Online edition of India's National Newspaper
Ramoji-HUF response to Rangachary Committee report
In response to a request from THE HINDU, Ramoji-HUF has provided the following detailed comments on the order released by Mr. N.Rangachary, Adviser to the Andhra Pradesh Government, on Margadarsi Financiers.
Comments and Observations on order of Sri N Rangachary, Chairman of one man committee, dated 19th February,2007, submitted to the Government of Andhra Pradesh
1. The report has been captioned as an ‘order’. However it is totally ambiguous as to provisions of law under which the so called committee has been constituted and under what provisions, an ‘order’ was passed. The order passed is in the nature of ‘report’ and captioning the same as an ‘order’ clearly shows lack of application of mind and erroneous motives with which it was passed.
2. Para 2 of the order states that an order dated 14-12-2007 has been passed holding that Margadarsi Financiers has been raising deposits contravening section 45 S of RBI Act.
This is another factual error, in as much that an order dated 14th December,2007 could not have been passed in February,2007. This again indicates the haste with which the one man committee passed the order irresponsibly and in a callous manner. The committee failed to appreciate the definition provided under section 45S of RBI Act wherein the HUF entities are not covered and are clearly out its purview and ambit by any interpretation. HUF is a natural and fluctuating body of individuals coming from common ancestor which is totally different from association of individuals. The constitution of HUF is a natural body which changes by birth, death and marriage of its members from time to time. The committee blatantly failed to properly interpret the section and came to a wild conclusion that Ramoji Rao HUF contravened the provisions of section 45S.
3. Para 4 of the order states that a Writ Petition has been filed before the High Court by one of the depositors that Margadarsi Financiers are not usually paying interest but rather are pressurizing the depositors to contribute to chits of allied concerns.
The one man committee ought to have verified the veracity of the contentions made in the said Writ Petition before relying on it as though the contentions are true. Margadarsi Financiers had never failed in its commitment to the depositors towards payment of interest as well as repayment of deposits on due dates, in the last 34 years. It has never been the practice of Margadarsi Financiers to pressurize any depositor to contribute to chits run by group company. In fact some of the depositors, in order to maximize their return on investment in the course of time, opted for transfer of their interest towards chits subscribed by them.
4. Para 5 of the order states that in none of the communications to the committee, the Margadarsi Financiers has addressed the issues relating to safety of deposits and preparedness to repay the same. The committee also made observations, depicting the attitude of Margadarsi Financiers as ‘strange’ and that it has not cared to advert to the sensitive issue of repayment of deposits, which affects the lives of many depositors.
The committee had totally failed to appreciate the ground realities and facts of the case and that Margadarsi Financiers has not committed even a single default in its 34 years of its existence. The observations of the committee are preconceived and prejudiced to meet the specific objective of casting false aspersions over the organization. There is no intention of any dilatory tactics not to return the monies, as evident from the impeccable track record of Margadarsi Financiers.
5. Para 6 of the order states that the funds of the Margadarsi Financiers have been invested in “fertile, drought prone and non-yielding companies”.
This is totally a mischievous allegation without going into the actual facts, growth and potential scope of the businesses where the monies have been invested. The order is delightfully vague and deliberately avoids the list of investments in the so-called “fertile, drought prone and non-yielding companies”.
6. Para 10 of the order states that the deposits have been used to finance periodical losses of group concerns.
This is untrue in as much the funds have been invested in group concerns having strong financial base and potential scope for future growth and earnings in course of time. The order of the committee deliberately ignored the sizeable market capitalization of the businesses in which the Margadarsi Financiers invested over a period of time.
7. Para 12 of the order states that more than 75% of the deposits during the year are used to meet current losses and to make investments. It has also stated that the fresh borrowings are utilized to repay earlier borrowings and that the interests of depositors are vitally affected by the absence of further borrowings and that the fate of the depositors would become critical.
