Sunil Godhwani, who oversaw the growth of Religare Enterprises from a small non-banking finance company, quit its board on Wednesday amid deepening troubles for the financial services major. Godhwani is the fourth director to quit in the past few months.
The resignation comes at a time when the company's fundraising plans and proposed related party transactions are under scrutiny from lenders and proxy advisory firms.
In April, Monish Kant Dutt, a nominee of IFC, resigned from the Religare Board. Dutt's resignation came less than two weeks after Ravi Mehrotra, a non-executive director, stepped down from the company’s board. Following this, the company postponed its FY17 results and eventually released it with the qualified opinion of auditors.
The auditors were concerned over regulatory scrutiny over loans given to group entities by the lending subsidiary Religare Finvest. This further led to rating firms downgrading the papers of the company and its subsidiaries.
On July 28, another non-executive director Sangeeta Talwar quit. But Godhwani's exit assumes significance considering the key role he had played in the growth of the company and the close relationship he enjoyed with the firm’s promoters-- Malvinder Mohan Singh and Shivinder Mohan Singh.
Handpicked by promoters around 13 years ago, the brothers had asked Godhwani to take charge of their non-banking finance company called Fortis. The Godhwanis, who were into the business of leather accessories, were known to the Singhs for at least two generations- hence the offer.
Godhwani turned the tiny Fortis into a sprawling empire under Religare, with interests across various financial services verticals. He had also overseen a popular IPO in November 2007. The shares which were offered for Rs 185 in the IPO had listed at 75 premium and had shot up to Rs 500 levels, before the market crashed in early 2008.
However, the last few years have been challenging for the firm amid mounting losses, despite divestment of interests in life insurance, mutual funds and other verticals. Last year, the Singh brothers, who were not part of the Religare board earlier, returned with Malvinder taking the position of the chairman. Godhwani was then given the position of CEO, following which he was made the full-time director of Religare. On Thursday, he stepped down from that position too without assigning any reasons.
Related party deals
On Saturday, the postal ballot for shareholders to vote on a resolution for approval of a related party transaction will close. Religare wants to make further investments of up to Rs 500 crore in one or more tranches in equity or preference shares in Religare Capital Markets (RCML), a subsidiary.
RCML needs additional funds for its India operations and would transfer a certain sum of the investment to its subsidiary-- Religare Capital Markets International (Mauritius) to help it repay its liabilities. Both the entities (RCML and RCMIML) have piled up losses. REL has already made a provision of Rs 30 crore for the diminution in the value of its existing investment in RCML.
Further, the company has stated that the provision for the diminution of the proposed investment of Rs 500 crore shall also be created in the company's books of accounts since RCML is in losses. Proxy firm SES has criticised the transaction and asked shareholders to seek more details.
"The Board before seeking shareholders' approval for the proposed investment should have considered all the options available, including but not limited to the revival plan of these two subsidiaries. The company should disclose to the shareholders, the action plan going forward, and give adequate justification to further the (proposed) investment, despite the fact that present investment has already suffered diminution in its value," it said in a report.
“Further, the company has mentioned that the standby letter of credit facility availed by RCMIML is falling due for repayment and RCML also needs additional funds for its India operations. SES believes that the company should bring separate resolutions for these two investments. In view of these concerns, SES recommends that shareholders vote against the resolution," stated the SES report further.
Separately, SES has also opposed a resolution to raise funds by the issue of debentures for this investment at the company’s annual general meeting.
A Religare spokesperson did not respond to an e-mail seeking comments on the recommendations.
Further, the company is also named a party in a petition by IDBI Trusteeship Services, which has challenged the right of certain shareholders to vote on this transaction. "The company strongly believes that IDBI Trusteeship Services has wrongly made the company as the party to its petition against certain shareholders of the company and the company will strongly oppose and defend itself," Religare said in a statement to the exchanges.
These shareholders have pledged their shares with the IDBI Trusteeship and falling share prices are not helping shareholders, including promoters, who have pledged their shares. The Bombay High Court is likely to hear the petition on Friday. Reflecting these concerns, the shares have lost over 60 per cent in the past month and 81 per cent in the current financial year. On Friday, they ended with gains of around 5 per cent at Rs 40.4.