Proxy advisory firm Institutional Investor Advisory Services (IiAS) has questioned the role of Raymond's Chairman and Managing Director in the related-party transaction involving JK House. Slamming his conduct in distancing himself from the deal, the proxy firm has asked shareholders not to reappoint him as a director in the annual general meeting on Monday.
In a note titled "For Gautam Singhania is an honourable man" released after Singhania's statement on the matter on Friday, IiAS said Gautam Singhania’s recent message to shareholders is an attempt to dissociate himself from the transaction that allows the company to sell premium real-estate in Mumbai at throwaway rates to promoters – including Gautam Singhania himself. "In doing so, IiAS contended that he abdicated responsibility for actions that were undertaken by the company – with the consent of the board – during his time as the company’s Chairperson and Managing Director. " Does Raymond Limited deserve a leader who is unwilling to take responsibility?" the note asked.
The transactions related to the signing of the contentious tripartite agreement were undertaken in November 2007. The decision to sign these agreements was made at two board meetings – on 23 June 2006 and 20 July 2007. During this phase, Gautam Singhania was the company’s Chairperson and Managing Director. He was also a party to the agreements.
IiAS said Raymond Limited (and its shareholders) deserved, at the very least, a board leadership that was accountable and took responsibility for actions of the company.
"IiAS holds Gautam Singhania responsible for the related-party transaction in the discussion. Therefore, IiAS has recommended that shareholders vote against Gautam Singhania’s reappointment as the director to Raymond’s board," the note concluded.
In statements on Friday, Raymond had said it was committed to protecting shareholder interest and its actions with regard to the transaction according to legal advice.
In Friday's report, IiAS also raised corporate governance questions on lack of timely disclosures, conflict of interest policy and the role of the board of directors.
Here is an extract of the questions and discussion:
Here is an extract of the questions and discussion:
1. If Gautam Singhania is dedicated towards ‘best in class corporate governance’, why were disclosures of the tripartite agreement not timely?
During 2006-2008, when the board approved the tripartite agreements and these were signed by the company, annual reports were silent on the transaction. Disclosures on related party transactions during these years stated, “There are no materially significant related party transactions made by the company with its promoters, directors or managements, their subsidiaries or relatives, etc. that may have potential conflict with the interests of the company at large.” It is only in the 2013-14 annual report that the company first specifically mentions the capital-work-in progress towards JK House in the fixed asset schedule: by 31 March 2014, the company had already spent Rs.1.5 bn on the redevelopment. Even then, the company did not disclose that it proposed to sell the residential piece of the property to the promoters at Rs 9,200 per square foot of carpet area.
The 2016-17 annual report, despite a disclosure regarding the tripartite agreement, does not mention the price of the transaction. – The company continues to maintain that “All transactions entered with Related Parties for the year under review were on arm’s length basis and in the ordinary course of business and that the provisions of Section 188 of the Companies Act, 2013 and the Rules made thereunder are not attracted.”
2. When did Gautam Singhania change his mind about the transaction?
JK House was demolished and rebuilt when Gautam Singhania was the company’s Chairperson and Managing Director. Therefore, the building structure, its plans, and its associated costs – aggregating Rs.2.7 bn or over Rs.11,000 per square foot – had his explicit or tacit approval. The entire effort from demolition to rebuilding and getting an occupancy certificate took about 10 years. If Gautam Singhania changed his mind during this time, it would have been prudent for him and the board to therefore change course. In not doing so, it is unclear if Gautam Singhania changed his mind then, or now – after the public push back. Shareholders must also ask if there are any more transactions undertaken by the company – with the blessings of the board – that Gautam Singhania is unlikely to endorse in the future.
3. Does the board support Gautam Singhania’s position? If so, why is the transaction being brought to shareholders for a vote?
Regulations require audit committees to first approve related party transactions before they are put to shareholders for a vote. In this case, the audit committee and the board, based on legal advice, have deferred the decision to shareholders. But, Gautam Singhania has been clear in their view that the transaction is not in the interest of the company. If the Board agrees with this view, why did it not quash the transaction before bringing it to shareholders? Assuming there were legal implications and therefore, the board decided to put the transaction to a shareholder vote, the board could have provided explicit guidance to shareholders in the notice itself, to reject the transaction.
4. Why is Vijaypat Singhania, who has exercised his right to acquire the property, still on the board and part of the audit committee?
Gautam Singhania contends that, in the interest of the company and the minority shareholders, the transaction should be defeated – and it is in this context that he has not exercised his right to the property. However, his father, Vijaypat Singhania has exercised his rights to the property. Extending the logic, Vijaypat Singhania, therefore, is not acting in the company’s interests. Yet, Vijaypat Singhania not only continues to be a board member, but also a member of the audit committee.
5. What is the company’s conflict of interest policy and how did the Chairperson ensure it was enforced at the time of signing the 2007 tripartite agreement, or even now?
Gautam Singhania’s claim of abstention from discussions over the tripartite agreement may be true in fact but misleading in its implication.At the time of approving the tripartite agreement and signing the agreement, Vijaypat Singhania was a member of the audit committee, and Gautam Singhania was the Chairperson and Managing Director – both being beneficiaries of the transaction. This structure continues even today. The nomination and remuneration committee, which is responsible for appointment and removal of directors, has had and continues to have, a strong overlap with the audit committee. In that context, can shareholders expect the board to be able to separate the interests of the company and the Singhania family?
The board and Gautam Singhania are stuck between the rock and the hard place. Therefore, the board has decided to defer the decision to shareholders, and Gautam Singhania is seeking to protect his personal reputation by disassociating himself from the fracas.
Good governance demands that the interests of the company are separated from, and put ahead of, the interests of its controlling shareholder. But, for the Chairperson of the Board to disassociate himself from the decisions made by the board, is a possible first.