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December 18, 2013

Blow-by-Blow Accounts on Private Equity-Promoter Blowups

Economic Times has a roundup up of the various recent blowups between Indian promoters and their Private Equity investors. The article starts with how employees of Sagar Ratna restaurants - allegedly at the instigation of the former promoter - beat up the executives appointed by the PE investor (who is now in majority "control" of the company). The PE investor has accused the former promoter of violating his non-compete agreement and promoting a rival chain. The promoter has claimed that he has nothing to do with the new chain and has offered to buyback his stake in Sagar Ratna at a 25% discount to the price at which he sold his majority stake over two years ago. Extracts:
The conflicts are, increasingly, becoming more acrimonious, even farcical, less professional and more personal. They are shining an ugly light on promoter quality and business practices, which were never of the highest order in India, and unfavourable regulations. "Promoters have used regulatory hurdles against PE investors," says Sanjeev Krishan, executive director of audit and consulting firm PricewaterhouseCoopers. "This is one reason why the number of active PE funds has come down in India."

... A consultant with a multinational accounting firm who has done due diligence for PE firms highlights one of the ways in which promoters add gloss. "Promoters have access to cash through their family circles," he says, not wanting to be named. "They route this cash via fictitious companies to show as genuine payments for sales done. The cash comes into the company, but it is just to boost sales and profitability, and paint a rosy picture."


...In recent conflicts, "promoters have come out poorly," adds the consultant quoted above. "Controls are just not there. Few people control the entire operations and they resist change." Rituraj Sinha bristles when such observations are made in a sweeping way. "All promoters cannot be tarred with the same brush," says Sinha, group chief operating officer, Security and Intelligence Services (India). "PE funds are in the business of investing and identifying well-run businesses from the bad ones. Therefore, the onus is on them."
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