Corporate Front: Strategy, Who'll Drink To Herbertsons?

As the battle for control between K. Chhabria and V. Mallya shifts to the Company Law Board, a long conflict lies in store.

When a business buddy turns into a takeover tycoon, expect a few fireworks. Even as Vijay Mallya, 44, the CEO of the UB Group, was spending New Year's Eve in Goa, his senior managers were busy digging up dirt on archrival Kishore Chhabria, 43. Not to be left behind, Chhabria, who is trying to take over the Mallya-owned Herbertsons, was finalising details to counter his rival's legal initiatives. Why? Because Mallya (stake in Herbertsons: 37.88 per cent) realises that his adversary had come perilously close to succeeding in his designs. Indeed, a resolution to remove Mallya--and 4 other directors close to him--was moved by Herbertsons' Vice-Chairman Chhabria at the Annual General Meeting (AGM) on December 30, 1998.

Sealed by the Mumbai High Court, which will only disclose the result on February 9, 1999, the vote may well go in Chhabria's favour, since he controls 47.48 per cent of the stake and claims to have got 50.30 per cent of the votes at the AGM. But Chhabria knows that the real battle will only be won in the courts of law.

For, Mallya is likely to press for status quo in management control of Herbertsons until the charges of financial irregularities against Chhabria are decided by the courts. That's why Chhabria is sharpening his legal tools to counter the petition filed by Herbertsons with the Company Law Board (CLB) on December 7, 1998. The petition alleged that Chhabria has siphoned off Rs 180 crore from Herbertsons' 100 per cent subsidiary, BDA.

Even as Chhabria was preparing to launch his onslaught, his confidante, Utpal Ganguli, the Managing Director of BDA, resigned on January 1, 1999. Since Ganguli was Chhabria's choice for the post of Managing Director of Herbertsons after the removal of Mallya and his 4 directors from the board, his resignation was viewed as a victory for the Mallya camp, which issued a press release on the episode. However, Chhabria had Ganguli back in his fold by January 11, 1999, when the latter was appointed the Vice-Chairman of BDA.

Meanwhile, at the CLB hearing on December 23, 1998, Chhabria, who is also the Chairman of BDA, stated that the petition aimed at deflecting the takeover threat facing Herbertsons. Chhabria is also preparing a detailed reply to counter the allegations, although it had not been filed till BT went to press. Refusing to defend himself against the charges made in Herbertsons' petition, Chhabria said: "The matter is sub-judice." In a faxed statement, BDA's spokesperson said: "The petition filed before CLB (by Herbertsons) is merely a retaliatory action to the steps taken for (the) removal of Vijay Mallya from the board"

Essentially, the charges state that, between 1993-94 and 1997-98, Chhabria diverted money from BDA "for his personal benefit." Most of this money was allegedly utilised by him to purchase Herbertsons' shares. Indeed, Chhabria did increase his stake in Herbertsons from 27.21 to 47.48 per cent in this period. Mallya also contends that BDA was managed independently by Chhabria. And that the Herbertsons board, which appointed 4 of the 9 directors on BDA's board, was never involved with decision-making at BDA. While citing the diversion of funds as the reason for BDA's accumulated losses of Rs 15.94 crore, on March 31, 1998, the Herbertsons petition also lists the way in which the funds were supposed to have been diverted.

For one, in March, 1994, BDA appointed Royal Wines, in which Chhabria has a 100 per cent stake, as its sole selling agent and a super-distributor for Mumbai and the rest of Maharashtra. While the products--mainly Officer's Choice whiskey (annual sales: 2 million cases)--were sold virtually at cost by BDA to its distributor, the latter sold them at a mark-up of Rs 140 per case. Of this differential, Royal Wines would pocket Rs 5 as commissions, and pay the remaining Rs 135 to Chhabria Marketing--owned 100 per cent by Chhabria--as marketing service charges. Based on the production at bda's Aurangabad distillery, Mallya estimates that nearly Rs 65 crore has been paid to Royal Wines and Chhabria Marketing in the past 5 years.

During the period, continue the charges, Chhabria Marketing was paid another Rs 30.51 crore by BDA for providing other marketing services. All these payments were in addition to bda's own expenditure of Rs 94.32 crore on "sales promotion and advertisement." Therefore, alleged the petition, "an astronomical (expenditure) of Rs 189.83 crore (is) said to have been incurred by the company by way of marketing services." Given the fact that BDA's cumulative turnover in the 5-year period was Rs 497.94 crore, the marketing-related expenditure constituted a high 38 per cent of the turnover.

