In today’s Finshots, we explain a SEBI order that highlights financial irregularities up the top brass at a formerly listed company called Lloyd Electric & Engineering.

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Now, let's dive in.

The Story

Lloyd Electric sold a lot of air conditioners in India. It was the third-biggest player in the country at one point after Voltas and LG. And it had a 12% market share.

It also sold televisions, washing machines, and air purifiers under its consumer durables division.

But that’s not how Lloyds started off in the 1980s. It actually began life making coils and selling them to other AC manufacturers. It also did some work to help cool the Indian Railways and made some heating equipment. This was its business-to-business (B2B) strategy.

Now in 2017, Lloyd’s business caught the eye of Havells — the folks who make wires, switchgear, lighting, and fans. But Havells only liked the AC business. It wanted to diversify into ACs too and build its consumer business. Its previous attempts to sell ACs had failed. And the company felt that Lloyds would be a perfect fit given its massive distribution channel across India.

So it offered ₹1,550 crores to seal the deal.

Lloyd accepted. It wanted to use the money to clear off some debts. So it gave Havells the permission to sell ACs and other appliances under the Lloyd brand name. Lloyd Electric would change its name to LEEL to avoid any confusion too. And LEEL would continue its B2B business.

But no sooner had the ink on the agreement dried, than an allegation of fraud emerged.

A fund manager named Porinju Veliyath had picked up nearly an 8% stake in LEEL. And in 2019, he alleged that the promoters of LEEL were involved in ‘day-light robbery’. That they were siphoning off the funds the company had received from Havells.

Naturally, the Securities and Exchange Board of India (SEBI) jumped in. It began to investigate if there was any truth to these allegations. And it put Deloitte to the task of scouring through LEEL’s financial statements.

A few days ago, it published its final order for the world to see.

So, what did SEBI find out, you ask?

Okay. Just to be clear, Havells didn’t pay LEEL the full ₹1,550 crores. It made some deductions for debt obligations and employee benefits. It also set aside some money in case any legal obligations arose. After all this, it deposited ₹1,458 crores into LEEL’s bank account.

But, LEEL didn’t show this entire amount as a profit from the sale of the consumer durables business. Nope. It got to work to show some deductions of its own too.

And one deduction it showed was an amount of ₹91 crores. LEEL’s explanation was that it conducted regular business with Havells. Maybe Havells bought coils from it or whatever. But, LEEL said that Havells owed the company the ₹91 crores. So it set off this sum from the money received during the sale.

But here’s the kicker.

When SEBI asked Havells whether it owed money to LEEL, the electrical goods company put its hands up and said, “What? We didn’t have any business dealings with LEEL prior to our acquisition!”

And since LEEL didn’t have any proof of correspondence with Havells either, that was enough for SEBI to figure out that LEEL was trying to understate its profit from the sale.

Not a good look, is it?

But that wasn’t all.

LEEL also deducted ₹320 crores from the profits of the sale and said it was the cost of the inventory it had transferred. But when SEBI looked at the audit report of inventory prepared by a CA firm in September 2017 — right around the time the deal was getting finalised — there wasn’t any mention of inventory worth ₹320 crores.

Can it get worse?

Oh yes. We have to talk about siphoning off the funds too so that the promoters and their associates could benefit, right?

So, LEEL wanted to sell its AC business for two reasons. It wanted to pare down its debt. But, it also wanted to make some capital investment and build assets and infrastructure that would help it to expand.

And if you looked at its Capital Works-in-Progress (CWIP), it would make sense. Think of CWIP as the expenditure on assets that are in the process of construction or completion. For LEEL, it suddenly rose from ₹10 crores to a whopping ₹313 crores.

But guess what…the CWIP rose because of a neat trick.

See, there were some entities that LEEL’s promoters were also associated with — ones like Himalayan Mineral Waters Pvt Ltd and Perfect Radiators and Oil Coolers Pvt Ltd. And these companies owed money to LEEL.

So, what did LEEL do?

It simply adjusted the accounts which showed that these entities owned LEEL money. And it put the money in the CWIP account. To show that it had received ‘Land’ as an asset from the entity. For instance, it showed a CWIP balance of ₹120 crores for Himalayan Mineral Waters Pvt Ltd.

But when SEBI looked at the books of the water manufacturer, they found something that blew their mind. Not only did the company have land only worth ₹13.5 crores in its books but its revenues were just ₹3 crores too.

So there was no way that the company would’ve been able to transfer assets worth ₹120 crores to LEEL.

And that was enough to convince SEBI that the folks in power at LEEL were up to some nefarious schemes.

Quite a sad state of affairs at a 30-year-old company which had quite a stellar reputation till then huh?

Until then…

PS: LEEL was taken to the insolvency court in 2019 and is currently under liquidation.

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