As we delve deeper into the realm of debt-laden corporate India with an increased effort made to resolve the burden, we uncover more and more shocking details of how such massive amounts of debt was accumulated and how promoters were able to get away scot-free with their frivolous over borrowing. At the risk of sounding like a one track record, accusations of fraud, mismanagement, breach of public trust, unethical practices and a slew of other well-known charges have surfaced in the resolution process of one of the country’s most debt-laden companies.
Lagadapati Amarappa Naidu and Company Infratech a.k.a. Lanco Infratech, the pride of India’s burgeoning infrastructure sector till a few years ago which caters to turnkey verticals such as power, EPC (engineering, procurement, construction), infrastructure and also has sizeable investments in solar and natural resources – today faces the brunt of the resolution process under IBC (Insolvency and Bankruptcy Code). A company whose Wikipedia page states that in 2010 it was one of the fastest growing group of companies in the world and in 2011 was the largest private power provider in India, the very same entity that was known to have deep connections with the then ruling Congress party, specifically Sonia Gandhi, is now on the brink of extinction.
Lanco Infratech, one of original “dirty dozen” – the 12 most debt infested companies identified for insolvency proceedings by RBI last year, got delisted from the stock markets very recently. The incredible story of how it went from being listed in November 2006, its success story and events leading to its downfall, can be attributed to one word – Fraud.
A well-known fact, which is disputed by Lanco, is that the company owes its initial success to political clout. Lagadapati Rajagopal (longtime Chairman of Lanco) was a former Lok Sabha member of the Congress, son-in-law of veteran Congress leader P. Upendra and was also known to be the blue-eyed boy of Congress President Sonia Gandhi- saw a phenomenal rise in his business empire during the 1990’s. Buoyed on the back of this success and his proximity to the Gandhi dynasty, Mr Rajagopal was not accustomed to being refused loans from leading borrowers such as ICICI Bank, IDBI Bank, Power Finance Corporation and Rural Electrification Corporation. Lanco Group is currently being managed by Mr Rajagopal’s younger brother L. Madhusudhan Rao, who blames the downfall of his company on macroeconomic issues affecting the infrastructure sector as a whole, high fuel costs, low capacity utilization and faulty government policies. In an interview in 2015 he also went on to say “I think on the perception side, we are at rock-bottom”. However, while these factors did play a role in the downfall, the primary reason lies with the disproportionate level of debt on the entity’s balance sheet. Combined, the brothers during their respective eras of leading the company, racked up a total debt figure of 44,000 crores by 2017, which was the second highest among the dirty dozen list of companies after the beleaguered Bhushan Steel.
The stock market too has a story to narrate about Lanco, the company rode the infrastructure wave of 2007-2010 in India to reach a stock price of Rs 74.7 (August 2010) and then fell to Rs.4.70 (June 2015). For much of 2018, the share price of Lanco was below 1 rupee, recently hovering around the 0.30 paise mark until it got delisted. The stock markets have punished companies that soaked up debt during better times and those with wobbly fundamentals. Being highly overleveraged, a slight change in fortunes can have an adverse effect on the functioning of a company. Lanco, like other companies in the power sector, was hit by the slowdown in the second term of the United Progressive Alliance (UPA) government. The sector was beset by slowing economic growth, high borrowing costs, delays in securing environmental clearances and completing land acquisition as well as fuel, coal and gas shortages.
Coupled with a rapid downturn in its fortunes, Lanco over the years has been at the receiving end of accusations ranging from when its managing director was caught in March 2007 at Hyderabad airport with about Rs.34 lakhs in allegedly unaccounted cash for a contract kickback, to when for a period its employees went without salaries. Then there were more disturbing accusations such as the time the company was granted commissioning (completion) certificates for a massive solar project in Rajasthan where it was found that instead of 1,70,000 solar panels needed to generate 35 MW of power, less than 1,000 panels, mostly non-functional ones were found at the site. The certificates were obtained fraudulently in order to avoid paying a penalty for delay in completion of work. Even the bidding process was marred with controversy with Lanco bidding for significantly more projects than what was permitted by any single entity, bids were made through fronts to sidestep the rules and win more contracts than legally permitted. In another incident, Lanco Infratech claimed to have paid Rs 1.89 crores as premium for an insurance policy, which was subsequently denied by New India Assurance Company saying it never issued a policy bearing those details submitted by Lanco. In our opinion the company has gold plated its projects such that project cost was inflated by multiple times as a result of which bank loans worth 1000’s of crores were taken and syphoned away with no promoter equity being offered. Unconfirmed reports also say that the chairman had acquired huge private lands in and around Hyderabad.
With nary a solution in sight and many lenders left in the lurch, insolvency proceedings seemed to be the only pragmatic solution for the Hyderabad Infra giant. On somewhat expected lines the insolvency proceedings didn’t go smoothly with bids by Thriveni Earthmovers, a Tamil Nadu based infrastructure and mining firm being rejected by the committee of creditors (CoC) twice with only 15% voting in favour as against 75% required for approval. Even Power Mech Projects, another EPC player couldn’t convince the NCLT to grant more time to submit its bids. Finally, with the patience of the NCLT wearing thin it decided to pass a liquidation order on 27th August 2018 against Lanco Infratech and appointed Savan Godiwala as the resolution professional to complete the liquidation process within 75 days. On the date of liquidation order, the claims of the financial creditors stood at 45,263 crores and those of the operational creditors were at 5,389 crores, with the combined total at a staggering 50,652 crores.
Scepticism about the recovery of dues being the order of the day, lenders can only hope for a small haircut, but common sense dictates that a promoter group who has been so efficient at manipulating the system in granting them loans will be equally, if not more prudent in hiding its ill-gotten gains.