LEEL Electricals was in 3 kinds of businesses 1) Branded Goods – to manufacture ACs and distributing and selling it under its own brand name 2) Contract manufacturing – to manufacture an intermediate product or parts of AC and sell to other AC manufacturers i.e. to competitors of its own brand 3) Turnkey Projects – undertaking turnkey contracts related to its ACs in India and aboard.
One fine day, LEEL announced sale of its branded goods business for 1502cr to Havells. As per the terms of the agreement, only brands and working capital were to be transferred to the acquirer and rest of the two businesses together with all plants and machinery will remain with the LEEL.
Havells came out with its quarterly results of Q1 post deal and announced that the deal is completed. It also disclosed all the relevant numbers. As part of the quarterly presentation they said they paid 1502cr, out of which the acquired net working capital (Inventory+Receivable-payables) is 74cr. So the rest 1428cr should be attributable to acquisition of the brands. Now this consideration of 1428cr paid for the brands should broadly be the profits in the books of seller i.e. LEEL, because the book value of brands was close to zero in its own books.
Many days after the declaration of quarterly results by the acquirer, LEEL came out with its Q1 results. Here was a googly. It said, the deal is still not closed pending certain conditions and hence profit from the deal has not been recognized. How in the world it’s possible, that the acquirer said that the deal is closed many days before but the seller said that it’s not yet!!!. One of them was obviously wrong. Because of this peculiar absurdity, in this particular quarter, working capital involved would have been seating on the books of both the companies in spite of the fact that only one was the owner of it.
Then Q2 results of LEEL came in which they said that the deal is closed. The profits disclosed due to sale should have been 1428cr. However they said they made only 946cr of profits and that too subject to “closing adjustments”. Moreover at the end of Q4 result of the financial year, company again said that profit on sale after closing adjustments was only 663cr (not 946cr), hence additional exceptional loss of 283cr during Q4 of the financial year. How it’s possible? Acquirer said that they paid 1428cr for brands. It was very clear from LEEL balance sheet that the book value of brands were negligible. So the consideration paid for the brands i.e. 1428cr should be the profits for LEEL. But it was not so.
So what explains the difference of 765cr (1428cr-663cr)? There are two possibilities in my view. First LEEL has been inflating its profits over past many years by creating fictitious working capital (inventory/receivables) which is subsequently adjusted from the gains on the sale of the business. Second Company had no fictitious working capital earlier. It actually had all this 765cr working capital (inventory/receivables) but it was not sold to acquirer as part of the deal. But the money collected from the subsequent liquidation of inventory/receivables has been siphoned off by the promoters and shown as lost or unrecoverable. I am not sure which is the case here? As expected, there are not enough disclosures either to figure it out.
It makes me wonder what the regulators were doing. I do not expect much from the auditors anyways. They will say “Whose Bread I Eat His Song I Sing”. It also makes me wonder how the income tax authorities cannot catch it. May be there are other priorities that have kept them busy.
However, things are not as bad in India as it looks from the illustration above. There are numerous examples for top notch corporate governance. Forget governance; think of Tatas post the change in management. Tata Sons did not stop, NTT Docomo from winning the case in Delhi high court for a payout of US$ 1.2 billion by Tata sons. The payment was stuck due to RBI permission. If they wish they could have stopped it in Delhi high court or they could have challenged the decision in Supreme Court. But it was not handled that way. I believe that was probably done to keep the word given by TATA.
All of it happened in India. It’s up to you which India you would like to create and follow..
That’s it for the quarter from my side.
