Sometimes, you wonder how brazen promoters can be. And then you find out: More brazen than you can imagine.

Consider this: There is a company, Raymond. It’s listed. It owns a property called JK House in Breach Candy, Mumbai. Breach Candy is this obscenely expensive place (for real estate) – prices are above Rs. 50,000 a sq. ft. JK House was built on a property bought in 1945, and the building housed, for most of the time, four of the Singhania families (who are promoters of Raymond) who paid rent to Raymond, indirectly.

Get this clear – Raymond, the listed company, owned the property. Raymond rented out four apartments – four duplex floors, in fact – to the promoters of Raymond at Rs. 6,000 per month to Rs. 7,500 per month between 1994 and 2012. That’s way lower than Breach Candy apartment rates – and the company has lost massive amounts of money already.

But you might say, okay, they promoted the company, so this is a kind of a perk. It’s a very large perk (each house would rent for a more than Rs. 500,000 per month) but you might still let this go.

And then things get sinister. In 2007, the JK House building was found to be unsafe. Raymond then made an agreement to get the Singhanias out into temporary accomodation, and footed that bill. And Raymond rebuilt JK House at a cost of Rs. 270 crores.

They spent approximately Rs. 270 crore redoing the property, all borne by the public company, Raymond.

Strangely, Raymond put a clause in during the redevelopment. That Raymond would SELL the residential part of the property to the Singhanias (Vijaypat, his sister-in-law, and his two sons) for Rs. 9,200 per sq. ft. if they wanted to buy.

Note: The selling price of Rs. 9,200 is less than the money spend in redoing the property. JK House has an area of 245,000 sq. ft. and at Rs. 270 cr. the cost of redoing it was Rs. 11,000 per sq. ft.

Of course they’d want to buy – that is an ultra low price considering market prices out there are more than Rs. 50,000 per sq. ft. And that is exactly what is happening. The promoters – Vijaypat Singhania and family – have “exercised their option” to buy at Rs. 9200 per square foot, just as the Municipal Corporation’s completion certificate came in.

But their wanting to buy is not the problem. The problem is of horrible corporate governance.

First, read this report by IiAS – an institutional advisory. It contains details of what will be sold, and for how much etc.

Raymond Loses Money. Shareholders will lose more than 280 cr.

Raymond spent Rs. 270 cr. on refurbishing the building. The residential apartments occupy 8 floors (4 duplex apts) and are about 26,000 sq. ft. in area.

The per sq. ft. carpet rate in Breach Candy is apparently more than Rs. 100,000 per sq. ft. So the company calculates the loss as:

26,000 sq. ft. sold at 9,200 per sq ft = Raymond gets 24 cr.

But that can be sold for 117,000 per sft = potentially they could have gotten 304 cr.

So the technical loss is 280 cr.

This is a huge amount for a company that made a consolidated profit of less than 30 cr. in FY 2017! Imagine such a company LOSING 280 cr. just to please their promoters.

The real loss is even higher. Because 26,000 sft is just the carpet area. According to IiAS, the total super builtup area of these flats (including non-carpet areas) is over 61,000 sft. It’s an “inefficient” construction, they say, but you and I know that the 26,000 sft is just to pull wool over investors’ eyes – you can control a “common” area and still not call it part of your carpet area.

If the real area is 61,000 sft. and we consider the Breach Candy rates of around Rs. 55,000 per sft (carpet area rates are much higher) – then Raymond could have got Rs. 335 cr. for these apartments. Instead they are selling them to the promoters for a measly Rs. 24 cr.

So they will lose about 310 cr. according to our estimate. This is still a HUGE amount.

The Lack of Disclosures

And the underlying issue is: Why didn’t they tell shareholders? They never revealed that they had agreed to sell apartments as a condition for getting the promoters out of the house during reconstruction. This is typical Bombay pagadi behaviour – to get a renter out of a house, you have to pay them extortionate amounts. But this is the Singhania family, promoter of the public company Raymond, which talks about being a complete man. In comparison, this transaction is about being a completely dirty man.

They didn’t disclose that they agreed to sell their property to promoters at a low rate.

They didn’t disclose what rate they agreed to sell at. (Even in subsequent annual reports. And the transaction was done in 2007)

They now suddenly say okay we have this agreement, and we have to honour it, so please give your okay. This may sound like corporate governance if they do not vote, but in general this leaves a bitter taste.

All investors must vote against the resolution. Even if they do, it’s not like Raymond will sell the apartments elsewhere – the promoters will go to court, and Raymond will need to defend its decision, and you can imagine that this will stretch in court forever. A few years later, they might just “settle” the case and carry on…

The End Note

Nothing good will come out of this, to shareholders. If you protest, they will stay in the apartments and pay sub market rents forever. They will try to sell the apartments to themselves later, in some other way.

If you don’t, the sale will go through and while minority shareholders suffer, it will soon be forgotten.

It seems that there’s a dispute going on in the Singhania family. And this could be the reason for the sudden need to own a property that is controlled by another family member.

There’s another property. In Bhulabhai Desai road in Mumbai. An irate investor says even this property is going to be used for promoter benefit.

This still doesn’t mean that Raymond is a bad company. It’s just that management is not trustworthy. At some point, such bad governance will hurt an investor. In Raymond’s case, such a thing will not be altogether unexpected, but such behaviour should be called out. In general, because management controls everything and they have chosen to take the stand that they will do things to harm minority shareholders, we would call investors “suckered”.