Raymond Limited: The Complete Rip-Off
In its forthcoming AGM on 5 June 2017, Raymond Limited has presented a resolution to make an offer to sell its premium real estate at throw-away rates to its promoters and their extended family. Should this transaction go through, IiAS estimates that it will result in an opportunity loss of over Rs. 6.5 bn for the company and its shareholders. IiAS recommends voting AGAINST this transaction. In our opinion, the board has failed to protect the interests of the minority shareholders. The company and its directors must prepare themselves for shareholders seeking recompense.
The sale of the four duplex apartments in JK House is likely to cause an opportunity loss of over Rs.6.5 bn (see footnote 1) to Raymond Limited. JK House is a recently-rebuilt building located at Breach Candy, Mumbai: Breach Candy is one of the most expensive real-estate locations in Mumbai. Raymond Limited’s own valuation report states that the residential property is valued at Rs.1,17,000 per square foot (built up), putting a value on the entire transaction at Rs.7.1 bn. Raymond, however, proposes to sell the property to the Singhania family factions for Rs.9,200 (see footnote 2) per square foot of carpet area – an over 90% discount to market rates.
IiAS estimates the opportunity loss at over Rs.6.5 bn (see footnote 3), which is large in the context of Raymond Limited’s own limited size: it aggregates over Rs.100 per share. Raymond has spent Rs.2.7 bn – not including the cost of land - in rebuilding JK House. The sale price of Rs.9,200 per square foot is lower than JK House's average cost of construction, estimated at over Rs.11,000 per square foot. If the company were to sell the residential properties at market value, it would more than recover its cost of development.
The transaction lends credence to an investor’s allegation that the promoters are using the company to support their own lavish lifestyle. Not only is the price of the transaction nefariously low, the structure itself is inefficient (See annex 2: floor-by-floor description of JK House). Only 36% of the total area is being utilized for commercial and residential purposes - the remaining 64% of the total area constructed is attributable to ‘other saleable amenities and service space’. The company can use, for its own purposes, only the commercial property, which is just 8% of the total structure (by square feet).
Independent of Mumbai’s current high real estate prices, transactions relating to JK House with promoters in the past have also been below prevailing market price – and to that extent, prejudicial to the interests of Raymond Limited’s minority shareholders. Previous agreements required the family to pay rent to the company at a flat rate of Rs.7,500 per month per duplex flat, which IiAS estimates is at less than Rs. 2 per square foot per month (see footnote 5). Management asserts that to incentivize the promoter families to vacate the old premises (which had become structurally weak and therefore needed to be rebuilt) and surrender their tenancy rights, the agreement to give them an option to purchase property at Rs.9200 per square foot was signed in 2007 (see footnote 6). This is a fallacious argument. The promoter family was living in the premises under a 9-year rent agreement signed with the company. At the end of the agreement – which would have been in 2012 – the family would have had to vacate the property. Given that the property was structurally weak (making it dangerous living conditions for the tenants themselves), Raymond Limited should have had a stronger negotiating platform (unless the company was given to understand that the promoter family would purposefully violate the rent agreement and not vacate). It seems unconscionable that the company cowed down to a sale transaction at such low prices.
Disclosures relating to this transaction can be considered inadequate or misleading, if not both. During 2006-2008, when the board approved the tripartite agreements and these were signed by the company, annual reports were silent on the transaction. Disclosures on related party transactions during these years stated, “There are no materially significant related party transactions made by the company with its promoters, directors or managements, their subsidiaries or relatives, etc. that may have potential conflict with the interests of the company at large.” It is only in the 2013-14 annual report that the company first specifically mentions the capital-work-in progress towards JK House in the fixed asset schedule: by 31 March 2014, the company had already spent Rs.1.5 bn on the redevelopment. Even then, the company did not disclose that it proposed to sell the residential piece of the property to the promoters at Rs.9200 per square foot of carpet area. Raymond Limited’s management asserts that there was no regulatory requirement for such disclosure: while this may well be true, we believe good corporate governance transcends compliance requirements. The company should have considered this material information for shareholders and made the disclosure.
The 2016-17 annual report, despite a disclosure regarding the tripartite agreement, does not mention the price of the transaction. – The company continues to maintain that “All transactions entered with Related Parties for the year under review were on arm’s length basis and in the ordinary course of business and that the provisions of Section 188 of the Companies Act, 2013 and the Rules made thereunder are not attracted.” While the company may have its technical and legal arguments for these disclosures (or lack of disclosures), IiAS believes that from the perspective of transparency and good governance, the board has failed in discharging its fiduciary responsibilities towards shareholders.
IiAS contends that the details of this transaction have come to light only account of regulatory changes that mandate shareholder approval for transactions with related parties which are not at arm’s length pricing. Without this regulation, the transactions could have well been undertaken without shareholders’ knowledge.
