MUMBAI: A report by a law firm has revealed financial irregularities at CG Power and Industrial SolutionsNSE 4.68 % (CGP) that may have led the company to lose as much as Rs 3,000 crore, sources close to the development told ET.
“Most of these transactions were to help parent company Avantha Holdings; the scary part was that some were routed through third parties,” a source close to the development told ET.
The company had mandated law firm Vaish Associates for an investigation that revealed that at least nine such transactions were allegedly carried out by CG’s top brass without following due procedure, or being approved by the board. ET has a copy of the summary of this report.
The Transactions
In 2016, CG sold its land in Nashik and the factory on it to a company named Blue Garden Estate Private for around Rs 200 crore. CG passed on Rs 145 crore to Avantha Holdings (AHL) and Rs 53 crore to a company named ACTON. The report states both Blue Garden Estate Private and ACTON were shell companies with no real businesses. ET found out from the MCA database that both the companies were incorporated in March 2016 and have the same registered address and authorised capital of Rs 1,00,000.
In a similar transaction in 2017, CG sold its Kanjurmarg land in Mumbai to the same Blue Garden Estate for Rs 190 crore without board approvals, after its pact to sell this land to another company for Rs 499 crore fell through. The proceeds were again transferred to ACTON and two employees of CGP were paid Rs 5.85 crore and Rs 1 crore, respectively, as a part of the deal. The Vaish report said that both these transactions were structured to raise advances for remitting to companies outside the CG group, and there were no approvals of the board and the risk and audit committee (RAC).
The probe was initiated after a cheque issued by CG in favour of Yes BankNSE 0.60 % bounced. The cheque bouncing bouncing issue was brought to the notice of an ‘operations committee’ (OC), which was formed around the same time in April after CG’s parent Avantha Holdings’ (AHL) creditors started invocation of pledge of the former’s shares in March. AHL had taken a Rs 500 crore-loan for its own use from Yes Bank, which came with a condition that it will issue post-dated cheques as per repayment schedule.
The cheques were issued by CG without approval from its board or RAC. After one of these cheques bounced on April 2, Yes Bank asked for a fresh cheque which was declined by CG board, citing lack of knowledge about the transaction. Yes Bank issued a legal notice under Section 138 of the ‘Negotiable Instruments Act’ to CG, its directors and the two officials who signed the cheques, ex-CFO VR Venkatesh and B Hariharan, group director (finance) at Avantha Group. “This was not the only transaction undertaken by CG without board approval and due processes.
Some employees informed the OC of five transactions that were executed without authorisation and not appropriately recorded in financial statements of CG,” a source told ET. Subsequently, SRBC & Co, one of CG’s statutory auditors, highlighted four other transactions that needed investigation.
The RAC then appointed Vaish Associates as legal counsel to assist with the investigation, which, in turn, got Deloitte on board to investigate from an accounting perspective. Yes Bank declined to comment.
At the time of going to the press, detailed queries to CG Power and Gautam Thapar were unanswered. “All transactions as far as I know were proper and with requisite approvals. It seems that you have access to the Vaish report. I do not but I understand that it is inconclusive and heavily disclaimed,” B Hariharan said in response.
Overseas Arms
Another transaction occurred in December 2017, SG’s Singapore arm took a loan facility of Euro 44 million (Rs 348 crore), which was guaranteed by CG, for general corporate purposes of the CG group but it was diverted and remitted into the account of Avantha International, a private investment arm of the group’s promoter. The Vaish Report stated that there was ‘round-tripping’ of the amount between CG and Avantha International to ensure it is squared off and not reflected on the accounts of CG Singapore. “The on-lending to AIA was neither approved by CG board, nor permitted by the facility document,” the report said.
Another such transaction was routed through CG Middle East which took a foreign currency term loan of as much as $40 million (Rs 284 crore). This amount was drawn down in the account of guarantor CG International BV, which transferred it to CG India and then to CG PSOL in the UK which finally extended 97% of the total amount as an interest-free loan to Solaris, an Avantha group company outside of CG group.
The investigation also revealed that CG had outstanding trade receivables of Rs 108 crore from identified customers. CG executed trade transactions with customers and then wrote off the amount on non-receipt of amount in December 2018.The investigation revealed that the entities with which these deals were done either did not exist at the stated address or their address were not traceable.
In another instance, CG made advances to a vendor in Singapore, Mirabelle Trading, worth around Rs 100 crore in three tranches between March and July 2018, without board approval. Mirabelle Trading is a trading arm of one of Avantha group companies, Ballarpur IndustriesNSE -7.69 %, which according to this transaction was to develop switchgear and transformer for CG in south-east Asia and the Pacific region.
Sources also said that CG Middle East made several large value advances to to various vendors for transaction that “lack commercial rationale and have not been adequately explained.” CG Middle East extended advances of around Euro 34.72 million (Rs 275 crore) to various vendors for jobs that they were not qualified to do.
There was also an issue of CG giving a loan of Rs 229 crore to arm CG PSOL, which already had an outstanding loan of Rs 877.74 crore from the parent. This transaction was structured to reduce the debt of AHL to CG PSOL, the report states.
Since the financial irregularities came to light, the board of CG has asked the chairman Gautam Thapar and CFO to step down, and sent its CEO on leave.
It has elevated former independent director Sudhir Mathur as whole-time executive director. The company has restated its financial statements for FY18, and the ministry of corporate affairs has summoned top executives and board members for questioning.
Thapar has maintained that there is no fraud and challenged his ouster by the board.
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