Fortis probe finds lapses in loans to Singh brothers
Hospital chain initiates recovery process; Malvinder’s appointment terminated
Aprobe ordered by Fortis Healthcare has found systemic lapses with respect to loans granted to entities related to former promoters, resulting in doubtful recovery, widening of loss, and litigation.
The hospital chain posted a net loss of ~9.32 billion in the fourth quarter (Q4) of 2017-18, against a loss of ~680 million in the same quarter last fiscal year. The loss widened due to exceptional items of ~8.33 billion, including ~5.8 billion being the provision for inter-corporate deposits (ICDs), among others. The financial result was not reviewed by Deloitte, the company’s auditor.
The company also announced the resignation of independent director Rohit Bhasin.
Fortis, which is in the process of finding an investor, has been in controversy since last year and its former promoters, Malvinder and Shivinder Singh, have been accused of siphoning off funds from the company. Fortis on Wednesday said it had initiated legal action to recover the funds.
The hospital chain also decided to terminate Malvinder Singh’s appointment as lead-strategic initiatives. Board Chairman Ravi Rajagopal said the company would also appoint an external agency of repute to establish the highest level of corporate governance and internal controls.
The Singh brothers, who now control less than a 1 per cent stake, have hit back at the company’s attempts to recover dues, claiming rights to the Fortis trademark and have served notices claiming ~2.52 billion from the company.
While Fortis has been giving loans to related parties through ICDs since 2011 and these were repaid till 2016, a roll-over mechanism was devised in 2016-17, whereby ICDs were repaid by the borrower companies at the end of each quarter and fresh ICDs were released at the start of the succeeding quarter.
The probe found ICDs were not given under normal treasury operations and were not authorised by the board. In February, the company appointed law firm Luthra & Luthra to carry out a probe after red flags were raised on ICDs of ~4.94 billion, which were given to promoter-related entities last July.
The probe report was reviewed by the board in its meeting over Monday and Tuesday.
The probe has found there were certain systemic lapses in assigning the ICDs from Fortis to another company (related to former promoters) last September. It found no diligence was undertaken in relation to the assignment and it was not approved by the treasury committee.
The assignment was terminated in January and the ICDs were secured by way of charge on assets and legal action was initiated to recover dues. In retaliation, the said company related to the Singhs dragged the hospital chain to Delhi district court in February, claiming ownership to Fortis and SRL brands, apart from financial claims.
On their part, Fortis executives told the enquiry that they were forced to undertake ICD transactions under repeated assurances of payment and the management’s objections were overruled. However, former executive chairman Malvinder Singh in his written responses has denied any wrongdoing, including override of controls in connection with grant of ICDs.
“While we await the Luthra & Luthra report from Fortis Healthcare, would like to mention that there has been no mismanagement or misuse of funds and position. Treasury operations have been a profitable part of the Fortis business for the past many years. All decisions on ICDs, which were part of the treasury operations, were collectively taken by the respective decision-making bodies at Fortis after deliberations. Presently, there is a vindictive approach from parties with vested interest towards the former Fortis promoters in these challenging times,” said Malvinder Singh in a press statement released to the media on Wednesday.
“The unfolding saga has no doubt shown the ugly side of Indian promoters, but at the same time we should be happy that such behaviour is not a norm. It also reflects the overbearing influence promoters have on companies and the inability of managers to push back,” remarked Amit Tandon, managing director at proxy advisory firm Institutional Investor Advisory Services (IiAS).
However, industry analysts point out that the Q4 result had certain positives. The net debt has not worsened despite all uncertainties. In fact, net debt reduced to ~12.79 billion at the end of 2017-18, compared to ~14.04 billion in March 2017 due to some loan repayments.
S P Tulsian of sptulsian.com, said, “With write-offs and provisioning of about ~9 billion, it may look optically serious, but the company has cleaned the balance sheet and this is nothing extraordinary or surprising and was well known. I do not see these results disturbing the potential buyers and hopefully the bids will come on expected lines.”
Moving forward, experts believe the company’s prospects and the stock price outlook will hinge on faster decision of the board on bids for the control of Fortis Healthcare.
If the bids are still valuing the company at valuations similar during previous bidding process, investors may still benefit. Ambreesh Baliga, an independent market analyst, says, “If the decision on bidding gets delayed further, then investors should look at moving out of the scrip.”