It is unclear whether the audit committee has approved the transaction: the AGM notice seems to suggest that, based on legal advice, the audit committee and the board have “deferred the matter to shareholders”. The exercise of the option to purchase will come under the ambit of related party transactions under the Companies Act 2013, and needs shareholder approval because the transaction is not at arm’s length. However, regulations require the audit committee to first approve the transaction before it is brought to shareholders. While there may be several legal considerations (given the timelines of the transaction, the on-going legal battles, and changes to regulation) for this approach, IiAS believes the audit committee and the board should provide guidance to shareholders. In deferring the decision to shareholders – and thereby suggesting that the audit committee and the board do not want to articulate a decision – IiAS contends that the board has abdicated its responsibilities and prioritized its own (legal) protection over the interests of the company and its shareholders.
The quality of board oversight at Raymond Limited is of concern if the board is unable to separate the interests of the company and its promoters. The audit committee is entrusted with the review and approval of related party transactions. But, at the time the tripartite agreements were approved and signed, and even now, Raymond Limited’s audit committee was conflicted – its members included Vijaypat Singhania, a direct beneficiary of the transaction.
Going forward, IiAS will recommend voting against the reappointment of the audit committee members in Raymond Limited, and factor the role of Raymond Limited’s board members in this transaction while voting on their (re)appointment in other listed companies where they hold board positions.
Exhibit 5: IiAS Voting Guidelines on (re)appointment of Independent Directors
IiAS recommends that shareholders vote AGAINST resolution #10 carried in the company’s 2017 AGM notice. Because this is a related party transaction, the promoter group will not be allowed to vote on the transaction. The individuals and entities listed as Raymond Limited’s promoters on 31 March 2017 are given below:
Raymond’s shareholders must engage with the company and seek the removal of promoters from the audit committee and the nomination and remuneration committee, and ask for both committees to be comprised only of independent directors. These measures will ensure that the committees are devoid of any potential conflict. They must also seek to separate the role of Chairperson and Managing Director, and push for a non-family Chairperson who can provide stronger oversight over the Singhania family, and one that can separate the interests of the company and its promoters.For shareholders proposing to attend the company’s AGM, which is being held at Zadgaon village, Ratnagiri, IiAS recommends asking the following questions:
Has the audit committee approved resolution #10?
Where does the board stand on resolution #10 and what is its guidance to shareholders?
Why were there no disclosures regarding this transaction earlier?
What does the 1,56,747 square feet of ‘Other saleable amenities and service space’ in JK House actually comprise of? Shareholders should ask for a break-up by square feet and not accept broad responses (like parking space and elevators).
Given that the company had a pre-existing sale price of Rs.9,200 per square foot of carpet area, why did it not curtail its cost of construction to less than that? Incurring an average cost of construction of over Rs.11,000 per square foot has ensured that the transaction is being undertaken at a loss.
How much debt is attributable to the rebuilding of JK House?
How much interest has been capitalized to the cost of the project? An almost 10-year project execution timeline will include delays and therefore an increase in costs.
What was the prevailing market price or the reckoner rate of the property at the time the 2007 agreement was signed?
What is the aggregate amount of annual rent the company is paying towards the accommodation of promoters and the extended family that are party to the tripartite agreement? How much does that work out to, per square feet of carpet area occupied by these promoters?
Are there any other on-going transactions with related parties that are not at arm’s length, but have not been brought to the shareholders’ notice?
Are there any other fixed assets owned by the company that are being used, either partly or fully, by promoters and / or their family members? If so, what are these assets and the aggregate investment in them?
Could the company have not made documents relating to this transaction (the agreement, valuation reports) more accessible by putting these up the website, more so given that these documents do not contain any price sensitive information? Asking shareholders to personally visit their offices to review these documents is an unnecessary inconvenience, especially for those not based out of Mumbai.
Why does the company have its registered office in Ratnagiri, when its largest operations and the corporate head office are located in Mumbai?
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.
Annex 1: Calculation of the opportunity loss on account of the transaction
IiAS believes the company and its shareholders will bear an opportunity loss of at least Rs.6.5bn because of the transaction. However, in our discussions with management, the company asserted that each duplex apartment has a little over 5,100 square feet of carpet area – therefore, the aggregate square feet of 4 duplex flats will be less than 22,000 square feet. To ensure a more conservative estimate of the loss, IiAS has taken a higher quantum of the saleable carpet area, at 26,000 square feet. If calculated using the management’s approach (based on carpet area and the differential between the valuation and the sale price per square foot), the opportunity loss is estimated at over Rs.2.50 bn. IiAS does not agree with this inference. The difference lies in a more practical understanding of how carpet area, built-up area and loading work.
IiAS shows below its own calculations, as well as those verbally presented by the company.
In this calculation, the company has ignored the aggregate area being sold and only focussed on the gross valuation of the carpet area. The aggregate square feet actually being sold is 61,032, but only the carpet area is getting priced in to assess the loss. Even if one were to assume that 26,000 square feet was the aggregate area being sold, the company has been unable to then explain the use and the value of the incremental 35,032 (61,032 less 26,000) square feet across the 8 floors.
Annex 3: Information sourced for this report
IiAS analysts have visited the company’s premises to review the relevant documents. Since they were not allowed to make copies of the relevant pages, our analysts have hand-written notes of the documents they have reviewed. In preparing this report, in addition to the documents reviewed, IiAS has relied on written and verbal information from management.
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