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Hello and welcome to FinShots Daily. In today's

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episode we explain a SEBI order

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highlighting the financial irregularities of a

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formerly listed company called Lloyd Electric

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and Engineering. Before we

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start today's episode, we have a question for you. Do

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using the link in the description below.

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Now onto today's episode. Lloyd

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Electric sold a lot of air conditioners in

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India. It was the third biggest player in

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the country at one point up to Voltus

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and LG and it had a 12% market

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share. It also sold televisions,

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washing machines and air purifiers under

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its consumer durables division. But

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that's not how Lloyd started off in

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the 80s. It actually began life making

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coils and selling them to regular AC

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manufacturers. It also did some work to

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help cool the Indian railways and made

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some heating equipment. This was

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its business to business or B2B strategy.

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Now in 2017, Lloyd's business caught

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the eye of Havels. The folks

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who made wires, switch gear, lighting

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and fans. But Havels only liked

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the AC business. It

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wanted to diversify into ACs too

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and build its consumer business. Its

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previous attempts to sell ACs had failed

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and the company felt that Lloyd's would

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be a perfect fit given his massive

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distribution channel across India. So it

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offered 1550 crore rupees to seal the deal. Lloyd accepted.

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It wanted

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to use the money to clear off some

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debts. So it gave Havels the permission to

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sell ACs and other appliances under the Lloyd

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brand's name. Lloyd Electric

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would change its name to

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LEEEL to avoid any confusions

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too. And LEEEL would continue

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its B2B business. But

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no sooner had the ink on the agreement dried

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that an allegation of fraud emerged.

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A fund manager named Porinju Velayath

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had picked up nearly an 8%

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stake in LEEL and in 2019

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he alleged that the promoters of

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LEEL were involved in

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daylight robbery, that they were siphoning

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off the funds the company had

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received from Havel. Naturally, Sebi

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jumped in. It began to investigate if

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there was any truth to these allegations

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and it put Deloitte to the task

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of scoring through LEEL's financial statements. A

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few days ago it published its final

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order for the world to see. So

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what did Sebi find out you ask? Ok,

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just to be clear, Havel's

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didn't pay LEEL the full

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1550 crores. It made some

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deductions for debt obligations and

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employee benefits. It also

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set aside some money in case any

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legal obligations arose. After all this it

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deposited 1458 crore

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rupees into LEEL's bank account.

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But LEEL didn't show this entire amount

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as a profit from the sale of

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the consumer diorville's business. No, it

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got to work to show some deductions of its

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own too. And one deduction it showed was an

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amount of 91 crore rupees. LEEL's

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explanation was that it conducted regular

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business with Havel's. Maybe Havel's bought

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coils from it or whatever. But

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LEEL said Havel's owed the company

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91 crore rupees. So it

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set off this sum from the money received during the

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sale. But here's the kicker. When

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Sebi asked Havel's whether it owed

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money to LEEL, the electrical goods

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company put its hands up and

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said, What? We didn't have

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any business dealings with LEEL prior to

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our acquisition. And since LEEL

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didn't have any proof of correspondence with

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Havel's either, that was enough for Sebi

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to figure out that LEEL was trying

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to understate its pre-fit from the sale.

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Not a good look, is it? But

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that wasn't all. LEEL also deducted 320

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crore rupees from the profits of the

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sale and said it was the cost of

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the inventory it had transferred. But when

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Sebi looked at the audit report of inventory prep-

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by a CA firm in September 2017, right

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around the time the deal was getting

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finalized, there wasn't any mention of inventory

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worth 320 crore rupees. Can it

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get worse? Oh yes, we had to talk

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about siphoning off the funds so that the

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promoters and their associates could benefit, right? So

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LEEL wanted to sell its AC business for

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two reasons. It wanted to pare down its

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debt. But it also wanted to make some

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capital investment and build a set in infrastructure

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that would help it to expand. And

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if you look at its Capital Work in

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Progress or CWIP, it would make sense. Think

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of CWIP as the expenditure on

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assets that are in the process

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of construction or completion. For LEEL,

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it suddenly rose from 10 crore

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rupees to a whopping 313 crore

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rupees. But guess what? The

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CWIP rose because of a neat

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trick. See, there were some

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entities that LEEL promoters were also

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associated with. Ones like

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Himalayan Mineral Waters Private Limited and

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Perfect Radiators and Oil Coolers Private

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Limited. And these companies owed money

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to LEEL. So what did

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LEEL do? It simply adjusted the accounts

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which showed that these entities owned LEEL

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money and it put the money in

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the CWIP account to show that it

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had received land as an asset from

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the entity. For instance, it showed

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a CWIP balance of 120 crore

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rupees for Himalayan Mineral Waters Private Limited.

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But when Sebi looked at the books

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of the water manufacturer, they found something

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that blew their mind. Not only did

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the company have land only worth 13.5

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crore rupees in its books, but its

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revenues were just 3 crore rupees too.

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So there was no way that the company

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would have been able to transfer assets worth

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120 crore rupees to LEEL. And that was

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enough to convince Sebi that the folks in

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power at LEEL were up to some nefarious

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schemes. Quite a sad state of affairs at

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a 30-year-old company which had quite a stellar

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reputation till then. podcast

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streaming platform until next time.