BS READS: A debt-laden gym chain, a tainted auditor, and the missing crores

Even as Talwalkar group firms are defaulting on interest payments, Talwalkars Health Clubs has been pumping money into newly incorporated firms with negligible operational income and no track record

A legacy gym chain brand whose history could be traced back to 1932, Talwalkars has been in the throes of a financial mess and stagnation. From over Rs 1,000 crore at its peak in March 2015, the chain’s market value today has plummeted to a mere Rs 15 crore, with both its group companies defaulting on interest payments since August 2019 and currently trading at under Re 4 per share.

While the Talwalkar group has a debt of over Rs 700 crore from Axis Bank, Indostar Capital has the biggest exposure to its group companies. According to media reports, continuous interest payment defaults have forced lenders to appoint a forensic auditor to look into the books of accounts of Talwalkar group firms.

Emailed queries sent to Axis Bank about the status of the forensic audit had not elicited any response as of the time of publishing of this report.

In August 2019, the statutory auditors of Talwalkars Better Value Fitness - MK M.K. Dandeker & Co. had resigned citing corporate governance and management issues. The resignation letter from the auditor states that they did not receive satisfactory responses from the company for queries raised. On the same day, Raman Maroo, independent director of the company also tendered his resignation citing his advancing age and other professional commitments as the reason.

Even though the Talwalkar group has been defaulting on interest payments, one of the group companies - Talwalkars Health Clubs Ltd (THL) has been pumping money into newly incorporated companies with negligible operational income and no prior track record, besides making investments in some companies owned by the promoter family. The annual report of the company for 2017-18 shows that it has invested more than Rs 60 crore in five such entities (See graphic).


 

A closer look at the books of accounts of THL and these five investee companies reveals various governance issues.

The Talwalkar group

Based in Mumbai, the Talwalkar group operates through two listed companies — Talwalkars Better Value Fitness Ltd (TBVFL), the luxury health-club and lifestyle business and Talwalkar Health Clubs Ltd (THL), the gym business. In its corporate presentation for 2017-18, the latest available, the group claims to have over 200,000 members for its 200 fitness centres across 84 cities in India and Sri Lanka.

The group is currently run by third-generation Talwalkar scions Prashant and Girish, along with other promoters Anant and Vinayak Gawande, and Harsha Bhatkal. While Girish is the chairman of THL and a TBVFL executive director, Prashant serves as CEO & MD of THL. Among other promoters, Harsha and Anant serve as executive directors of THL.

A tainted auditor, and investee companies with no track record

THL's books of accounts for 2017-18 were audited by Lakdawala & Associates, an audit firm owned by Ketan Lakdawala, who has since been arrested by the Mumbai Police’s economic offence wing. He had also audited PMC Bank through another firm, Lakdawala & Co, and been accused of receiving kickbacks to overlook lapses in accounts.

Lakdawala & Associates, which had been appointed the statutory auditor of THL in September 2017, had signed off the company's annual report for 2017-18. Apart from THL, the firm was also the auditor for three of the Talwalkar group’s investee companies — PWG Fitness, Abhipray Enterprises (name changed to Tallwall Trading), and Satkam Enterprises.

Abhipray Enterprises, and Satkam Enterprises have no prior track record of operations. Incorporated a day apart from each other in January 2018, these companies are recipients of Rs 15 crore of investment apiece from THL. So far, the companies have neither filed their financials with the Registrar of Companies (RoC) nor filed any regulatory document related to shares allotted to THL.

Both Abhipray Enterprises and Satkam Enterprises appointed Lakdawala & Associates as their auditor on the day of their incorporation and also shared a common registered address, a premise belonging to Popular Prakashan, which is owned by Harsha Bhatkal, also a promoter and executive director of THL.

On September 27, 2019, Lakdawala & Associates resigned as the auditor of these two companies. And the very next day, it was replaced by T Lakdawala & Associates, according to RoC filings. Business Standard could not establish if T Lakdawala & Associates is also related to Ketan Lakdawala.

