Eight shell firms, a Pali Hill house on rent: whistle-blower claims UPL promoters siphoned off money – The Economic Times

Clipped from: https://economictimes.indiatimes.com/prime/corporate-governance/eight-shell-firms-a-pali-hill-house-on-rent-whistle-blower-claims-upl-promoters-siphoned-off-money/primearticleshow/79650123.cms

SynopsisThe whistle-blower claims that UPL entered into rent deals with a shell company and paid crores. The whistle-blower also alleges that shell firms were used to carry out other illegal transactions. ET Prime tried to independently verify the charges with the help of the documents provided by the whistle-blower and filings with MCA and stock exchanges. Here’s what we found.

A whistle-blower at UPL (formerly United Phosphorous) has alleged that the promoters have siphoned off money. The person, a board member of the listed agrochemical company, has reached out to ET Prime and provided documents to support the various accusations.

The whistle-blower alleges that UPL entered into rent deals with a shell company owned by its employees and paid crores of rupees in rent for properties held by the latter, which was earlier owned by UPL chief Jaidev Shroff himself.

From the details submitted by the whistle-blower, it seems there were certain corporate-governance issues with regards to the transactions done by the promoters of UPL. The issues were also raised in the past in front of the company’s board and its former auditor SRBC & Co.

ET Prime tried to independently verify the various accusations made by the whistle-blower from the documents provided and information available from filings with the Ministry of Corporate Affair (MCA) and stock exchanges. ET Prime also reached out to UPL, its directors, the then auditor SRBC & Co, an affiliate of global auditing firm EY, to have their perspective on these allegations and get a clearer view of what might have happened.

Before diving deep into what has been alleged, let’s get a sense of UPL as a company with a global reach.

The rise before the controversy
UPL has transformed from being a local player to a global agrochemical firm in the last five decades. It rose from a domestic phosphorous maker to become the fifth-largest agrochemical company in the world. It has 48 plants across the globe, with sales in over 130 countries and a diverse portfolio of herbicides, fungicides, insecticides, seeds, and bio-solutions. UPL has grown inorganically with over 30 acquisition integrations in the last two decades.

Over the decade, UPL has seen its sales and profit grow at an annual rate of 21% and 17%, respectively. In FY20, it clocked a revenue of INR35,756 crore and a profit of INR1,776 crore.
Among the 30 analysts who cover the stock, a majority 27 have a ‘buy’ call, two suggest ‘hold’, and only one advises ‘sell’. The present mean-price target on the stock is INR595, an upside of 25% from current levels. Mutual funds hold 5.2% in the company. Foreign portfolio investors have 37%. Insurance companies hold 10.2%, with LIC alone having 7.84%.

But since October, when KPMG resigned as the auditor of its Mauritius-based subsidiary, which was used to acquire Japan-based ArystaLifeScience, the stock has been going downhill. The stock is down 17% year-to-date, while the Nifty is up 11%.

The sudden resignation has not been taken kindly by the market, as there has been a flurry of such resignations in recent years in companies where corporate-governance issues later cropped up. Neither the company nor KPMG has given any negative observations leading to the auditor’s resignation. The fact that KPMG Mauritius declined to share the exit details as required by market regulator Sebi further caused a dent in investor confidence in the company.
Let’s now take a closer look at all that’s been alleged by the whistle-blower.

They’re all related. “I would like to point out and bring to your attention certain events, facts, and circumstances that are indicative of serious infractions of the legal and regulatory framework by UPL and perpetration of fraud on the shareholders of UPL, misuse of public funds, and siphoning off funds of UPL,” reads a letter provided by the whistle-blower. The letter, validated by a top law firm, was sent to the board of directors of UPL and SRBC, the auditor, back in July 2017.

The letter, a copy of which is with ET Prime, alleges that Jaidev Shroff, along with his family members and cohorts, are shareholders and/or directors and/or own and control, inter alia, the following eight shell entities through nominees, who are either employees of UPL or are associated with Shroff or UPL in some other capacity, which were used to carry out the alleged illegal transactions.

  • Teknomic Consultants Private Limited
  • SadafuliFinvest Private Limited
  • Accolade Properties Private Limited
  • Esthetic Finvest Private Limited
  • Tatva Global Environment Private Limited
  • Enviro Technology Limited
  • Demuric Holdings Private Limited
  • Ultima Search

“The shell entities are related to UPL is further demonstrated by the fact that Teknomic and Accolade have the same registered address as the address of head office of UPL at Ready Money Terrace, Dr Annie Besant Road, Worli, Mumbai. In addition, Demuric, Esthetic, and Sadafuli have the same address, which is opposite UPL Ltd in Valshad, Gujarat,” the letter reads.

