For a company named Lilliput, it certainly made big headlines. In October 2011, newspapers were agog with reports that promoter Sanjeev Narula and private equity majors, Bain Capital and TPG, who had invested in the children’s clothing company, were at loggerheads over the soundness of the company’s financials. Lilliput isn’t the only investor-promoter relationship that’s turned sour and the newness of the courtship wasn’t the only reason. Cracks have deepened in other seasoned partnerships as well, with some disputes featuring ICICI Venture already in litigation.
The most prominent one is perhaps Subhiksha where promoter R Subramanian has filed a ₹500-crore defamation suit against Wipro chairman Azim Premji whose Zash Investment had bought a 10% stake in Subhiksha from ICICI Venture for ₹230 crore. Subramanian maintains that Premji’s defamatory statements about Subhiksha in a media interview had caused substantial loss of goodwill. The Bombay High Court has asked Premji to file a reply; meanwhile, he continues to nurse his financial wounds, having earlier said that the Subhiksha investment was an “error”. His efforts at seeking redressal led him to serve a legal notice to Subhiksha board members, which included ICICI Venture representatives as well.
Agree to disagree
Prominent cases where the promoter and investors didn’t see eye to eye
Like its part sale of Subhiksha, there is another legacy exit that has come back to haunt ICICI Venture, that of Transafe Services (TSL), a joint venture with Balmer Lawrie. After controlling partner ICICI Venture sold its 71% stake in the JV, the then managing director resigned, too. It was later discovered that the then management had overstated profits considerably over successive years. Since Balmer Lawrie bought ICICI Venture’s stake on the basis of an inflated valuation, its last annual report states that it has filed a civil suit in the Calcutta High Court against “erstwhile majority shareholders represented by ICICI Venture, seeking relief inter alia to the effect that the sale of shares in TSL to the company by ICICI Venture is void entailing consequent restoration of all advantages derived by each party from the void contract.”
Shrinking deal size
The fall in average deal size in 2011 reflects
the conservative mood of PE investors in India
Not surprisingly, since the issue under discussion was thorny and, in some matters clearly sub judice, none of the parties contacted — be it ICICI Venture’s Vishakha Mulye or Balmer Lawrie managing director Virendra Sinha, Lilliput’s Narula, Bain Capital’s Amit Chandra or Subhiksha’s R Subramanian — wanted to comment.
And since the parties involved refused to voice their point of view, it is very hard to deduce where the blame should lie and to what extent in each case. However, Satish Mandhana, managing director, IDFC PE, feels that a big deal is being made out of a few stray instances. He says, “Barring exceptional circumstances, a PE investor and a promoter’s interests are aligned, and in such exceptional cases the courts will decide who actually has to be blamed.”
Top PE Deals in 2011
Despite infrastructure being a much talked-about sector, only one sector deal made it to the top five ranking during the year
While there is no denying that in the Indian context, amicable relationship with a promoter is of paramount importance, conflicts are not something that promoters and investors can plan for. PR Srinivasan, founder, Exponentia Capital, says, “The dispute is always about bad numbers, either there is underperformance or there is cooking of books. Investors are unlikely to keep quiet if it is the latter.” He adds that the management is equally to blame for choosing PE investors on the basis of price rather than choosing investors who have a good understanding of the risk management challenges of the business. “Obviously, they start arguing at the first sign of trouble,” he concludes.
This point about private investors being incompetent at assessing risk is something that Mandhana does not agree with. His take, “One needs to see the track record of the fund in other deals as no PE investor would like to indulge in conduct that jeopardises their deal-making ability.”
PE investing is not only about cashing in on opportunities; it is also about profitable exits. Whether promoters and their financiers will increasingly get litigation-happy, given that exits are getting increasingly difficult, or whether commercial interests will prevail over personal dislikes remains to be seen.