3 months LIBOR (or London Inter-Bank Offer Rate) but the amount was advanced/remitted to Solaris free of interest.

6: Outstanding Advances to Vendors in CG Singapore 

A service agreement was signed between CG Singapore and Mirabelle in 2013 by Acharya without a board resolution. Acharya was a Director of CG Power but not CG Singapore. Mirabelle, an associate company of Avantha Holdings, allegedly did not have any expertise in providing the services it had been tasked to provide, such as to create new business opportunities for the CG Power group in countries like Indonesia and Malaysia. 

7: Outstanding Advances to Vendors in CG Middle East

Advances worth 34 million Euros that were given to vendors by CG Middle East between FY2017-18 and FY2018-19 have not been recovered. Service agents were appointed by CG Middle East for customer contracts that cost CG Middle East 35 million Euros, or a million Euros more than what had been advanced. Out of the 34 million Euros advanced, 0.6 million went to Ballarpur International Holdings BV as an interest-free loan. Approval of the board for appointment of service agents and the interest-free loan had not been obtained.

8: CG Power Subsidiary advanced Rs 778 crore to Avantha Holdings Limited

CG Power pays royalty to Avantha Holdings Limited for rights to use its brand name. The last such payment was made on August 31, 2018. An advance of Rs 778 crore had been made by CG Power’s subsidiary, PSOL, to Avantha Holdings on November 13, 2018, but the money had not been repaid. Avantha Holdings wrote a letter to CG Power on September 28, 2018, saying it would make a deposit of Rs 229 crore on certain conditions. An important condition was that the entire amount would be remitted back to Avantha Holdings if CG Power failed to pay the royalty due by March 20, 2019.

However, CG Power and Avantha Holdings could not come to an agreement on the terms of payment before March 20. A sum of Rs 235.83 crore (deposit amount plus interest) was then transferred to PSOL eight days later on March 28 and on that day itself PSOL transferred the amount to Avantha Holdings. Once again, the board of CG Power was unaware of this deal that resulted in a gain for Avantha Holdings at the cost of CG Power.

9: Outstanding Trade Receivables of Rs 108 crore from Identified Customers

CG Power executed trade sales transactions worth Rs 120 crore between April and June 2017 with three customers, Sidhi Vinayak Traders, Miriam Enterprises and Jain Enterprises, for products such as copper wire rods and services like cargo lamination and fabrication of tanks. Since payments did not come till the end of December 2018, CG Power made a provision of 10% of the contracted amount as liquidated damages. The company entered into another agreement with Baba Iron Industries to sell its outstanding receivables and made a provision in consultation with its statutory auditors, S R Batliboi & Company LLP (limited liability partnership).

Vaish Associates and Deloitte alleged that these transactions appeared to be fictitious. These were discrepancies in the invoices issued: signatures did not match, tax numbers, addresses and information on directors of particular entities could not be found and there was no documentation to support claimed physical movement of goods. Other entities involved in these transactions were Aldrich Consultancy, Velocious Info Services, Mahalaxmi Traders, Swastik Trading, Star International, Kausal Trading, Shri Balaji Projects, Shri Sai Sales Projects, Sri Infra Projects, S K Traders and R K Trading.

Venkatesh, the then CFO, claimed he paid these commission agents on verbal instructions from Acharya. Yet again, the transactions apparently violated company rules and board approval was not obtained.

If the allegations documented by Vaish Associates, in collaboration with Deloitte, that have been reproduced in SEBI’s interim order, turn out to be correct, difficult times lie ahead for Gautam Thapar and the Crompton Greaves and Avantha corporate conglomerates.

The writers are independent journalists.