Candor Investing

Explained – Corporate Governance Issues at KRBL

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

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

The nephew referred in the above order is Anurag Potdar

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

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?

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 31st 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.

8th Feb-2019
IT Tax Demand Notice

13th Mar-2020
Resolution of the IT Case

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