A detailed research into the corporate governance issue in CG Power and Industrial Solutions has revealed that a battle for the boardroom and for corporate control has led to value destruction for minority shareholders of the company.
CG Power is under investigation by the Serious Fraud Investigation Office and Enforcement Directorate for use of funds and land assets from the company by promoter-connected entities and borrowings against assets of the company for the benefit of other group companies.
A report by InGovern Research Services has raised several questions on the role of the board, banks, and private equity firm KKR India. “Banks and non-banking financial companies seem to have been fully cognizant of the situation in the company and other group companies and yet continued to fund and increase group company exposures against guarantees of the listed company,” the report said.
An audit committee of the company on Tuesday red-flagged unauthorised transactions by certain employees of the company, leading to an understatement of not just the company’s liabilities but also advances to related and unrelated parties of the group.
The report has cited that fees paid for non-audit services, including tax audit fees, certificate work, fees for other services and expenses, were usually more than 50 per cent of the total auditor’s remuneration for any given year.
“As a good corporate governance practice, it should never exceed 30 per cent of the total auditors’ remuneration. Arrangements such as these should be treated as red flags and concerns should be raised by shareholders to their boards,” the report stated.
The research also said that KKR India may have had a role in the unfolding of events at CG Power, since the private equity investor had debt exposure to the holding company Avantha Holdings, which the latter was unable to repay fully.
This may be why the relations went downhill between KKR India and the promoter of CG Power, Gautam Thapar.
Moreover, KKR India had asked for appointment of Narayan Seshadri initially as a consultant and later as an independent director, who then set up an operations committee and hired Vaish Associates to investigate certain transactions.
“We have been a lender to Avantha Holdings and not a shareholder of CG Power until we enforced our share pledge on September 16, 2019, as a result of defaults by Avantha Holdings. As a result of our enforcement, we now own just under 10 per cent of equity stake in CG Power. As a shareholder, it is in our interest to engage constructively with the company, both through its board and shareholders, in order to preserve and enhance the value of the company. The appointment of Seshadri as an independent director predates our share pledge enforcement and in any case it is entirely within the board's power to manage the affairs of the company in accordance with its charter,” said a KKR India spokesperson.
When contacted, a source close to Thapar said the company in question here is CG Power Solutions, which is a subsidiary of CG Power and Industrial Solutions. It is incorrect to assume that a non-executive chairman is associated with the day-to-day operations of a subsidiary. “The then managing director and chief executive officer should clarify such matters as they were looking into the daily workings of the company. It seems these reports stem from certain bogus reports being referred to at different levels,” the source said.
Thapar has alleged that the events at CG Power have been orchestrated by the lenders as KKR India to oust the promoters and take control of the company
The report also mentioned that the wealth of CG Power shareholders has eroded by more than 76 per cent in less than a year.
It also suggests that CG Power’s funds were used to pay off debts of BILT or other group companies.
BILT had defaulted in repayment of borrowings and payment of interest and underwent strategic debt restructuring in 2017. Its subsidiary BILT Graphic was also under severe financial duress and had to undertake a master restructuring agreement in 2018. It is possible that the funds were routed to BILT to avoid the possibility of banks curtailing the limits to CG Power itself.
A Securities and Exchange Board of India order dated September 17, 2019, stated that, “Funds diverted from your company were fraudulently transferred to its promoter company i.e., Avantha Holdings and entities related or connected with the company, viz., Avantha International, Acton, Ballarpur International, Mirabelle, and Solaris, without the knowledge of the company and without any approval from its board.”