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Potential Fraud in BSE Listed Company?
[/vc_column_text][vc_separator css=”.vc_custom_1647339034936{margin-bottom: 30px !important;}”][vc_column_text css=”.vc_custom_1679458758852{margin-bottom: 15px !important;}”]On March 7, 2023, Pune-based Modulex Construction Limited — a BSE-listed company — received a resignation letter from one of its independent directors, Sandeep Khurana, which was made public through a stock exchange filing, a week later. Khurana’s resignation letter which runs across 25 pages with additional 40 pages of annexures is not a standard template of a resignation letter. The longish resignation letter highlights glaring corporate governance issues with the Pune-based construction technology company, especially pertaining to a rights issue, approved by the board of directors in March 2022.
The story and allegation
On February 28, 2022, Modulex Construction Technologies in a stock exchange filing stated that the board of the company is considering raising funds through a rights issue which is subject to the board’s approval and it will be put on a vote in a board meeting scheduled for March 2, 2022. Later on March 15, 2022, the company further informed that the rights issue has been approved by the board of directors of the company. However, the company did not furnish any detail of the rights issue apart from the fact that INR41 crore will be raised.
In his resignation letter, Khurana stated that he raised some queries regarding this rights issue.
“As the agenda was sketchy and contained no details apart from the amount of INR41 crore, through my e-mail dated 02.03.2022, it was pointed out that the proper course would be to obtain approval of the audit committee before obtaining board approval,” his letter stated. He also highlighted in the letter that apart from the agenda of the rights issue, he was also sent two offer letters from Punnose for his comments. The offer letter was regarding the appointment of Credent Investment Private Limited as an advisor on the rights issue. Khurana opposed such an appointment as he highlighted that another independent director of Modulex Construction Technologies, Aditya Kanoria has a significant shareholding in the said company and this creates a conflict of interest and Kanoria, as the chairman of the audit committee, himself approved the appointment of Credent Investment.
The purpose of the rights issue, as Khurana was informed, was to invest INR25 crore in a group company named, Give Vinduet Windows and Doors Private Limited (GVWD) and rest of the amount will be utilised for project finance and working capital requirement. The management of the company claimed that GVWD is a manufacturer of doors and windows, which will be supplied to Modulex Construction Technologies. When Khurana did some digging, he found out that GVWD is merely a shell company with aggregate assets of only INR28,000 as on March 31, 2021. As per Registrar of Companies (RoC) filings of the company, the assets have further gone down to around INR10,400 as on March 31, 2022.
He further alleged that the rights issue was nothing but a Ponzi scheme where fresh funds are raised from incoming investors to repay the existing investors of GVWD. Khurana further stated that when he opposed the rights issue in the board meeting held on March 15, 2022, he was asked to resign. “When I raised questions on the sanctity, purpose and rationale of the rights issue, I was constantly humiliated at the board meetings and treated as an outcast with no director or even the company secretary being allowed to speak to me. As further humiliation, I was removed from all WhatsApp groups of the company and no mails of mine were ever responded to by the directors or the employees at all levels,” Khurana said in his resignation letter.
This led Khurana to file a whistleblower complaint on April 22, 2022. After filing the complaint, Khurana was instructed not to take part in any business meetings or contact any other director and the company secretary. Amid Khurana opposing the rights issue and a whistleblower complaint, the management scrapped the rights issue. However, they later came up with a new scheme of preferential allotment. On November 9, 2022, Modulex Construction Technologies through a stock exchange filing stated that over 18 million equity shares will be allotted on a preferential basis to 52 shareholders of GVWD at a swap ratio of 1:1.345.
Khurana stated in his resignation letter that such a preferential issue is no better than the rights issue and is being created solely for the purpose of paying back the investors of GVWD and such an allotment can lead to a loss of INR100 crore of shareholders’ money. As per RoC filings, GVWD had raised around INR29 crore between June-September 2021. Out of which INR18.78 crore was advanced as a loan to Modulex Modular Buildings Private Limited, a subsidiary of Modulex Construction Technologies.
Khurana did some math around the said preferential allotment and found out that this allotment will lead to over INR100 crore loss to the shareholders. According to Khurana, 18 million-odd shares of Modulex Construction Technologies Limited to be allotted through this preferential allotment at a book value INR64.7 per share comes out to a value of INR117.8 crore. Further, 24 million shares of GVWD that were to be swapped, valued around INR17.75 crore at a book value of INR7.33 per share. This was a clear loss of INR100 crore.
The bottom line
The role of independent directors has always been questioned whenever a huge scam comes to light, be it IL&FS or DHFL. Khurana’s resignation stands out as one of the rare instances where an independent director has tried to expose the corporate governance lapses through a detailed resignation letter. Modulex Construction Technologies and the allegations made against it are of a small scale when compared with PTC India. However, this stands out as a good precedent for how independent directors can put a foot down and expose the wrongdoings of any company if need be.
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