Fraud-hit CG Power to sell properties by FY21, use proceeds to repay debt

Fraud-hit CG Power and Industrial Solutions (CG Power) is planning to complete the sale of its Mumbai land parcel by March 2020 and CG House by the following financial year, the company has informed its rating agency.

“As per the management, the company also aims to complete the sale of its land parcel in Kanjurmarg by end-January 2020 while the sale of CG House is likely to be completed by the first half of FY2021,” India Ratings said in its note while downgrading the company’s ratings from BBB+ to B on Friday on corporate governance issues.

The proceeds from the sale (land and CG House) are likely to be used for repaying part of its debt and meeting its working capital requirements.

In June this year, CG Power informed the exchanges it had entered into an agreement with Evie Real Estate for a land parcel in Kanjurmarg, Mumbai, for Rs 498.96 crore.

The land parcel currently houses the transformer-manufacturing unit of CG Power and measures 13 acres.

CG Power on Tuesday informed the exchanges of a risk and audit committee (RAC) report that detailed dubious transactions at the company. The report indicated it was an employee-led fraud. Following this, the India Ratings’ downgrade came.

“The Negative Outlook reflects the heightened debt repayment risk in the near term, given the company’s weak liquidity position,” the rating note released on Friday said.

According to India Ratings, CG Power’s liquidity position deteriorated significantly with a cash balance of Rs 240 crore at end of FY19, estimated against debt-servicing requirements of more than Rs 600 crore in FY20.

“The downgrade reflects weak corporate governance reflected by the financial irregularities reported by the company in 4QFY19 results announcement and weakened financial profile,” the rating note added.

One of CG Power’s joint auditors, SRBC & CO LLP, has sought information and an explanation from the company regarding certain other transactions as part of the notice issued to it. These notices, India Ratings in a note said, “pertains to cases where the auditor believes an offence involving fraud is being or has been committed by the officers or employees of the company”.

Between October last year and August this year, CG Power’s rating has been downgraded multiple times. In October, the company was rated AA negative, which fell to BBB+ on August 5.

The RAC report, which was made public on Tuesday, had flagged high-value loans extended to group companies. An India Ratings note on April 3 shows lower recoveries from group companies. “As of December 2018, CG Power received Rs 80 crore of Rs 760 crore extended to associated group companies, as against an expectation of Rs 200 crore,” the note said.

There has been an attempt to reduce these receivables from the Avantha Group through reduction in royalties payable. In the December 2018 quarter, CG Power decided to reduce royalties payable to Avantha by half and in turn reduce loan receivables from the group. “Against a reduction in royalties, the company would be reducing group receivables by Rs 410 crore. As per the management, the balance Rs 270 crore would be recovered over a period of time,” the India Ratings in its April 3 note said.