Sad to Note that Farouk Irani is in trouble and has resigned as the MD of First Leasing...even though I have met him just once in the late 1990s when we had a long three hour engrossing conversation on Leasing and on India Opening out …..he is known as the Father of Leasing in India and has authored a Book on Leasing called ‘Inside Leasing’…he was impressed with the depth of our talk and invited me to visit him in Chennai to brainstorm further and even explore a business or working relationship…I never did take him up on the Invite even though I was quite well conversant with the Accounting and Income Tax Issues that were plaguing the Leasing Companies as my Forte was Indian Equities
He founded First Leasing ,a part of the A C Muthiah Group in Chennai and was it’s MD since 1973
Most Leasing Companies proliferated in the 1980s to take advantage of the nascent Industry and the Accounting Treatment given to Financing Lease as Different to Operating Lease where Fixed Assets leased were allowed to be capitalised and depreciation claimed on them to lower Taxes even though the valid argument was that the Possession and Benefits of such Assets lie with the Lessee and not the Lessor and therefore should be capitalised in their books….Huge Tax Investigations followed and most Companies folded up
Mr Irani and First Leasing has been accused of diverting Hundreds of Crores to unrelated activities .His Resignation does not absolve him of accountability and responsibility to First Leasing…he denies any wrongdoing ! ….but then where are the Borrowed Monies truly applied ?
The Company has no whistle blower policy and it were the Banks,led by State Bank of India, who had lend that asked for explanations from Mr Irani as to the specific application of the borrowed funds to which Mr Irani was unable to give a satisfactory answer
Ironically and Interestingly there has been no default in repayments to the Banks !…except for they appear to have been borrowing from one to repay the other !
Farouk Irani resigns as MD of First Leasing
RBI appoints special auditor for First Leasing; firm’s MD allowed to quit
The Share Price of First Leasing reached a High of 116 in 2011 and even in December 2012 was Rs 77….It’s dropped to Rs 15 levels currently (FV Rs 10) giving a Market Cap of just Rs 34 crs on an Equity of Rs 22.8 crs
First Leasing has been paying dividend every year from 1975 when it began with 18% and took it to a high of 35% in the mid 1990s only to drift it back downwards and for FY 13 it has proposed 18% …The Company has weathered storms in the 1980s when it had to bail out a Group Company of A C Muthiah’s Father with paying of Rs 170 crs to Depositors
On Hindsight Mr Irani kept Equity Low and preferred the Debt Route for Funds rather than seek Private Equity to derisk the business….Profit levels remained at a stable Rs 30 + cr levels except in FY 2011 when it crossed Rs 70 crs as interestingly in this year First Leasing earned an extraordinary profit of Rs 53.42 crs on sale of unquoted at the time 295000 shares of CARE which had cost it just Rs 25 lakhs ….The Unit cost was below Rs 10 while Sale was at Rs 1800 +per share .CARE came out with an IPO in December 2012 at Rs 750
Financials reveal that the Networth of First Leasing on March 31,2013 was Rs 364 crs with Equity at Rs 22.8 crs and Reserves at Rs 341.2 crs….PAT was Rs 34.7 crs (Rs 31.6 crs) giving an EPS of Rs 15+ and a P/E of 1 ! and a Book of Rs 160 and a P/BV of 0.1 !
But these low Relative Valuations are completely misleading….Reason is outlined below
Long Term Borrowings show at Rs 181 crs while Short Term Borrowings were Rs 1218 crs thus Debt aggregate was Rs 1399 crs
Against these Borrowings the Receivables under Lease & Hire Rentals were Rs 1088 crs Non Current and Rs 677 crs Current thus aggregating Rs 1765 crs
Other Assets and Liabilities are not material enough to dig for this hole of Rs 1000 crs !
So where is this Hole that Farouk Irani has confessed exists if the Receivables are much more than the Borrowings !?
Clearly the Answer will be revealed from a forensic audit of the Receivables as above…..They are Clearly and deliberately it appears Overstated….and that’s how funds may have been diverted out of the Company and shown as Debtors but funds never to be received back ! …..or Provision for Bad Debts seems to have been understated for years Now if the hole is Rs 1000 crs and Networth is just Rs 364 crs,the Company is Sick and surely Dividend will not be paid.
…so will A C Muthiah Group infuse Funds and restate the Receivables fairly just like the Tata Group did when a similar Hole was discovered in Tata Finance in one of it’s subsidiaries Nishkalp due to mark to mark losses on Stocks Invested in like Global Telesystems and Vakrangee Software
Auditors Sarathy & Balu continued to give Clean Reports through the Years and there were no adverse comments from even the Internal Auditors M.K Dandekar & Co….no wonder for the FY 13 Annual Report was signed on May 27,2013 in the cooler climes of the hill station Ooty in the Nilgiris !….did not these Auditors seek Debtor Confirmations or reconcile the Post Dated Cheques with the Total Receivables !?….did they not even have a look and review the Full Specific List of Receivables to check if they are genuine !?…just imagine that it seems Rs 1000 crs of the aggregate Rs 1765 crs Receivables at March 31,2013 is the Hole !
The Pioneer of Leasing is in Pain & Poverty ….and the Father of Leasing is facing a total loss of Reputation build up over the Years …..they have only themselves to blame
And Mr Irani took home over Rs One Cr in Salary and Commission in FY 13
And if it comes to pass that the Banks that have got this huge Lending Exposure to First Leasing have been cheated or defrauded it would not be the first time this would have happened….The Muthiah Group has been grappling to revive SPIC too….and we know in Tamil Nadu that Political Patronage by the Party in Power is a major business influencer and the situation can be extremely volatile and vindictive for those out of favour !
Spare a Thought for over 24000 Shareholders who too must be feeling let down by their MD and Company and the Muthiah Group and are sitting on huge Wealth Erosion in their First Leasing Holdings…and with a very strong probability the Company may go into Liquidation if Fresh Funds are not Infused to save it