MUMBAI : Company boards in India are not known to stand up against promoter transgressions. So on 29 August, when the board of CG Power and Industrial Solutions Ltd (CG Power) removed its chairman Gautam Thapar for alleged fraud, support and applause poured in from far and wide. His ouster was a big statement: CG Power—which makes products related to power generation, transmission and distribution—was a part of Thapar’s Avantha Holdings Ltd and had been with the family for three generations.

In the run up to Thapar’s removal, the board had reported the alleged fraud to capital market regulator Securities and Exchange Board of India (Sebi) and the ministry of corporate affairs, pointing to serious accounting anomalies that it claimed understated CG Power’s total liabilities by a few thousand crores through several undisclosed related-party transactions. As things stand, government agencies are probing the charges.

Thapar meanwhile is contesting the charges of fund diversion and criminal conspiracy, alleging instead that the entire episode was an elaborate set-up to wrest control of the company. In his initial arguments before the investigating agencies, Thapar is said to have pointed to the role played by certain members of the board, whom he has accused of colluding with some of Avantha Group’s lenders.

Besides these conflicting narratives, a key player in l’affaire CG Power is private equity (PE) firm KKR (Kohlberg Kravis Roberts and Co. Lp), a key lender to Thapar’s Avantha Group. According to documents reviewed by Mint, long-standing relations between Avantha Group and KKR India seem to have soured in 2016 over an unsettled transaction. Did this play a role in the ouster of Thapar from CG Power? The PE firm has denied playing any role. Mint pieced together events leading up to Thapar’s ouster to understand if there is any substance to the allegation.

Long relationship

According to several people who spoke to Mint on condition of anonymity, Thapar’s relations with KKR began in early 2011, soon after the global alternative investment manager set up its credit franchisee in India and appointed veteran banker Sanjay Nayar as its country head. Nayar, a former CEO of Citibank India, was handpicked by KKR’s legendary co-founder Henry Kravis.

According to documents reviewed by Mint, between 2011 and 2016, KKR India had lent over 2,500 crore to Avantha Group across eight transactions of varying tenor and pricing. However, problems arose between the two in late 2016 over the latter’s repayment of the final instalment of a 800-crore loan. While Avantha Holdings had repaid the principal and part of the accrued interest, there still remained an unpaid outstanding due of close to 100 crore at the end of 2016.

One of the persons in the know says Avantha Holdings cited Reserve Bank of India regulations governing foreign currency remittances and potential legal challenges as its inability to pay these outstanding dues. However, KKR India insisted that Avantha was obliged to make the payment. Among various options, KKR India suggested that Avantha Holdings could raise funds from various group companies in the form of brand royalties. The matter remained unresolved.

Despite these differences, in early 2017, Avantha Holdings approached KKR India once again for a new loan of 900 crore. Thapar, who was already grappling with losses in the power and paper businesses, urgently needed more money to meet debt obligations. This time, he offered CG Power shares as security. KKR India readily obliged, also roping L&T Finance Holdings Ltd, one of its trusted long-term joint lending business partners in India. Together, KKR India and L&T Finance lent the entire sum of 900 crore.

The troubles intensify

Thapar’s financial woes intensified. Two of his flagship companies— Avantha Power and Infrastructure Ltd, and Ballarpur Industries Ltd—had been in intensive care for a long time. This had forced Thapar to sell other group assets in 2018, including the consumer division of Crompton Greaves and the paper unit in Malaysia. In 2014, Avantha Power sold its Korba power plant to Adani Power Ltd for 4,200 crore.

By mid-2018 it became clear to Thapar that Avantha Group didn’t have the cash flows to repay KKR India and L&T Finance on time. Around August last year, close to a year before the maturity of the 900-crore loan, Thapar approached KKR India to roll over the debt. Alternatively, he suggested that KKR India consider invocation of the pledges by converting the debt into equity, said the second person with direct knowledge of the matter, adding: “While CG Power was not in the best of shape, Thapar believed that there was a significant potential upside for investors."

The financials of CG Power in mid-2018 explain why Thapar possibly felt this way. Despite suffering losses, CG Power was improving profitability of its key entities in India, Indonesia, US and Sweden, show its filings. In addition, it was also in advanced talks to sell its loss-making subsidiaries in Ireland and Belgium, according to this person.

Although not averse to the idea of equity conversion, KKR India told Thapar it first wanted to focus on improving operational efficiencies of CG Power. So, it proposed that the firm’s board appoint Narayan Seshadri, chairman and CEO of Tranzmute Capital and Management Pvt. Ltd, and a long-time KKR India associate, as a consultant.

Enter the consultant

Thapar, according to the third person, agreed to KKR India’s condition. “Thapar believed that Seshadri will come and understand the business and then make recommendations to the board," said this person. Accordingly, on 3 October 2018, Seshadri made a presentation to the CG Power board. However, halfway through the appointment process, KKR India proposed that Seshadri be appointed an independent director instead of a consultant, said the person cited above.

Seshadri had been a long-time KKR associate for all operational matters. In May last year, KKR India and Tranzmute Capital announced the formation of a partnership to offer turnaround services to stressed firms. In October 2016 Seshadri along with KKR India’s Nayar had started a non-banking financial company named Epimoney Pvt. Ltd. But despite having existing business relations with KKR India (a related party), the board cleared Seshadri’s appointment as an independent director and he joined CG Power board on 8 March this year.

KKR India, however, denies having any role in Seshadri’s appointment to the board. “We were a lender to Avantha Holdings with no locus standi to any other group companies or its board in October last year. It is entirely the board’s call to appoint any external advisory entity and we do not have any involvement in the decision-making process of the company, a KKR India spokesperson told Mint. Seshadri and the CG Power Board did not respond to emails from Mint.

