Lessons from the Raymond Vs Bharat Patel fracas
MAS Team | 10 March 2017
A minority shareholder of Raymond Limited, Vishal Patel, published an open letter in Business Standard on 2nd March, alleging that the promoters of Raymond have been using company cash, supposedly for personal benefits. Gautam Singhania, who controls Raymond, is known to have a very flashy lifestyle. Which is fine, except that that his expensive jets, yachts and controversial construction of a huge mansion in South Mumbai for personal use, have all been funded by public shareholders, Patel accuses. Do you need yachts to make cloth, asks Vishal Patel’s uncle Bharat Patel. The Patel family owns a substantial chunk of Raymond -- 1.2% stake held by Bharat Patel in his own name, and another 2.99% stake held by the family investment firm, Finquest Securities. The Patels have a litany of allegations against Singhania and his fellow directors:
  • Singhanias did not inform the shareholders about ambitious reconstruction of Raymond House in South Mumbai, which was embroiled in controversy and refused permission. The municipal corporation has alleged that the company has violated various municipal rules while spending Rs186.7 crore as of 31 March 2016 on redeveloping the property. 
  • Mr Singhania has spent shareholders’ money on personal luxury such as boats and yachts (worth Rs 72 crore) and aircraft (worth Rs114 crore). 
  • Raymond had been charged Rs133 crore in depreciation in the last nine years on boats and yachts and another Rs117 crore as depreciation of aircraft in the last 10 years. The letter alleged said the auditors should have separately disclosed this to shareholders instead of disguising it as "miscellaneous" expenses.
  • According to the letter, Raymond had a net profit of Rs197.2 crore in the last 10 years, while in the same period it has charged Rs327.8 crore as expenses for the assets and Rs56.17 crore was paid as remuneration to the promoters. Patel said Chairman Gautam Singhania’s salary rose 33.7 percent in FY15-16, to Rs11.39 crore.  
  • The company has changed its registered office to an inaccessible place in Ratnagiri, from Mumbai, so that small shareholders cannot attend the company's annual general meeting.
Complete Man, Incomplete Company – Recent History
For years, Raymond has been known among consumers for its fine woolen fabrics but among investors as an ugly diversified conglomerate. Like many cash-rich companies, Raymond had expanded into cash-guzzling cement and steel businesses in the ‘80s and was losing money. In a restructuring done in late 2000, it sold these two divisions, which corrected the past ills and left the company with lots of cash to pay off debts. The cement division fetched Rs785 crore, which was used to pay off the debt of Raymond Synthetics, guaranteed by Raymond, and the long-term debts of Raymond itself (Rs300 crore). Raymond was left with Rs300 crore that it planned to spend on brand acquisitions and new product launches. The sale of its steel unit to Thyssen Krupp group of Germany fetched Rs387 crore in cash and Rs25 crore in the form of equity for 24% stake in the new company, EBG India. 
At the same time, Raymond Calitri Denim, a wholly owned subsidiary, was merged with the parent when it had losses of over Rs53 crore and debt equity ratio of 3:1. Raymond had invested Rs41.9 crore as equity in this sick subsidiary and had given interest-free loan of Rs88.66 crore. The merger fetched tax benefits of more than Rs100 crore, but that was small consolation for the huge debts, losses and uncertain future of the denim unit. After all this restructuring, Raymond was left only with its core business of textiles. It also did some share buyback. Unfortunately, contrary to management’s stated wishes, even such extensive restructuring has not created much value for shareholders. 
Over the past 25 years, the stock has moved from just under Rs200 to over Rs641, a pathetic compounded annual growth of 4%. What are the lessons from the facts of Patel’s letter? 
1. Leopard Cannot Change Its Spots: Gautam Singhania and his father Vijaypat Singhania have been messing around with the company for a long time. The response from Gautam Singania to Patel’s letter? Several tweets that Bharat Patel is trying to blackmail the company and he was arrested but received a bail on medical grounds. 
2. Institutional Investors’ Role: It is interesting to note that Life Insurance Corporation has a 5.21% stake and Mirae Asset Management a 2.74% stake, but they are keeping quiet, allowing the promoter to run the company like his private fief, if Patel’s facts are true. 
3. ‘Independent directors’ are not Independent: Independent directors in Raymond are I.D.Agarwal, Nabankur Gupta, Pradeep Guha and Boman Irani. Boman Irani has been linked to chain marketing company QNet. None of the other directors would side with minority shareholders or speak up against mismanagement. 
4. Look elsewhere: It is intriguing why savvy investors like the Patels would buy a stock like Raymond’s, unless they have some leverage over the promoters and get them to act in a certain way. There is no dearth of good stocks for a patient, long-term value investor like the Patels. Why get embroiled with a company with a long track of record of very poor value creation?