These observations are absolutely baseless and betray lack of elementary knowledge of the nature of business of Margadarsi Financiers and its application of funds over a period of time. The Ramoji Rao HUF runs several businesses including Margadarsi Financiers and owns more than 99% share holding in large concerns forming part of the group including Ushodaya Enteprises Limited (which runs the Eenadu newspaper-the largest circulated telugu daily, ETV news channels –having TV channels in 11 regional languages and 1 national language, Priya Foods-which markets about 190 well known food products), successful hotel businesses, the Margadarsi Chit Funds Limited-the largest chit fund company in the country having turnover of over Rs. 3,000 crores per annum, Usha Kiron Movies Limited which runs the largest integrated film city in the world, spread over 1600 acres and various other highly successful ventures. One man committee conveniently failed to note that the depositors of Margadarsi Financiers, in case of failure of the organization to repay any of the deposits or interest thereon, have recourse to the net assets of the entire Ramoji Rao HUF (which are far in excess of the deposits in Margadarsi financiers) and not merely the assets relating to Margadarsi Financiers. In view of the financial soundness of the group entities, there is not even a remote scope for failure on part of Margadarsi Financiers to repay any of its depositors, irrespective of whether fresh deposits are taken or not.
8. Para 15 of the order states that only one company in the group i.e. Ushodaya Enterprises Limited had substantial business and that it was making losses and is likely to do so in future. It was stated that some of the group concerns where investments have been made by Margadarsi Financiers are dormant.
These observations are factually incorrect. Virtually all the entities in the group are doing very well and have excellent potential for future growth. The committee also failed to appreciate the fact that any business which undergoes expansion, will initially incur losses and would certainly flourish and enrich in course of time. The committee also failed to appreciate the businesses of group viz. Dolphin Hotels Ltd, Margadarsi Chit Fund Limited and other entities making profits consistently. The businesses of group concerns, apart from landed properties, have huge market value. The order of the committee is therefore totally wrong in deliberately over looking these facts and in assuming that the Ushodaya Enterprises Limited will continue to make losses. The committee has also not listed out the concerns it considers to be dormant and the reasons for coming to such malicious assumptions and conclusions.
9. Para 16 of the order states that the balance sheets of group concerns do not reflect assets that can realize more than book value and that most of the assets themselves have been offered as security to lenders such as banks etc. It was also mentioned that huge liabilities towards taxes in dispute have not been provided for. Further it was stated that in case of Ushakiran Finance Pvt Ltd, the investments have been disclosed at cost and not yet depreciated.
These observations are totally devoid of truth and logic. The market value of the businesses and landed properties (mostly located in urban areas) at current market value belonging to the group concerns are huge and far in excess of liabilities thereon. It should be appreciated that the group concerns have all along been deploying the funds in businesses having long term growth potential. The order also failed to mention the correct name of the company and the details where it was alleged that there are huge tax liabilities which are not provided for and in dispute. There are no such ‘huge’ tax liabilities in case of group concerns. Further, the allegation made by Committee that Ushakiran Finance Pvt Ltd has shown investments at cost and not depreciated values, is incorrect as there is no such company by such name which again goes to show totally callous manner in which the order was framed.
10. Para 17 of the Order states that the investments made by Margadarsi Financiers are to be regarded as sunk costs which are illiquid in nature and will be difficult to realize the same in absence of ready marketability of the shares of group concerns, Para 18 of the Order had come to a conclusion that the Margadarsi Financiers will not be able to garner any resources to pay off the depositors and Para 19 of the order states that Margadarsi Financiers will fail in meeting its obligations to depositors.
The findings of the committee are not only baseless but totally devoid of truth. Most of the group concerns have been commanding strong financial base and high net worth. The assumption that the investments are to be regarded as sunk costs, is totally incorrect, as the businesses in which the investments were made enjoy sound financials apart from having enormous scope future earnings. The tall claims made by the committee that the shares of the group concerns are not readily marketable, are proved to be totally false by the fact that the World renowned investment company i.e. Blackstone group of USA has come forward to acquire 26% equity in Ushodaya Enterprises Limited for a consideration of USD 275 million (equivalent to Rs.1217 Crs) and the banks have come forward to advance a sum of Rs.850 Crs to the same company, after conducting a thorough due diligence checks and evaluation by one of the most renowned firms in the World.