MCA filings confirm the addresses are indeed same for the above-mentioned companies. “While some of these shell entities may have been disclosed as related parties, the true extent and nature of the transactions undertaken with these shell entities and their impact on UPL remain concealed owing to the various devices put in place by Jaidev Shroff, his parents, and his brother to deceive the shareholders,” the letter alleges.

Sadafuli and the Pali Hill dealings
According to another document shared by the whistle-blower, UPL entered into a leave-and-licence agreement from 2002 onwards with Sadafuli for Salisbury House, an apartment in Pali Hill, Mumbai, where Jaidev Shroff resided. The whistle-blower alleges that the Salisbury House is actually owned by Shroff and his family members and the leave-and-licence arrangement is merely a sham to siphon off funds from UPL as rental income with the help of multiple circuitous transactions.

It is alleged in the earlier-mentioned letter that in 2001, Sadafuli had a share capital of INR100,000 and unsecured loans of INR70,000. In 2002-2003, it was advanced an unsecured loan of INR388,39,363 to acquire Salisbury House for INR470,34,558 and this was allegedly done to facilitate renting Salisbury House back to Shroff by way of a sham leave-and-licence agreement on October 1, 2002.

According to the lease-and-licence agreement in 2002, signed for 66 months, the total cumulative rent, along with the deposit, comes up to around INR6 crore, and according to MCA filings made by Sadafuli during FY12-FY19, a total of INR24.9 crore has been paid as rent for Salisbury House. In FY19 alone, Sadafuli has received INR4.24 crore as rent for the house.

The letter further alleged that from FY12 to FY14, Sadafuli has been receiving secured and unsecured loans from multiple entities (such as Accolade and Demuric) related to the Shroffs, and has also in turn been providing loans to entities like Tatva, Esthetic, and Ultima as well as Bipin Jani.

Sadafuli's dealings with related parties (FY12-FY14)@2x

Other assets held by Sadafuli include more properties around Mumbai and a yacht. It is unclear if the rental income recorded from these is also from UPL.

According to Sadafuli’s FY12 annual report, Shroff was the majority shareholder in the company with a 97.83% stake. The rest was equally divided between Salim Govani and Bipin Jani, employees of UPL, as alleged by the whistle-blower. Nerka Chemicals Private Limited, a promoter of UPL, had also been disclosed as a preference shareholder in Sadafuli.

In FY13, Shroff transferred his entire 97.83% stake to Teknomic Consultants, which then became the holding company of Sadafuli. Teknomic is owned by Samir Mehta and Jani — both are associated with the Shroffs through companies like Nerka Chemicals, Heline Environment, Tatva Global Water Technologies, Tatva Global Renewable Energy, Tatva Global Environment, Entrust Environment, UPL Investment, and Sharvak Environment, etc.

Holding structure and shareholders@2x

Arun C Ashar, the current director of finance at UPL, was the director of Teknomic till January 25, 2007, according to MCA filings.

“Sadafuli owns property and a yacht worth well over INR200 crore, but controlling equity in the company was sold for a little over INR45 lakh to Teknomic, which in turn did not have adequate funds to buy the shares and received loans from a few companies including Accolade Properties,” the whistle-blower claims.

Accolade Properties belonged to Vikram Shroff, brother of Jaidev Shroff, and also a director on the UPL board. In FY12, Accolade received INR45 lakh through equity contribution from Vikram Shroff, and in FY13 it was disposed of for the same amount to Teknomic.

In 2012, when equity in Sadafuli was transferred from Jaidev Shroff to Teknomic, the latter also received a loan from Accolade and others. Accolade gave the company around INR90 lakh. Teknomic used these funds to buy a controlling stake in Sadafuli and Accolade, according to the whistle-blower’s letter.

The letter mentions that Teknomic received five unsecured loans from the following entities:

  1. Accolade -INR90,00,000
  2. Tatva – INR93,250,000
  3. Enviro – INR113,033,000
  4. Demuric – INR800,000
  5. Ultima – INR90,00,000

Sadafuli, Accolade, and Teknomic further invested their revenues in financial instruments, which include UPL Ltd and Uniphos Enterprises, a promoter group entity.

Number of shares held@2x

The letter goes on to allege that Jaidev Shroff, his parents, and brother have been using the shell entities to “systematically appropriate and divert the funds of UPL for their own personal gain and benefit, to the detriment of the shareholders of UPL, the investor community as well as UPL itself. This has been done by means of the shell entities entering into related-party transactions with UPL, consequent non-disclosure of the shell entities as belonging to the promoter group, and conducting circuitous dealings between the shell entities and UPL in order to mask the misuse of public funds being orchestrated at UPL”.

