Chennai/Delhi: Three directors on the board of Subhiksha Trading Services Ltd resigned over the past six months as the discount retailer hurtled into a crisis that has left behind angry investors, employees and business partners.

Snowballing problems: A file photo of Subhiksha managing director R. Subramanian. Harikrishna Katragadda / Mint

Another set of disclosures to the ministry showed that 10 banks had lent Rs620 crore to Subhiksha as of 2 May and that the company has issued at least 40 million convertible bonds to private equity funds. Subhiksha’s 2007-08 revenues were Rs2,300 crore, its founder and managing director R. Subramanain said in January.

Commenting on the resignations of the directors, Subramanian suggested in an email response that these directors had quit the board to avoid the legal problems they would inevitably face as the crisis at Subhiksha worsened. “Indian company law imposes a lot of penal obligations on board members even for mistakes committed due to inability rather than intent to default— non-payment of salaries, dishonour of cheques etc., are cases in point. Director resigning would only be related to that as they would understandably not want to get tangled in such issues. All resignations have stated personal reasons which we believe would be around avoiding penal legal liability," said Subramanian. “Of course, I continue to be on the board," he added.

The three board members who resigned were not available for comment.

However, Mint learns from persons close to the board that at a stormy board meeting attended by all the directors and held in Mumbai on 22 November, the board raised several questions about Subhiksha’s finances and its governance practices. Two of the three resignations followed this board meeting.

The discount retailer now has only three members while Blue Green Constructions and Investments Ltd, a listed company that Subhiksha acquired in June, has four board members, including Subramanian. He, however, refused to divulge the identities of the board members, citing the reason that Subhiksha is an unlisted firm.

Meanwhile, the problems at Subhiksha continue to snowball.

Business television channel CNBC TV18 said in a Wednesday report that several top managers have quit the company.

The Employees Provident Fund Organization—which manages the compulsory retirement savings accounts of employees—has begun an inquiry into why Subhiksha has not paid the money that it has to mandatorily move into the provident fund (PF) accounts of its employees. The first hearing was held on 3 February and a follow-up hearing was held on Wednesday. The next hearing is scheduled for 19 February.

The company said in a press note: “ view of our admitted non-payment of salaries for a few months, an enquiry has been initiated by PF authorities to verify the facts—this is under the provisions of the PF Act. The company has clarified that in view of non-payment of salaries, there is corresponding non-payment of PF and as such that there is no default."

It also said that “All directors of the company were summoned for today’s hearing. As this is a quasi-judicial enquiry before a statutory authority, we are in no position to comment on the proceedings. We are fully cooperating with the enquiry and expect to resolve all issues within the framework of law. While we can’t comment on the quantum...the figure of Rs5 crore... quoted (is) vastly exaggerated."

Ten banks had lent Subhiksha Rs620 crore as of 2 May, according to a document on the website of the ministry of corporate affairs. These are a mix of working capital loans and term loans from The Hongkong and Shanghai Banking Corp. Ltd (Rs85 crore), ABN AMRO Bank NV (Rs50 crore), Centurion Bank of Punjab Ltd (Rs40 crore), Yes Bank Ltd (Rs50 crore), Standard Chartered Bank (Rs25 crore), HDFC Bank Ltd (Rs65 crore), Development Credit Bank Ltd (Rs25 crore), Federal Bank Ltd (Rs50 crore), Bank of Baroda (Rs75 crore), ICICI Bank Ltd (Rs155 crore).

Talking about the exposure to bank debts, Subramanian said that the total amount is around Rs750 crore and that they have credit arrangements with 13 banks. He refused to comment on the individual loan transactions and the bankers that they partner with for credit.

The security for these loans vary from movable assets, immovable assets, charge of current assets/book debts of the company, pledge of promoters’ shares, stock and book debts, inventories, “first and exclusive charge on credit card receivables from PoS (point-of-sale) installed by ICICI Bank in Subhiksha stores".

Another document filed by Subhiksha with the ministry of corporate affairs reveals that the company had passed a resolution at the extraordinary general meeting held on 25 July to increase its authorized share capital from 500 million shares to 740 million shares of Rs10 each.

In the same meeting, the company got shareholder clearance to issue convertible warrants to a few private equity funds. Subhiksha decided to issue and allot 4,07,08,236 warrants, with “each warrants carrying right to subscribe one equity share of Rs10 at par on a future date".

The maximum number of warrants to be allotted to India Advantage Fund was 1,55,79,066 warrants; Emerging Sector Fund, 76,73,271 warrants; ICICI Fusion Fund, 16,60,947 warrants; ICICI Fusion Fund II, 33,72,227 warrants; Zash Investment and Trading Co. Pvt. Ltd, 1,00,66,346 warrants; and ESOS Trust, 23,56,379 warrants. Subramanian mentioned that the company “had no proposal except for existing shareholders which (was) also later not acted upon".

Meanwhile, Tata Teleservices Ltd has filed a case in Madras high court opposing Subhiksha’s amalgamation with Blue Green Constructions and Investments, that the Chennai-based retailer acquired last year.

Tata Teleservices says it has to recover about Rs10 crore from Subhiksha for about 10,000 corporate telephone connections given to the company. “We are objecting to the scheme of amalgamation because we don’t want to creditor to another company whose net worth is not known to us," Tata Teleservices’ lawyer A.K. Mylsamy said.

Subramanian says the merger is currently pending in Madras high court but said Tata’s objection is “not sustainable". “They are trying to mix a commercial dispute with the merger," Subramanian said.