It is also important to mention here that Blackstone, out of its 250 proposals received in India, approved only two of them including that of Ushodaya Enterprises Ltd. Thus an agreement was entered to raise above Rupees Two Thousand crores in just one of the group concerns with a view to restructure the businesses and meet the HUF commitments. From this, it is very clear that not only the shares in group concerns have got demand and liquidity in the market but also the resources of the group are adequate.
The assumptions made in Paras 18 and 19 have also proved to be ill conceived and totally fallacious as seen from above. Further, it must be mentioned that the Chairman of one man committee adopted double standards in totally ignoring the agreement made by Ushodaya Enterprises Limited with Blackstone group which was highlighted in National Media even while mentioning in its letter dated 27th January,2007 to Margadarsi Financiers, wherein it was stated that the AP High Court did not grant any stay of proceedings against constitution of the committee as seen from local newspapers. Thus the committee chose to ignore what appeared to be unfavourable news vis-à-vis the machinations of the state government, even while it selectively took cognizance of local news reports.
11. Para 21 of the order has computed the deficit as regards creditors at Rs.1369.48 Crs based on the audited balance sheet of Margadarsi Financiers.
The committee failed to appreciate the real value of investments reflected in the balance sheet of Margadarsi Financiers. The market value of the investments made in group companies is far in excess of its liability to creditors contrary to what is wrongly depicted in the order. The order deliberately ignored the market value so as to confuse the depositors and public and to depict the group in low esteem.
12. Para 22 of the order states that Margadarsi Financiers can repay only 49 paise in a rupee to the depositors.
The committee came to a wild conclusion that only 49 paise in a rupee is available to the depositors. The estimates made by the committee are grossly fallacious and were made with a view to depict the group’s financial position in poor light to the public and also to create a panic/ scare in the minds of depositors. As mentioned in preceding paragraphs, the Ramoji Rao HUF is in a position to meet substantial commitments by just divesting 26% shareholding in one of the group concerns and through part financing from banks. Thus the market value of just one of the group companies as evaluated by a leading international firm stands at above Rs 4,690 crores, much higher than the commitments, which is clearly evident from the agreement entered. From this, the financial strength of the entire group can be gauged, taking into consideration, all the properties and businesses of the group concerns. By ignoring the well publicized mega deal/ agreement with the Blackstone group, the committee has displayed a prejudiced and blatantly malicious approach.
13. Para 23 of the order states that investment in group concerns are to be regarded as sunk costs and realization will cause considerable disturbance to Margadarsi Financiers and will result in losses. It was also stated that excepting one or two companies, the rest of the concerns where investments were made, are either dormant or non-functional.
The committee miserably failed to appreciate the market value of the properties owned and businesses of the other group concerns. The order is totally evasive as to which concerns / companies have been studied by it and found to be not profitable or dormant or non-functional. The callous approach of the committee without any proper exercise, gives rise to doubts as to whether it has studied the financial statements of the concerns belonging to Ramoji Rao-HUF or it has just based its findings on press statements made by those not having any idea of the businesses of the group.
14. Para 24 of the order states that the deficit of Margadarsi Financiers should be taken at Rs.2348.09 Crores ignoring the investment of Rs.988.31 Crores in group concerns, which is to be regarded as irrecoverable.
The order of the committee is totally fallacious and absurd in coming to such a wild conclusion that investments in group concerns is to be regarded as having no value. It is clearly obvious that the committee intends to depict wrong financial arithmetic of the group with a view to confuse the innocent public / depositors. Further the order of the committee contradicted its own findings in the preceding paras wherein it was stated that one or two companies of the group are profitable and by implication have positive networth. As mentioned above, the net worth of just one of the concerns was valued at over Rs.4690 Crores by a reputed international firm. If the value of all other group concerns and the value of immovable properties, are taken into account, the combined net worth would be substantially higher. The committee again miserably failed to value the businesses properly and has betrayed total lack of knowledge and evaluation of business concerns and for that matter even rudimentary / basic knowledge of financial statements. The order of the committee has been obviously tailored to suit the ill-motivated designs of the political masters.
15. Para 25 of the order states that it will be difficult for the depositors to recover any thing unless additional funds are introduced from own sources and / or by unlocking its equity holdings in one or more subsidiary companies having prospects.