What the other side has to say
“There was a leave-and-licence agreement between Sadafuli and UPL with respect to Salisbury House. This agreement was on an arms-length basis. Jaidev Shroff and his family resided in that house,” Jani wrote in an e-mail reply to ET Prime’s queries.

Jain says the allegation of the whistle-blower that the Salisbury House is owned by Jaidev Shroff and his family members is not correct. “In fact, Salisbury House is owned by Sadafuli Finvest Limited. Also, we take strong exception to term a legitimate and arms-length transaction of leave-and-licence agreement being termed as ‘sham transaction’ to siphon off funds from UPL as rental income with the help of multiple circuitous transactions,” Jani writes.

“The relationship between Sadafuli and UPL is of a licensor and licensee on agreed commercial terms as provided in the various leave-and-licence agreements. The lease rentals paid by UPL to Sadafuli is at arm’s length price and as per the market valuation for all the years,” Jani adds.

Jani further clarifies that neither he nor Mehta is related to the Shroff family.

“Tecknomic has had several transactions in the ordinary course of business with different entities including with entities owned/controlled by the Shroff family. These transactions were normal business transactions and were entered into on an arms-length basis following all legal requirements,” Jani says.

Sandeep Deshmukh, UPL’s company secretary and compliance officer, replied to ET Prime’s queries and said the audit committee of UPL had received a complaint on June 2, 2017 from Poonam Bhagat Shroff under the whistle-blower policy of UPL.

“Mrs Shroff alleged that Jaidev Shroff and his family-owned and controlled several of the entities with whom UPL regularly conducted business transactions in violation of law. At the time of the complaint, and continues as to the present date, Poonam is fighting a very public and bitter matrimonial dispute with Jaidev Shroff, the global CEO of UPL which is why the origin and the authenticity of this allegation is questionable,” he says.

“As the allegations were of serious nature, the audit committee hired J Sagar Associates (JSA), a prominent and independent law firm, to conduct an impartial enquiry into the various allegations of Mrs Shroff. JSA conducted a detailed enquiry into the various transactions entered into by UPL with such entities focusing on (a) whether such entities were entities related to UPL, and (b) if such entities were related to UPL, would such transactions be construed as related-party transaction and whether UPL took the necessary approvals under law for entering into such transactions,” Deshmukh writes.

“After a detailed inspection, on April 26, 2018, JSA submitted its report to the audit committee of UPL. In its report, JSA concluded that except a few technical breaches, there was no illegal transaction that took place between UPL and such entities. JSA was specifically asked by the audit committee to independently review UPL’s transactions with Sadafuli and after a detailed review, it concluded that UPL’s transactions with Sadafuli were legitimate bona fide transactions and these transactions were in compliance with the appliable provisions of law,” Deshmukh adds.

After taking all these on record, the audit committee had concluded that UPL did follow all the relevant provisions of law and made all the required disclosures. Accordingly, the investigation was concluded, and the complainant was informed accordingly, Deshmukh says.

“SRBC & Co LLP was the auditor of United Phosphorus Limited (UPL) until the financial year ended March 31, 2017. We retired from the audit mandate at the annual general meeting on July 8, 2017, in accordance with the regulation on mandatory auditor rotation,” SRBC & Co says.

Overpaid promoters?
The whistle-blower has also raised concern on the promoter’s remuneration and pointed out that while the company’s profit fell by 26% in FY19 compared to FY18, chief executive and promoter Jaidev Shroff saw his compensation rise substantially over the year. According to the company’s annual report, Shroff’s remuneration went up from INR13 crore in FY18 to INR38 crore in FY19, an increase of 192%. In FY20, Shroff’s remuneration stood at INR57 crore.

Earlier this year, proxy advisors — Institutional Investors Advisory Services (IiAS) and Stakeholders Empowerment Services (SES) — had recommended that institutional investors vote against the reappointment of Sandra Shroff as non-executive director of UPL. SES made its recommendation citing excessive remuneration paid to her through subsidiaries or group companies.

In FY20, UPL paid INR94 crore as remuneration to three non-executive directors – Sandra Shroff, Jai Shroff, and Vikram Shroff. SES alleged this was done through subsidiaries to bypass the disclosure norms and approval requirements.

IiAS had also recommended against the reappointment of Singh as an independent director of UPL, saying during his tenure in the company since FY18 the promoter remuneration increased from INR49.1 crore to INR119.7 crore in FY20 and a large proportion of it was paid through subsidiaries with no clarity on the remuneration structure or performance metrics that determine variable or overall pay.

Sandra Shroff, vice-chairman of UPL, resigned from the board just before the annual general meeting on August 31, 2020.

(Graphics by Sadhana Saxena

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