An analysis of BDA's balance-sheet does indicate unusually high marketing costs. For instance, in 1997-98, such expenses (Rs 35.25 crore) constituted 44.59 per cent of the net turnover (Rs 79.04 crore). But both Chhabria and his uncle, M.D. Chhabria--whose companies have purchased Herbertsons' shares since 1994--have obtained a clean chit from the Income Tax department for 1997-98.

Mallya also alleged that Chhabria used bda's money to pay Rs 9.55 crore to advocates and solicitors to fight his battle against his estranged brother M.R. Chhabria between June, 1992, and April, 1995. And that between 1993-94 and 1997-98, the company wrote off Rs 8 crore, due from a few Maharashtra-based dealers, as bad loans. "It is a matter of common knowledge that (this) is one of the means to cover up diversion of funds by way of kickbacks," states the Herbertsons petition. In 1997-98, BDA paid Rs 4.50 crore as a "non-competition fee" to Chhabria Marketing. Obviously, Mallya believes this was unnecessary: since the latter had no dealings with any other liquor producer, it should not have been paid the fee.

But how was the money used by Chhabria to purchase shares in Herbertsons? Royal Wines extended a Rs 6.55-crore loan to 3 investment companies--IMFA Holdings, Mahameru Trading, and Shirish Finance--which were unrelated to the Chhabria empire. The 3 companies, which were taken over by the M.D. Chhabria-owned Seven Star Investments in 1996-97, purchased a cumulative 19.71 per cent stake in Herbertsons between October 27, 1994, and February 2, 1997. Chhabria Marketing too extended Rs 8.35 crore through a series of transactions to 6 investment companies, fully-owned by the Chhabria-controlled Galan Finvest, which purchased a 27.21 per cent stake in Herbertsons on December 14, 1993. This money did not come from BDA, but was given by Herbertsons as payment for the Lord & Master brand it purchased from Chhabria Marketing.

Only Chhabria's response, and the decision of the courts, will tell whether Mallya's allegations are justified. But as skeletons tumble out of the cupboards of both the warring factions, the Mallya-Chhabria battle is becoming murkier by the day. After having lobbied with the Securities & Exchange Board of India--where Mallya tried to prove that Chhabria's acquisition violated the Takeover Code, 1994--the battleground has now shifted to the CLB. But at the end of the day, the losers will certainly be Herbertsons and BDA--and their corporate spirits.

Why BDA Is brewing losses

Incorporated in February, 1986, BDA became a part of the UB Group in December, 1993. That was when Kishore Chhabria, who wrested the company from his brother, M.R. Chhabria, joined hands with the UB Group CEO Vijay Mallya. The deal gave Chhabria a 26 per cent stake in the Mallya-owned Herbertsons, in exchange for making BDA a 100 per cent-owned subsidiary of the former. Subsequently, Chhabria became the Vice-Chairman of Herbertsons and the Chairman of BDA, whose 9-member board constituted 4 directors from the Mallya camp. But Mallya has alleged that BDA was independently managed by Chhabria.

Today, BDA is among India's top 5 liquor companies with brands like Officer's Choice (marketshare: 10 per cent), Calipso, and Class. But strangely, despite a strong growth in volumes, which increased by 77 per cent between 1995-96 and 1997-98, the company has incurred losses for the past 5 years. Indeed, BDA's accumulated losses on March 31, 1998, stood at Rs 15.94 crore, which was 80 times its net worth of Rs 20 lakh. Moreover, the company's accounting practices are questionable, and its financials have been extensively qualified by its auditors, Lovelock & Lewes, in the past 3 years. For instance, in 1997-98, the auditors expressed doubts about:

Non-provision of Rs 9 crore received as unsecured loans.
Recoverability of Rs 7.07 crore from certain debtors.
Non-provision of Rs 1.34-crore interest due to Herbertsons.
Recoverability of Rs 7.30-crore loans and advances.

In fact, Lovelock & Lewes stated that they were "unable to form an opinion whether the (1997-98) balance-sheet gives a true and fair view of the company's affairs " Mallya, for one, doesn't disagree.