New Delhi: Did ICICI Venture Funds Management Co. Ltd and Azim Premji-owned private equity arm Zash Investment and Trading Co. Pvt. Ltd try to persuade overseas investors to purchase shares of Subhiksha Trading Services Ltd when they knew the retailer was in deep financial trouble?
Madras high court justice V. Ramasubramanian said they did in an order he issued on 25 October that was made available to Mint on 8 November.
Also See | The Subhiksha debacle (PDF)
“From August 2008 onwards, both ICICI Venture and Zash started looking for victims in the form of foreign investors,” the ruling said.
But the judge also indicated that Zash itself had been among the “victims”, having purchased a 10% stake in Subhiksha—which subsequently collapsed under the weight of debt and unpaid bills—from ICICI Venture for Rs.230 crore in March 2008. After selling the stake to Zash, ICICI Venture’s holding in Subhiksha dropped to 23%.
A Zash spokesperson denied that it had sought to sell off its stake to overseas investors, instead pointing to the portion of the verdict that referred to it as one of the victims.
The court said ICICI Venture’s head of capital markets Sanjay Mehrottra had pitched Subhiksha to foreign investors during meetings in Singapore in August 2008 and by email, according to the documents that the court received. Mehrottra presented a “rosy picture” of the company, showing financials prepared by chartered accountants Deloitte Haskins and Sells, the court said.
The Zash spokesperson denied that Mehrottra’s sales pitch included efforts to sell Zash’s stake.
“We did not directly or indirectly solicit any investor. We had just purchased the Subhiksha share from ICICI Venture and, therefore, had no intention and reason to solicit other investors,” the spokesperson said.
ICICI Venture countered the order, saying it hadn’t been aware of Subhiksha’s troubles earlier.
“In September 2008, ICICI Venture, through its managed funds, advanced a loan of Rs50 crore to Subhiksha,” an ICICI Venture spokesperson said on Thursday. “Had it been aware of the financial troubles prior to September 2008, it would not have put its money to risk.”
ICICI Venture also said that it wouldn’t have been able to sell shares in Subhiksha because of rules regarding overseas holdings in the retail business. At the same time, ICICI Venture said on Thursday that “correspondence was undertaken by the executive, capital markets group, to put in touch foreign investors with the Subhiksha management” because Subhiksha had sought its help in contacting overseas investors to fund expansion plans.
The judge said both parties would have been aware of the state of Subhiksha’s health as far back as June 2008, rather than three months later, which is when both companies have said they became aware of the retailer’s condition.
“Until (the) end of September (2008), there was no inkling whatsoever of there being any liquidity issue in Subhiksha,” ICICI Venture said in a press release issued in February last year, about three weeks after Subhiksha’s founder and managing director R. Subramanian publicly admitted in January 2009 that the company was on the brink of “collapse” and that it had shut its nationwide network of about 1,600 stores.
ICICI Venture reiterated on Thursday that Subramanian “kept all stakeholders, including the board of directors, in the dark regarding the real financial position of Subhiksha”.
Given that ICICI Venture’s nominees were on the board, “they cannot really feign ignorance of what was happening in the transferor company (Subhiksha) except by coming up with a confession that such nominee directors failed to perform their duties and obligations”, the judge said.
The judge said ICICI Venture withdrew its nominees from the board only in January 2009, showing that the relationship between the two had not “run into rough weather” until then. ICICI Venture’s nominees were a majority on the board until then, the court said. ICICI Venture said it wasn’t given adequate, relevant information by the company management.
The judge said that ICICI Venture would have “escaped from the scene” by off-loading its 23% stake if it had been able to find buyers.
“In such circumstances, I am unable to accept the contention of the shareholders that their eyes were opened only after the court convened a meeting and till then they were kept in the dark,” the judgement said.
ICICI Venture rejected the contention that Zash was a victim.
“Zash was well informed based on its diligence of the financial position of Subhiksha,” the spokesperson said on Thursday. “Hence, ICICI Venture cannot be held responsible for Zash’s woes.”
The case in the high court was part of the process by which Subhiksha was seeking to list its stock by acquiring listed Blue Green Constructions and Investments Ltd and using it as a vehicle to do so.
The court cited correspondence in August 2008 between ICICI Venture and overseas investors, in which it praised Subhiksha for being “asset-disciplined” and for building revenue of more than Rs2,300 crore with net owned funds of Rs250 crore.
Projections given to one potential investor were “so convincing that any investor would have been lured to bring equity”, the judge remarked, according to the document reviewed by Mint.
“Therefore, it is clear that even up to September 2008, ICICI Venture was looking for foreign investors to bail the company out of woods,” the judgement said.
The bid to sell shares to overseas investors was unsuccessful, coming as it did during the global financial meltdown.
The move to take over Blue Green had been opposed in court by various creditors, including Kotak Mahindra Bank Ltd, HCL Infosystems Ltd and Tata Teleservices Ltd, among others.
ICICI Venture and Zash, which had initially given their consent to the merger plan, later opposed the move.