Last Law Of Manu ...Run

THE foundation of Manohar Raja-ram (Manu) Chhabria's business empire has received a jolt. The hitherto docile financial institutions have voted against two key resolutions. One proposed the reappointment of Chhabria as director of Shaw Wallace & Co (SW), the other was to pass the balancesheet and the profit and loss account for the financial year ended June 30, 1996. The vote was recorded at a poll after a tumultuous annual general meeting (AGM) on August 8 in Calcutta. There was pandemonium at the AGM as SW employee shareholders breathed vitriol at the Chhabria-led management for acting against the interests of shareholders, employees and debtors. However, all resolutions were passed, thanks to the brute majority of the 48-odd per cent equity held by Chhabria.

As expected, Chhabria was absent at the AGM; he remains holed up in Dubai to avoid confronting the Enforcement Directorate (ED) which wants to question him for alleged FERA violations in connection with fund-siphoning from SW.

The FIs were faced with a Hobson's choice as voting for the first two resolutions would be tantamount to defending the indefensible. SW's annual report and accounts for the period ending June 30, 1996, has attracted more qualifications from the auditors than any other major Indian company in the recent past. In fact, one auditor, Price Waterhouse, is not offering itself for another term; the vacancy will be filled by S.R. Batliboi and Co, while Lodha and Co will continue as the other auditor. The auditors have washed their hands of the balancesheet and profit and loss accounts, saying they are "unable to comment whether the company is sick within the provisions of the Sick Companies (special provisions) Act".

What appears to have scared the auditors is the total financial mess at SW, making it almost impossible to assess hidden liabilities and the growing allegations of siphoning of funds. The culpability of the auditor in the sudden collapse of the CRB group must have also rung an alarm bell. Analysts feel that if the auditors had been more vigilant in passing the company's previous annual accounts, particularly the 15-month period ending June 30, 1995, things would not have been in such a sorry state.

SW's 1995-96 results are an eyesore. Against a net profit of Rs 53.3 crore in 1994, and Rs 70 crore in 1994-95, it has this time recorded a token profit of just Rs 10 lakh, forcing the company to skip dividends for the first time in 50 years. Of course, the 1994-95 results were as bad, if not worse, but were camouflaged by financial jugglery and misstatements which were overlooked by auditors. What appears to have roused the auditors from their complacency—particularly Price Waterhouse—is a petition filed in June 1996 by 299 employee shareholders and the All India SW Employees Federation with the Company Law Board (CLB). This accuses SW, its directors and some of its present and former subsidiaries of mismanagement. The auditors and the involved FIs have also been made respondents.

The Department of Company Affairs (DCA) has also filed a petition of mismanagement with the same CLB bench. And there's the ongoing FERA probe. While the ED is seeking to interrogate Chhabria in this connection, he is refusing to come to India and face the charges. Business circles are surprised how Chhabria has been allowed to defy the ED while ITC directors are undergoing an ordeal by fire.

THE plan to siphon off huge funds from SW was allegedly hatched in 1993. While the beneficiary would be Chhabria, its midwife was P.L. Narasimhan, the then finance director, who later faced ED interrogation and imprisonment. Suddenly Narasimhan unfolded SW's "Vision 2000", projecting it as a Rs 5,000-crore company by the turn of the century. SW would not only be the liquor king but also a multi-product giant in various unrelated fields. Ostensibly to finance these projects, from 1994, SW began garnering huge amounts through ICDs and public deposits. But suddenly in 1995, Chhabria changed tack and declared that liquor was SW's core area and the company would not only drop diversification plans but also hive off non-liquor related divisions.

During the period SW raised about Rs 300 crore but invested only about Rs 80 crore in acquiring assets. Where did the balance Rs 220 crore go? This has allegedly been siphoned off from the company and taken out of the country via the hawala route.

The alleged operation was unsophisticated. SW acquired dummy subsidiaries into which it began funnelling huge loans and deposits obtained through ICDs. In '94-95 SW's net transfer to 18 subsidiaries was Rs 153 crore. The subsidiaries invested Rs 90 crore in six moribund companies registered with the Guwahati Stock Exchange. The subsidiaries also invested Rs 45 crore in another SW subsidiary, Hayward Breweries, which is not a manufacturing unit.

It is difficult for the uninitiated to solve the riddle as the accounts of the subsidiaries and Haywards Breweries have not been published as yet, although they were supposed to have been attached with the current balancesheet. While fingers are pointed at Chhabria and his accomplices for masterminding the alleged scam, sources say the delay by the CLB in probing the subsidiaries and the ED's failure to interrogate Chhabria are assisting the cover-up operation.

Two examples illustrate the cavalier manner in which SW is being run. The petition notes that after 1992, SW entered into a brand promotion agreement with the Golden Tobacco Company (GTC) whereby GTC was to display SW's stickers on its cigarette packets. But GTC allegedly reneged on the agreement. The auditors have corroborated this, adding that out of the brand development agreement of Rs 19 crore, Rs 14 crore have already been paid to the GTC.

It is doubtful whether this can be recovered and a long and costly legal battle is on the cards. In the second instance, the petition says SW was forced to buy rejected software from Dunlop (India)—another Chhabria-controlled company—for Rs 30 crore to boost Dunlop's bottomline. Thereafter SW booked the sale of the same software for Rs 47.50 crore to Jumbo Global (I) Ltd, another Chhabria stable company.

The auditors have noted this transaction and said it could not be ascertained as yet whether the sales proceeds were realised. But SW has not made any provisions for this. It is also charged that what is shown as sales promotion expenses could actually be a conduit to siphon off funds. These expenses are rising continually and went up from Rs 25.89 crore in the 15-month period ending June 1995 to Rs 47.32 crore in the current 12-month period.

The adverse impact of the huge loans taken by SW began to manifest in the 1994-95 balancesheet. According to the current balance-sheet, unsecured loans incurred by the company total Rs 263 crore (including Rs 45 crore taken from subsidiaries). This was only Rs 55 crore in 1993-94. SW's total sundry debtors net of provisions is now Rs 192 crore (subsidiaries Rs 49 crore). It was just Rs 83 crore in 1993-94. Accrued interest of subsidiaries is Rs 87 crore, up from Rs 5 crore in 1993-94. Corporate circles apprehend that considering the financial state of the subsidiaries, they would be unable to repay either the principal or the accrued interest which would have to be written off at the cost of the shareholders and other debtors of SW.

According to the 1995-96 balancesheet, total loans and advances to subsidiaries is Rs 328 crore—and it's likely to be much higher now. It is indeed strange why SW has continued to divert funds to subsidiaries while it is defaulting in repayment of its ICD and public deposit borrowings. No wonder the auditors have played safe by pleading inability to comment whether the rates and the terms of the loans taken or granted by the company are not prima facie prejudicial to the interest of the company.

While Chhabria's detractors are jubilant over the FIs' decision to vote against the two resolutions hoping that Chhabria will now be brought to book, others are not so sure. The latter feel that Chhabria has considerable clout with the powers that be, otherwise he could not have got away with so much so long. They feel that the FIs' dissenting vote could be a mere eyewash to ward off future criticism of inaction. It remains to be seen if any follow-up action is taken against Chhabria now.