Want to buy brand new flats in South Mumbai’s Breach Candy, where realty prices quote in lakhs of rupees per square foot (psf), at Rs 9,200 psf? That is what textile major Raymond is planning to offer its chairman Gautam Hari Singhania and his close relatives.
The deal, a part of a decades-old family agreement, which has been put for shareholder approval in the upcoming annual general meeting (AGM), has drawn the ire of proxy firm Institutional Investor Advisory Services (IiAS). While the deal raises corporate governance issues, it also brings to the fore a legal battle over the iconic property — named after initials of the group’s founding fathers Juggilal and Kamalpat— between two branches of the Singhania family.
IiAS has slammed the move as a “rip-off” and questioned the quality of board oversight in the company. Estimating that the move will cost over Rs 650 crore in opportunity lost, IiAS has asked shareholders to vote against the resolution, which is coming up for vote on June 5.
The resolution seeks shareholder approval for offer by the company to each of the family members: Chairman emeritus and Gautam's father Vijaypat Singhania, Gautam Hari Singhania, Akshaypat Singhania and Veenadevi Singhania along with Anant Singhania (collectively referred as 'sublessees') for the purchase of premises in the new building known as 'J K House' at Rs 9,200 psf.
The 1,916-square yard property was acquired by Raymond in the 1940s to be used as the residence of its directors. Of the 12 floors, the first four floors had a shop and a museum, and the remaining eight floors comprise four duplex flats. Gautam’s grandfather, Kailashpat, had acquired Raymond woollen mills from its British owners around this time.
Kailashpat had two sons, Vijaypat and Ajaypat. Like in some other business families, the brothers were married to sisters Asha Devi and Veena Devi, respectively.
In the mid-1990s, the brothers and their families had agreed to take two duplex flats each.
Accordingly, Ajaypat and Veena Devi’s sons, Akshaypat and Anant, had rights over two duplex flats in the old building and have staked claims for possession of floors 21, 22, 23 and 24 in the new building.
The proposed sale is in accordance with the terms of the agreements dated November 6, 2007 executed between the company, Pashmina Holdings, a Raymond subsidiary, and the sublessees, who had surrendered their tenancy rights to enable the demolition of the old structure and construct a new structure. In July last year, Raymond received the occupancy certificate for the new building.
The recently rebuilt JK House is valued at Rs 1,17,000 psf (built up), putting a value on the entire transaction at Rs 710 crore.
Raymond, however, proposes to sell the property to the Singhania family factions for Rs 9,200 psf of carpet area — an over 90 per cent discount to market rates.
The sale price doesn’t even cover JK House’s average cost of construction, estimated at over Rs 11,000 psf. Raymond has spent Rs 270 crore, not including the cost of land, in rebuilding JK House. If the company were to sell the residential properties at market value, it would more than recover its cost of development, IiAS said.
The opportunity loss at over Rs 650 crore was large in the context of Raymond’s own limited size: it aggregates over Rs 100 a share, it said.
The deal raised several corporate governance issues, including conflict of interest of Vijaypat Singhania who was part of the audit committee.
“IiAS believes the board has failed to protect the interests of the minority shareholders. The company and directors must be prepared for shareholders seeking recompense,” the report warned.
In an emailed statement, Gautam Hari Singhania, chairman and managing director, Raymond, said, “We adhere to the highest level of corporate governance. Consequently, and given that offer required to be made by the company under the tripartite agreement pertaining to J K House, related party transaction which is in not in the ordinary course of business, the Raymond audit committee and board of directors have, based on legal advice and fiduciary duty to the shareholders, deferred the matter to shareholders for decision. All relevant facts pertaining to this matter have been set out in the AGM notice for shareholders to take a considered view. Needless to say, the promoters, being interested parties, will abstain from voting on this matter.
“I assure you that the company is committed to protect interest of all its shareholders and is taking all appropriate steps, including legal measures, towards this objective. As also mentioned in the notice, the company will raise all defences in the legal proceedings that have been initiated and will undertake all steps to protect and preserve the property of the company.”
Governance issues apart, if the minority shareholders vote the proposal out, it would weaken the claims of the family of late Ajaypat, according to a source close to the family. Emails sent to Akshaypat and Anant did not elicit any response.
The move by Raymond closely follows an April hearing at the Bombay High Court, where Akshaypat and Anant have moved arbitration petitions. Raymond’s counsels had agreed not to create third party rights on properties claimed by the two.
“At the hearing held on April 12, 2017, the learned senior counsels assured the honorable judge of high court that the company will not, till further orders, create any third party rights or alienate or encumber or part with possession of the two apartments, situated on the 21st, 22nd, 23rd and 24th floors of the new building, and will continue the leave and license agreement for the alternate premises occupied by the sub-lessees,” the AGM notice said. The next hearing is scheduled on June 14.
Though Raymond shares fell by up to 10% in early trade on Thursday, they recovered handsomely to close with gains of 2.5 per cent at Rs 680.5 on the BSE.
Some questions Raymond shareholders should ask, according to IiAS
- Has the audit committee approved the resolution to sell JK House?
- Where does the board stand on the resolution, and what is its guidance to shareholders?
- Why were there no disclosures regarding this transaction earlier?
- What does the 156,747 sq ft of ‘other saleable amenities and service space’ in JK House actually consist of?
- Given that the company had a pre-existing sale price of Rs 9,200 per sq ft of carpet area, why did it not curtail its cost of construction to less than that?
- How much debt is attributable to the rebuilding of JK House?
- What was the prevailing market price or the reckoner rate of the property at the time the 2007 agreement was signed?