“KKR is not a promoter of Tranzmute. Nor in any way does it remunerate Mr Seshadri for his independence to be compromised," Sudhir Mathur, who is the new whole-time executive director of CG Power, wrote in an email to Mint, adding that Epimoney has no relationship with CG Power. Mathur also stressed that “the board, headed by Gautam Thapar, after deliberations, accepted the recommendation of the nomination and remuneration committee and approved the appointment of Mr Seshadri as an independent director".

Meanwhile, Bharti Enterprises founder Sunil Bharti Mittal had begun buying shares in CG Power in January 2019. By 30 June, Mittal owned 8.3% in CG Power and was among the largest shareholders. Though he is yet to make his stance known, The Economic Times reported on 3 October 2019 that Mittal, along with a clutch of other institutional shareholders, was working on a revival plan for CG Power. However, when Mint asked Mittal, he denied these reports.

“Gautam Thapar found out about Mittal’s stake buy in end of March and immediately suspected a conspiracy," said the person cited above. “What followed were frantic parleys where Thapar sought an extension of the repayment period, which KKR refused."

Board games

According to the persons cited above, one of the first things that Seshadri did soon after coming on CG Power board was to constitute the operations committee with an objective of seeking refinancing of certain loan facilities and improving the operating performance of the company. Subsequently, in its disclosure to the exchanges on 19 August, the board of CG Power said it was during the process of refinancing loans that the operations committee became aware of several suspicious transactions.

Along with these discoveries, SRBC and Co. Llp—an affiliate of EY India—a joint statutory auditor of the company, also flagged certain transactions involving unauthorised advances paid by CG Middle East FZE to certain vendors suspected to be related parties.

So, the board appointed an independent law firm, Vaish Associates, to probe the allegations. While the law firm probed the findings, CG Power’s managing director K.N. Neelkant was asked to move away from day-to-day management. Further, Mathur, who was then an independent director of the company and a member of the operations committee, was redesignated as the whole-time executive director of the company on 10 May.

Vaish Associates’ findings were damning. Its probe found that total liabilities of CG Power and the group may have been potentially understated by approximately 1,053.54 crore and 1,608.17 crore, respectively as of 31 March 2018. Moreover, the law firm’s report found that advances to related and unrelated parties of the company and the group may have been potentially understated by 1,990.36 crore and 2,806.63 crore, respectively, during the same period.

The fallout

As an immediate fallout of the report, Sebi on 18 September debarred Thapar from accessing the capital market for a number of alleged irregularities, including diversion of money. On 17 September, Sebi directed BSE to appoint forensic auditors to audit the books of accounts of CG Power from 2015-16 onwards till date. Its brief: to examine manipulation of books of accounts, misrepresentation and wrongful diversion of company funds. The audit firm has six months to submit its report to Sebi.

In his defence, Thapar has alleged that Vaish Associates did not contact either him or the company’s senior management. Thapar has said that he was not given any opportunity to present his version of the facts. Deposing before regulators, Thapar is understood to have also alleged CG Power has cut off all access to vital documents that could help prepare his defence. The Securities Appellate Tribunal has since ordered CG Power to provide all necessary documents to Thapar to present his side of things.

Among other things, Thapar is understood to have cited a letter by Mathur dated 31 May. In Mathur’s letter, which has been reviewed by Mint, he has denied the findings of SRBC and Co. audit about related-party transactions. Mathur explained the position of the management to each observation in the SRBC and Co. audit, purportedly supporting Thapar’s position.

Notably, since writing the letter, Mathur has been appointed as executive director of CG Power with a revised compensation.

In conclusion

Legal experts believe Thapar’s fate now rests with the outcome of the Sebi-mandated forensic audit. “If it is proven beyond reasonable doubt that there were indeed serious violations, then CG Power or any of its lender (s) will be free to press criminal charges against Thapar and the senior management. However, it is also possible that probe may only find procedural lapses, penalty for which is not severe," said Sajid Mohamed, partner at Agrud Partners, a Mumbai-based corporate law firm.

“This may be headed for a long legal battle, where the prosecution will have to prove that money was indeed siphoned off by the former promoter," he added.


Private equity firm KKR India has stated the following in response to a story, ‘How Thapar Vs KKR blew up in CG Power’, published in Mint on 14 November:

“As a lender to Avantha Holdings, KKR enforced the share pledge in CG Power to protect our interests. We did not choose to become shareholders of CG Power. We accepted Gautam Thapar’s request not to enforce all our contractual rights in relation to our loan to Avantha Holdings for a period of time and only fully enforced on CG Power shares as the stock exchange notifications surprised us. Avantha Holdings was fully aware that there was a payment default in its borrowings from KKR.

“All the decisions and steps on appointment of directors to the board of CG Power were taken by the company’s board. KKR currently has less than 10% stake in CG Power, and does not have rights to seek nomination of directors to the company’s board. These are the facts. The narrative that is being articulated is a well thought out design to create a defence for a particular individual. We strongly believe corporate governance should be prioritized over all other concerns as that is the need of the hour."

Mint’s response to the statement is given below:

“Every fact reported in the story has been vetted in multiple ways. The story has also prominently reported the views of both KKR and CG Power’s executive director Sudhir Mathur to add their perspectives and version of events. The objective of the story is to establish the circumstances that led to Gautam Thapar’s ouster from the company. Multiple attempts were made to seek further clarity from all the stakeholders mentioned in the story. Any inference alluding to a motive or agenda is strongly denied."

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