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All hell breaks loose for KRBL (Starting April-18)
ED cancels Mohnish Pabrai’s transaction to buy 2.7% stake in KRBL

• The famous value investor Mohnish Pabrai tried to buy a significant stake in KRBL from one of the existing investors – Omar Ali Balsharaf
• However, the Enforcement Directorate (ED) wrote to the BSE and blocked this transaction. Thus, the deal was not consummated.
• ED alleged that Balsharaf was one of the accused in the VVIP chopper scam and he had purchased the KRBL stake using crime money ill-gotten from the VVIP chopper scam.
• Balsharaf filed a case in the Delhi High Court.
• It may be noted that KRBL was not party to this case. Balsharaf was objecting to the ED blocking the sale of KRBL shares.
• Let us look at what the High Court judge observed in his order dated 9^th Jan-2019

• The High Court clearly ruled that the ED orders to block the sale of KRBL shares was outside the law
• Look what else the High Court has observed in the same matter

• The High Court observed that Balsharaf who is the distributor for KRBL products in Saudi Arabia for a long time (20+ years) had acquired the stake in KRBL in 2003
• How could Balsharaf have acquired this stake using “crime money” for a crime which was allegedly committed 5 years later around 2008?
• In plain words, the High Court is saying that the ED officer who issued a letter to BSE blocking the deal was simply lying.

KRBL shares tanks 20% after former director Gautam Khaitan arrested in the Augusta Westland VVIP chopper scam (Aug-18)

• In a chargesheet filed by ED in Jun-19 it is alleged that Gautam Khaitan has been the beneficiary of Rs 850 Cr of slush funds in various defense deals.
• It is also alleged by ED that part of the money has been routed through a step-down subsidiary of KRBL based out of Dubai – RAKGT.
• How is KRBL connected to Gautam Khaitan?
  Gautam Khaitan was an independent director of KRBL between Jul-2007 and April-2013
• KRBL management claims that though Gautam Khaitan was an independent director of KRBL, the management was not aware of his other dealings and KRBL is no way associated with the alleged corruption in VVIP Chopper scam.
• As soon as Gautam Khaitan’s name appeared in the VVIP Chopper scam in Apr-13, he was made to resign from the KRBL board.
• It may be noted that Gautam Khaitan has been arrested, whereas no formal charges have been pressed against KRBL management in a case that is ongoing at least since 2013 for a crime which was allegedly committed around 2008/09.
• However, we should note that the ED has alleged the routing of money as explained in the below flowchart

• The crime money has allegedly been routed through a company called RAKGT which is linked to KRBL
• In the same High Court order, the judge noted that RAKGT is no longer directly connected to KRBL in India

The nephew referred in the above order is Anurag Potdar

• Though this doesn’t prove or disprove anything, the KRBL management claims that they have nothing to do with RAKGT and it is being run by its nephew. However, it is not clear if Anurag Potdar continues to be associated with KRBL today.
  A reading of the related party transactions do not list either Anurag Potdar or RAKGT as related parties, but we cannot rule out if KRBL still carries out legitimate business – distribution of Basmati rice in UAE through their nephew.

• From the above, we note that at best KRBL is alleged to have only provided a way to route the bribe/crime money. The main characters in the VVIP Chopper scam is someone else.
• The amount allegedly routed through KRBL is much lesser than the total amounts believed to have been involved in the entire scam.
• There is no formal chargesheet against KRBL or its directors even though investigation is ongoing at least since 2013 for a crime allegedly committed around 2008/09

Embraer Case – Attachment of Property (July-19)
When ED could not make much progress against KRBL in the VVIP chopper scam, it took action against KRBL in another defense scam – the Embraer case.

ED attached KRBL property at Dhuri, Punjab

• The Enforcement Directorate alleged KRBL complicity in the Embraer defense scam case and attached land property worth Rs 15 Cr situated adjacent to the rice mill in Dhuri, Punjab.
• ED alleged that this was crime money and land worth an equivalent amount was attached by the Enforcement Directorate.
• Gross Fixed Assets of KRBL = Rs 1537 Cr
  PAT (2019) = Rs 503 Cr
  Income Tax paid in 2019 = Rs 230 Cr
• The KRBL management engaging in the Embraer defense scam around 2009 to benefit for a paltry sum of Rs 15 Cr looks a little outlandish, however the jury is still out.

Here it may be pertinent to look at the tryst of another famous FMCG company with law enforcement

Case against ITC in the 1990s
What was the allegation?
Rs 800 Cr evasion of excise duty between 1990 and 1995.
Violation of the Foreign Exchange Regulation Act (FERA). Money was illegally routed by the international division of ITC through Singapore-based subsidiaries.