The order of the committee is framed with complete confusion and haste. The order concluded that the net worth of the group is virtually zero and on the other side is assuming one or two of the subsidiary companies have potential for divestment. The order also failed to appreciate the facts and take into account the value of the business as seen from the widely publicized reports which appeared in the press in connection with the divestment of 26% to Blackstone group. The order of the committee is mischievous and has obviously been prepared without any basic exercise and evaluation of the financial statements of the group.
16. Para 26 of the order states that Margadarsi Financiers is a unit of Ramoji Rao HUF and that the HUF may still have some assets which are not part of Margadarsi Financiers. It has also surmised that if there are assets there could also be liabilities. The order has stated that the committee’s findings are based on statements of Margadarsi Financiers filed with the Income-tax department and it could not examine the details of assets and liabilities of the HUF.
The findings herein clearly shows that the committee did not bother to examine and study any of the financial statements of other group concerns, other than Margadarsi Financiers, despite the investments in group concerns. When the committee could obtain the statements of Margadarsi Financiers directly from the Income-tax Department as stated in the order, what prevented the committee from obtaining the financial statements of other group concerns wherein the investments have been made by Margadarsi Financiers. The order of the committee is confounding, as at one stage, it has mentioned losses of Ushodaya Enterprises Ltd and also made wild predictions about possible losses in future. The committee in this para has however confessed it has not read any statements other than those of Margadarsi Financiers. It has also confessed its total ignorance of the assets and liabilities of the group. When the committee is not aware of the basic financial resources and strengths of the group and details of assets and liabilities as confessed in this para, the very basis of the order on which it was made is totally fallacious and it is thus evident that the order was made with malafide intentions to tarnish the image of the group by showing it in poor financial light to the public / depositors.
17. Para 27 of the order states that Andhra Pradesh Protection of Depositors of Financial Establishments Act,1999, seeks to protect the interests of the depositors, who are facing phenomenon of deposit collecting establishments vanishing all of a sudden and thereby ruining the depositors.
The observations made in the order, even though indirectly, are highly objectionable. Margadarsi Financiers has been in business since 1972 and developed various businesses thru its investments from time to time, which have grown substantially. The group enjoys very high credibility amongst the public at large, which is evident from the fact that the vilification campaign against its businesses for over 100 days has been ignored totally. There has never been an instance of even a single default in payment of interest and principal to the depositors in the last 34 years. It is totally atrocious even to indirectly relate the Margadarsi Financiers with vanishing / blade companies.
18.Para 28 of the order states that Margadarsi Financiers is qualified to be treated as Financial establishment under the Andhra Pradesh Protection of Depositors of Financial Establishments Act,1999.
The view expressed in the order of the committee is totally baseless and is only a personal view. The Act has clearly defined the financial establishment to mean “ person or group of individuals”. Thus HUF is totally outside the scope and ambit of the said Act. Thus Margadarsi Financiers being a unit of Ramoji Rao-HUF is not within the purview of the Act.
19.Para 29 of the order states that under section 3 of Andhra Pradesh Protection of Depositors of Financial Establishments Act,1999, the government is empowered to attach any property on default in respect of deposit. Para 30 of the states that Financial stability is to be considered as a factor which will affect the ability of establishment to return deposits to the public. Para 31 of the order concludes the finding of the committee to the effect that Margadarsi Financiers will not be able to refund the public deposits in full because of the legal inability to raise any more deposits, the funds of the establishment have been irretrievably lost by more than 50% by way of business losses and the greater part having been invested in illiquid assets and therefore Margadarsi Financiers is likely to default in return of deposits and would likely to function in a manner prejudicial to the interests of the depositors.
Prima facie, the provisions of Andhra Pradesh Protection of Depositors of Financial Establishments Act,1999 as alleged in the order are not applicable to HUF for the reasons explained above.
The conclusions arrived by the committee hastily, are totally baseless and do not take into account the real value of businesses in which the HUF has made investments over a period of time. The order also ignored the fact that HUF has already made certain arrangements and mechanism so as to service the interest and repay the deposits that mature over a period of time. The order also failed to appreciate the fact the deposits held are scheduled to be matured year to year and the arrangement have been made by HUF for meeting the commitment as per schedule without any default as in the earlier years.