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Corporate Report

Published on: Aug. 23, 2021, 6:57 p.m.
Trouble brewing at McLeod
  • McLeod: victim of a massive debt trap; Photos: Sajal Bose

By Sajal Bose. Executive Editor, Business India

In mid-2000, the Khaitans-owned McLeod Russel (MRIL) adopted a contrarian strategy in buying tea gardens in bear market. The move shocked many in the industry since the big boys like Tata Tea and Hindustan Lever were pressing the sell button. But it showed the world how the strategy paid off and became the largest tea producer in the world. Sadly, today the tea major is facing insolvency proceedings. The fault lies not with its performance but it is the victim of debt trap for excessive betting with the company’s fortune.

MRIL is now facing severe financial trouble. It has borrowed heavily to support the ailing McNally Bharat Engineering, a group company, beyond its financial means for the last few years. MRIL’s debt today is much larger than its total asset value. The estimated total loans and advances at Rs2,900 crore in March 2021 is more than the net worth of the company around Rs1,800 crore. The company struggled with such high debts at both individual level and group level and started faltering on debt servicing. Liquidity crisis deepened further. 

Recently on 6 August, The National Company Law Tribunal (NCLT), New Delhi Bench admitted an application under the insolvency and bankruptcy code (IBC) against MRIL, the largest bulk tea producer in the country. The bankruptcy proceedings were initiated by power infrastructure company, Techno Electric & Engineering Company in 2019 over a defaulting on repayment of Rs100 crore loan.  As of June 2019, MRIL owed Rs104.81 crore to the financial creditor, including the principal amount of Rs100 crore. The loan amount together with interest was to be fully repaid on or before 31 March 2019, according to the plea.

'Unethical and cheating'

Techno had provided an inter corporate deposit (ICD) of Rs100 crore to MRIL, subject to the condition that the same would be utilised for the purpose of repayment of all loans relating to four estates due to banks and financial institutions to ensure that all encumbrances created on the estates were released. MRIL had also mortgaged a property. However, the title deeds relating to the estates were not handed over to Techno and the loan amount was not repaid by the due date of 31 March 2019. 

PP Gupta, managing director, Techno says, “MRIL not only failed to pay us or hand over the original title deeds of the four gardens. But they have sold those gardens to Luxmi Tea without our knowledge. This is unethical and cheating.” Gupta was also upset that it took two years to get the case admitted after it has travelled to four benches. The tribunal in its order said that it was satisfied with the present application, which was complete in all respects and the applicant is entitled to claim outstanding financial debts from the respondent and that there has been a default in payment of the financial debt. Message was sent to Aditya Khaitan, chairman, MRIL for his comment on the dispute but he has not responded. 

The MRIL board has dissolved and as per the NCLT order, Kanchan Dutta had been appointed as the interim resolution professional (IRP) under the provisions of the IBC. The company’s business and all obligations will continue with the guidance of the IRP. Azam Monem will continue to guide the operations of the company. When contacted for his views Dutta says he is not able to share any comments with the media.

  • Khaitan: challenging to retain management control

Techno’s is not the only application to be filed against MRIL under IBC. A bank, too, had filed an application earlier. In 2019, Yes Bank had moved the NCLT against the company alleging a loan default of Rs500 crore but yet to be admitted. 

However, on 20 August MRIL challenged the NCLT’s order to start insolvency proceedings. The company filed an appeal in the National Company Law Appellate Tribunal (NCLAT) against the order of Delhi bench of the NCLT. The matter will come up for hearing on 25 August. “The route MRIL has taken to go against the NCLT will be rejected instantly upon hearing,” says Pankaj Singhania, founder Lakewater Advisors, an equity research firm in Kolkata.

Commenting on the recent development, well-known Calcutta High Court advocate Raghunath Ghose of R.N. Ghose & Associates, who is proficient in corporate matters says, “I think the best option for the company is to settle quickly with the lender before the insolvency proceeding starts. This will give the company some breathing space and then it can pursue on its huge debt for restructuring with banks outside insolvency.” It is assumed, majority of financial lenders agreed to arrive at a resolution plan. 

Lenders had also initiated a debt resolution process under the Reserve Bank of India (RBI) circulation dated 7 June, 2019. The company had mentioned in its notes to the results for the quarter ended March that the inter-creditor agreement (ICA) for arriving at and implementing the resolution plan has been confirmed and signed by certain lenders and was in the process of being approved by remaining lenders.  “The company has been selling this story of debt resolution for many years. The fact is that the situation gas gone beyond their control,” says a person in the industry watching the development closely.  

Earlier between 2019 and 2020, MRIL disposed off 17 estates for around Rs764 crore. But it was not enough to pare the huge debt. The Khaitans today hold merely 10 per cent of the company.  

BM Khaitan group company, MRIL, is India’s largest with about 31 estates in Assam and two in West Bengal. Across India, Africa and Vietnam, it produces around 73 million kg of tea with 73,000 employees. Its gardens are located on some of the biggest and best tea growing areas in the world. In India, it produce over 40 million kg, including bought leaf.  

Modern factories

MRIL produces high quality tea which commands a premium. It has a continuous process of modernisation and upgradation programme of factories. The factories are among the most modern in the business and with export markets in mind, conform to the strictest conditions set in the EU and American markets – no chemical pesticides, no stray germs, vacuum packing, no man handling the product etc. As a quality producer, the company held on even through the crisis period. The company follow all ethical practices and sustainable process in tea manufacturing. Gardens and its infrastructure created around it are ahead of the industry. 

The Khaitans are known to be a good employer. Under the leadership of Aditya Khaitan and his high-calibre team of professionals, the company expanded in a blistering pace in India and overseas in the last decade.

  • The fall and admission of MRIL in NCLT is unfortunate and more so because the situation could have been avoided with some risk mitigation and corporate governance measures

The debt of MRIL came to public notice when its erstwhile auditor Deloitte Haskins & Sells made adverse comments on the annual statements of both MRIL and McNally Bharat. Deloitte observed that liabilities of the tea company have exceeded current assets as on March 2019. The company had also failed to meet statutory liabilities and painted a dire picture by casting doubt on the company’s refinancing proposal, which it felt was not in the control of the company. Subsequently Deloitte had resigned as auditors from both companies. 

Also when the pressure of investors and shareholders intensified with deteriorating performance, mounting debts and alleged inter-company misappropriation of funds, prompted MRIL chairman Aditya Khaitan at the company’s AGM, to admit that it was a mistake. 

“The fall and admission of MRIL in NCLT is unfortunate and more so because the situation could have been avoided with some risk mitigation and corporate governance measures,” explains Singhania.  Rather than an acute business downturn or flaw in business model, the company has been brought to its knees due to sub-standard policies and practices of the promoters, he adds.

The financial result of the company has become insignificance. In quarter ended June 2021 consolidated results, MRIL has reported a loss of Rs67 crore on a turnover of Rs221 crore as against the loss of Rs94 crore on a turnover of Rs196 crore in the previous corresponding year. 

As uncertainty mounts, it will be interesting to see whether the Khaitans’ appeal against the admission can be reversed by the NCLAT. And if not, then can Khaitan persuade 90 per cent of creditors (banks) to allow withdrawal, even if Gupta does not agree? But obviously it would be best to get Gupta to agree too by offering him a generous settlement.

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