Weaving A Tangled Web
But McLeod has been able to do far more than mere innovative accounting. The company has boosted its profits primarily through 'other income', of which profits from sale of investments (net of losses) accounted for Rs 19 crore. McLeod Russel sold 6.7 lakh Nestle shares. And who bought them? Subsidiary companies Natex Investment & Marketing and Eveready Industries, which together bought 9.9 lakh shares. The sale enabled McLeod Russel to boost its bottomline.
Eveready Industries, too, was able to show a higher profit in 1995-96 due to higher 'other income', of which profit on sale of investments amounted to Rs 10.25 crore. Compare this with the increase in net profit of Rs 9.8 crore. Eveready sold units of UTI's Unit-64 and HDFC shares. Eveready also gave a loan of Rs15.24 crore to its subsidiary, Natex, and an ICD of Rs 7 crore to McLeod Russel, its holding company.
Another subsidiary, Faith Investments, also contributed to McLeod's cash flow by repaying its loan. It was able to do this by selling investments, mainly the scrips of Eveready, India Foils and Bishnauth Tea "" all group companies. In Natex, the loans given by Eveready were used to buy shares in Nestle, India Foils, Bishnauth Tea and Williamson Financial.
It is clear, therefore, that transfers of investments within the group have been made to boost the bottomlines of both McLeod Russel and Eveready Industries. When McLeod bought Eveready, it raised funds by way of very short-term zero per cent non-convertible debentures amounting Rs 310 crore, which were repaid in 1995-96.
The premium on redemption, which amounted to Rs 16.6 crore, was not routed through the P&L account, but was, instead, adjusted against share premium account. As on March 31, 1996, out of the rights-cum-public issue of Rs 302 crore, the company received Rs 240.80 crore from share application fees and call money. The balance Rs 62.02 crore as on 31 March 1996, has been shown as arrears proportionately against share capital and share premium account.
With the money raised through the capital issue, McLeod Russel not only paid back the debentures but also increased loans and advances by around Rs 22 crore.
How did Eveready fund its purchases of group company shares and loans to its holding company and subsidiaries? By borrowing from the Industrial Reconstruction Bank of India and from the ICD market, against the security of its real estate.