Who all got arrested?

• Two former Chairmen of ITC – then India’s largest “professionally managed” public limited company – Chugh and Sapru were arrested and put in jail
• Total number of ITC executives arrested was 15.
• Even serving ITC Chairman – Y C Deveshwar was questioned several times by the Enforcement Directorate.

How did the case got resolved?

After 4 years of investigations, the ED finally decided to press formal charges in 2002.

In the meantime, the Foreign Exchange Regulation Act (FERA) was replaced by another law Foreign Exchange Management Act (FEMA) in 1999. The last date for filing formal charges under the now extant FERA was 31^st May-2002.

Formal charges were also pressed against the then serving ITC Chairman – Y C Deveshwar by the Enforcement Directorate in its chargesheet.

What happened to the ITC stock?
In the last 25 years, the ITC stock has gone up 33 times

Given the enormity of action taken against ITC – one of the largest public listed companies in India even in the 1990s, the allegations against KRBL at best seem to be small irritants.

Secondly, we may also note that it is far easier for KRBL to dupe the lacs of farmers it procures paddy from than to try their hand at international crime especially in the highly competitive defense procurement industry.

8^th Feb-2019
IT Tax Demand Notice

• KRBL board declared that the Income Tax (IT) department had raised a tax demand of Rs 1270 Cr.
• The IT department disallowed expenses of Rs 2221 Cr.
  Rs 1996 Cr of these expenses was for paddy purchases made from farmers between the years 2010 and 2017.
• KRBL management claimed that the methodology of paddy purchases was different in different states. It was mandatory to go through the mandi broker (arthiya in local language) when buying paddy from farmers in Haryana and Punjab. Money could be paid through the banking channels to the arthiya.
  However, in Uttar Pradesh, it was allowed for companies to directly purchase from the farmers.

• KRBL said that the paddy purchases from farmers dis-allowed as expense by the IT Dept were actually cash purchases from Uttar Pradesh farmers. Before Jan Dhan accounts became universal around 2015/16, it was preposterous to think
• The management claimed one more important thing – even though purchases were directly made from farmers, the produce had to be first brought to the Mandi, an entry had to be made and then KRBL would lift the produce from the Mandi.
  This meant, KRBL had official Mandi receipts for all the procurement they had done directly from the Uttar Pradesh farmers.

13^th Mar-2020
Resolution of the IT Case

• Fast-forward 12 months and the stand of the KRBL management was vindicated on appeal.
• The tax demand notice of Rs 1270 Cr was reduced to Rs 101 Cr

From all the investigative work enumerated above, we observe that there is doubt that KRBL facilitated the routing of bribe money in the VVIP Chopper scam. However, not only that nothing has been proved, but 7 years into the investigations no chargesheet has been filed against KRBL or any of its directors.

The massive Rs 1200 Cr IT case against KRBL also seems to have been fictitious.
ED clearly lied and acted outside the law to block the Pabrai-Balsharaf transaction.
The attachment of Rs 15 Cr land also seems to be part of witch-hunting against the company.

Given the quality of the business and the fact that it will be one of the least impacted businesses in the post-covid world, I continue to hold the business and have added at lower prices.

Disclaimer: Please do not consider this article as a stock recommendation. The article is an illustration of the kind of analysis that goes into fundamental research and equity investing. I do hold the shares of KRBL Ltd.
Please consult your investment advisor before making any investment decisions.

If you want to learn some Forensic Accounting, check out our online (pre-recorded) workshop on “Forensic Accounting for Investors”

1. Enforcement Directorate arrests 15 officials of ITC (1996)
   https://www.icmrindia.org/casestudies/catalogue/Business%20Ethics/ITC%20The%20FERA%20Violation%20Story.htm
   
2. Chronology of battle between ITC and BAT and the subsequent allegations of financial irregularities in ITC’s international business division (1996)
   https://www.outlookindia.com/magazine/story/how-it-all-began/202506
   
3. ITC’s moment of reckoning – Outlook coverage of the ITC FERA violation case (1996)
   https://www.outlookindia.com/magazine/story/itcs-moment-of-reckoning/202502
   
4. Enforcement Directorate to press formal charges against ITC (2002)
   https://www.financialexpress.com/archive/enforcement-directorate-may-initiate-prosecution-against-itc-shaw-wallace/38269/
   
5. FERA case against ITC dropped (2004)
   https://www.thehindubusinessline.com/todays-paper/tp-news/article28850117.ece
   
6. KRBL company conference call transcripts
   
7. BSE announcements – KRBL
   
8. Delhi High Court case judgments
   http://delhihighcourt.nic.in/case.asp