PWG Fitness received Rs 25 crore as share application money from THL (Rs 20 crore in 2016-17 and Rs 5 crore the next year). Unlike the other two companies, PWG Fitness is already identified as an associate company of THL. As of March 31, 2018, around 50 per cent in the company was owned by THL and the rest by Sri Lanka-based Power World Gym Ltd, in which THL holds a 49.5 per cent stake.

PWG Fitness, too, was audited by Ketan Lakdawala’s firm. Incidentally, the firm resigned from PWG Fitness on the same day as it did from Abhipray Enterprises and Satkam Enterprises. And PWG Fitness, too, replaced it with T Lakdawala & Associates.

The company has not filed its financial statements with RoC since 2016-17. According to its annual report for 2016-17, PWG Fitness earned zero income from operations and a mere Rs 91,510 as other income. The annual report recognised Rs 20 crore as share application money but there was no account of Rs 5 crore invested by THL.

Other investments by THL

THL also invested Rs 11 crore in Chennai-registered Bloom Sports & Fitness Studio, incorporated only in February 2018. The company is currently 50 per cent owned by Sarvesh Shashi, who also runs yoga studios named Zorba, a joint venture with TBVFL.

Bloom Sports’ annual report for 2018-19 also shows negligible revenue from operations and zero assets. It, too, had not allotted any shares to THL or shown any share application money pending for allotment in its books as on March 31, 2019.

Just three months after its incorporation, Bloom Sports raised a loan of Rs 10 crore from Indostar Capital Finance, pledging THL’s stake in PWG Fitness, according to RoC filings. It used this money to grant a loan to another company during 2018-19, show RoC filings, without specifying the name of the entity.

THL invested another Rs 10 crore in subscribing to the shares of Life Fitness Pvt Ltd, a company owned by the Talwalkar family. The latest annual report for Life Fitness shows that the company recorded a total revenue of only Rs 98 lakh and posted a net profit of around Rs 25 lakh. The company’s RoC filings show that it operates as a real estate and property leasing company. Life Fitness had not allotted any shares to THL till March 31, 2019, or recognised any share application money pending for allotment.

Apart from PWG Fitness, no other investee company has recognised share application money from THL or allotted any shares to it so far. There is no trace of around Rs 60 crore moved from the books of accounts of THL. If you add the Rs 10-crore loan provided by Bloom Sports to an unknown entity, at least Rs 70 crore would be missing from the books of THL and associate companies.

Were these investments part of regular business operations? Even if they were, the investee companies are yet to allot to THL the shares for which these investments might have been made.

"Why would a company spend crores of rupees on companies with no prior track record and negligible assets on books? If the investments were for regular business operations, I don’t see any reason why this could not be within the entity or through a 100 per cent subsidiary. I don't see the rationale for investing money in promoter-owned companies," says Amit Tandon, founder and managing director of IiAS, a Mumbai-based proxy advisory firm.

"From the point of view of promoters, when a company is collapsing, depending on which side you are on, you could either try to salvage all this or move the money. Frequent resignations of auditors also raise a red flag on the way the company is operating," he adds.

While a forensic audit will further uncover the extent of the rot, there are plenty of indications of how the companies’ books of accounts might have been cooked up, besides the involvement of an auditor that has been involved in multiple suspect deals.

"Looking at the current situation of group companies that are defaulting on debt payments, such transactions prima facie seem to have been done with a mala fide intent. Investing in companies linked to directors and having no track record is a clear case of diversion of funds from the main group company," says J N Gupta, co-founder & managing director of Mumbai-based proxy advisory firm Stakeholders Empowerment Services (SES).

Emailed queries sent to the promoters of Talwalkar group companies – Prashant Talwalkar, Girish Talwalkar, Harsha Bhatkal and Vinayak Gawande – had not elicited a response till the time of publishing of this report. Their responses will be incorporated as and when they are received.