Competing with the mango season, the impairment season arrives with due ceremony.
First came an infrastructure major recognising an impairment of nearly US$1bn (billion), at the exchange rate prevailing the last time the government changed in New Delhi.
Next came a non-banking finance company (NBFC), admitting a hole in its books of over US$1bn at the current exchange rates.
Then there was a news splashed of a sugar daddy writing off ₹991 crore when it finally acknowledged its subsidiary going belly up.
Impairment is no more interesting than bank reconciliation, unless a story comes attached.
That is precisely where a PVC major punching a hole of ₹898 crore. in its standalone book stands out. The number may be small; but the story is tall!
The name Kalamkriya Ltd, may conjure up the fancy image of an enterprise selling expensive hand-printed sarees.
The company secretary who helped get the incorporation done, even in her wildest imagination could not have expected that at some later stage in its life, the company would be the chosen vehicle for some intriguing financial reengineering.
Somewhere the dissonance between the name and the deed had to end; hence, it was renamed Cuddalore Chemplast Vinyls Ltd (CCVL).
Forthwith, the object changed from publishing and printing (God knows what) to manufacturing and selling PVC.
Then, it didn’t like its parent, and dumped Sanmar Consolidations Ltd and, instead, chose Sanmar Engineering Services Ltd (SESL).
On 19 September 2017, the company invested ₹2,654 crore in SHL Securities (Alpha) Ltd. The funding for this was provided by SESL in the form of ₹300 crore in equity capital and ₹2,356 crore through Zero Coupon Compulsorily Convertible Debentures.
Though a little unclear, SHL Securities (Alpha) Ltd used the ₹2,654 crore to acquire the shares of a cluster of entities, being Sanmar Holdings Ltd, Sanmar Global International Ltd, Sanmar Specialty Chemicals Ltd, and its immediate subsidiary, Chemplast Sanmar Ltd.
At this point in time, the corporate structure was a five-tiered one. At the top was SECL holding 100% of CVCL. CVCL held likewise SHL Securities. Below it was Sanmar Specialty Chemicals and in the basement was Chemplast Sanmar Ltd. The other entities are not relevant to this story.
After the above corporate action, a composite scheme of arrangement (SoA) under the Companies Act, 2013, was conceived in two parts.
Part I of the SoA involved the merger of SHL Securities (Alpha) Ltd with SESL; and Sanmar Specialty Chemicals with Chemplast Sanmar. Both these are marked with arrows in the diagram on the left
In one fell swoop, Chemplast Sanmar was liberated from the three levels of parents it had. It became a fellow subsidiary of its former parent, CCVL.
Readers are advised to check if their ballpoint is working and start putting the diagram on paper!
This step left CCVL with a huge hole in its books as its assets of ₹2,654 crore moved out, but the liability stayed with it.
This is the first stroke of value migration from CCVL to SESL of ₹2,654 crore.
Under part II of the SoA, Chemplast Sanmar Ltd, spun off its suspension PVC business, as a going concern to CCVL, as a demerger under the law.
The hackneyed reason for any such separation is greater focus for individual businesses, each to chart its own course etc.
These actions were made, retrospectively, effective from 1 April 2018.
As of 31 March 2019, the books of CCVL ended with a negative reserve of ₹3,180 crore.
This hole was partially plugged by revaluing (post the demerger) the fixed assets of ₹444 crore to ₹1,123 crore.
Later, CCVL borrowed ₹825 crore from banks and made an investment of ₹1,200 crore in the CCPS of a group entity. The balance was bridged by an additional CCD from SESL
Subsequently, the CCPS was disinvested. The ₹1,200 crore realised was not used to repay the related bank loan, but was instead used to redeem a portion of ZCCD held by SESL.
This was smart financial engineering. The bank loan of ₹825 crore was left on the operating company’s books. The cash was migrated to the group holding entity.
Parallelly, the CFO of Chemplast Sanmar refused to be left behind on such financial juggling. He did his part by borrowing from HDFC ₹1,270 crore at 17.5% (no typing error) pa.
The cash appears to have moved to Mowbrays Corporate Finance and Sanmar Group International Ltd. Within a year, the board of Chemplast realised the said investments were unrelated to its business and took back the cash.
₹1,556 crore was realised in that process. But the HDFC loan was not repaid.
With so much spare cash, the board of Chemplast, which had spun off the suspension PVC business as non-core, realised the mistake and wanted to take back that business.
Just as a demerger helped to separate, a merger with CCVL would have helped to bring them together.
But it took a more financially savvy route of acquiring CCVL’s shares and ZCCCD from SESL for the exact amount of ₹1556 crore.
Yet another smart move of upstreaming the cash to the group apex company and the debt was retained in the operating entity.
Students reading this article should not form the impression that the various steps that stuffed the operating business with debt and migrating the cash to the owners. was anything unholy.
The recommended read to know more about such practices is Barbarians at the Gate by Bryan Burrough and John Heylar.
When the story started, CCVL was the great-grandfather of Chemplast, Finally, it became the child of Chemplast.
After the excitement of piecing together this story of corporate craft, it is difficult not to be reminded of a story in Vetala Panchavimshati, (Vikram and Betal for those fed on ACK!) which also inspired a Kollywood runaway success.
The Spirit asked Vikramaditya the following riddle- “A king marries a young woman. His son, the prince, marries the woman’s mother- when both couples beget children, what would their inter-se relationship be?
As Vikram spoke, a pack of wolves howled and the words were lost.
The story, too, ends here!
(Ranganathan V is a CA and CS. He has over 45 years of experience in the corporate sector and in consultancy. For 17 years, he worked as Director and Partner in Ernst & Young LLP and three years as a senior advisor post-retirement, handling the task of building the Chennai and Hyderabad practice of E&Y in tax and regulatory space. Currently, he serves as an independent director on the board of four companies.)
