Cover Story : King Karti

TWENTY-FIVE years ago, when Palaniappan Chidambaram was the Commerce Minister, he claimed that he was the bigger and better reformer than Manmohan Singh, who was then the Finance Minister and acknowledged as the ‘Father of Reforms’ in the country. PC would immediately refer to the export-import policy and contend that the manner in which he had simplified the rules for international trade were far more critical than what MMS had done in the area of red tape and licence raj.

Unfortunately, PC wasn’t there for too long. Immediately after the Harshad Mehta Scam, he had to resign because of wife, Nalini’s investment in Fairgrowth Group, which was embroiled in the Securities Scam. Chidambaram wasn’t deterred. He went on to present what was consensually acknowledged as ‘India’s Dream Budget’ five years later under the United Front regime. Seventeen years later, as the Finance Minister, he took credit for one of the finest periods—a really high-growth one—in post-Independent India.

Almost all of us were unaware that PC, and his family, especially his son, Karti, was one of the largest beneficiaries of the reforms. It’s only now that we have got glimpses in the multi-million dollar corporate-cum-property empire that was built by the son over the past decade or so. It’s only now that we have heard allegations that Karti was a powerful middleman, who got things done in the finance ministry when his father was the FM. He was the alleged recipient of the bribes that the FM Father took to clear mega deals.

The noose is getting tighter around Karti’s neck. For a long time, PC claimed that the charges against his son were baseless and malicious. It said that they were a part of a political vendetta against him. He challenged the ruling regime to come after him directly, rather than try to falsely implicate his son. Karti got the Madras High Court to stop the Central Bureau of Investigation (CBI) from questioning him. The tide, however, changed.

CBI was allowed to finally grill PC’s son. On August 28 this year, it questioned him for seven hours. The agency has put out a ‘Look Out Circular (LOC)’ on Karti. Ironically, it claimed that the notice was based on rules detailed out in an ‘Office Memorandum’ (OM; October 27, 2010), which was issued by the Ministry of Home Affairs when PC held the portfolio. The CBI apprehended that, like industrialist Vijay Mallya, Karti would flee the country.

BASED on a Delhi High Court order (dated August 2010), the OM guided the concerned agencies to take “recourse to LOC… in cognisable offences under IPC (Indian Penal Code) or other penal laws, where the accused was deliberately evading arrest or not appearing in the trial court despite NBWs (non-bailable warrants) and other coercive measures and there was likelihood of the accused leaving the country to evade trial arrest”.

However, the burden of the proof against Karti and, hence, PC, lies on three crucial lynchpins. First, was Karti the direct owner or indirect controller of the Advantage Group, which received huge amounts, and invested a part of it in assets in 15-20 countries? Was the money received for the specific favours doled out by his father, and deals cleared by him? Finally, do the assets in India and abroad belong to the Advantage Group and, hence, Karti?

Disadvantage Karti
IN his various pieces in the New Indian Express, chartered accountant-journalist S Gurumurthy may have hammered the last nail in Karti’s legal coffin. In a series of articles, the former did showcase enough evidence to first directly, and then indirectly, link PC’s son to the Advantage Group. His target were two firms, Advantage Strategic Consulting in India, and Advantage Singapore, “which gets questionable money and owns huge global wealth”.

Gurumurthy wrote that 60 per cent of Advantage India’s equity was owned by four people—CBN Reddy, Padma Viswanathan, Ravi Viswanathan, and Bhaskararaman. Three of them are linked to Karti. CBN Reddy (his full name is Chinnabala Nageswara Reddy), Padma and Ravi were directors in Advantage India, when it was owned by Karti. According to www.zaubacorp.com, Ravi and Padma were appointed in 2005, and Reddy in 2008. The four above-mentioned shareholders of Advantage India then gifted their holdings in Advantage India to Karti’s daughter, Aditi Nalini Chidambaram. The reason was quite specific in Reddy’s will. He said that Aditi’s grandfather (from the mother’s side), the late B Rangarajan was his “friend, philosopher and guide” and, therefore, he felt “deeply indebted” to him. Hence, he bequeathed the shares to Rangarajan’s favourite granddaughter, Aditi.

Along with the shares in Advantage India, Reddy gifted 22,500 shares he held in Kriya FMCG Distributors to Aditi. The history of Kriya FMCG is interesting since it held 38,700 shares in Advantage India at one time. They were owned by Aditi and her mother, Srinidhi, who is Karti’s wife. The two owners transferred the shares to Reddy, who gifted them to Aditi.

Of the three directors in Kriya FMCG, two were Reddy and Mohanan Rajesh. A former director of the company was Sundar Sreenivasan Sreenivaasan, who became a director in Ausbridge Holdings in May 2012. He also became a director in Myvakil.com, along with Mohanan in August 2009. And who was a former director of Myvakil.com? The answer: Karti Palaniappan Chidambram (June 2000-August 2009). Another former director of the company was Annamalai Palaniappan, whose tenure was the same (June 2000-August 2009). Annamalai’s name is important because she became a director in Chess Management Services on May 18, 1998, or the same date as Karti. However, the latter resigned his post in March 2013, and was replaced first by Jayashree Swaminathan, and then by Palaniappan Nandini. Now, Nandini is a director in Kaimabetta Estates, whose two of the other three directors include Annamalai and Karti. The loop between these individuals intersects several times.

CHESS Management Services is crucial because its name will emerge later. For the moment, let’s go back to Advantage India. Like Reddy, the other three shareholders gave similar reasons to gift the shares to Aditi. Who did the four shareholders appoint as the executor of their wills? Karti Chidambaram. As both the executor of the wills, and legal guardian of the recipient, he will control the shares when the shareholders die, and till Aditi is a minor.

The remaining 40 per cent of Advantage India was owned by Ausbridge Holdings and Investments, whose ownership was transferred from Karti to Mohannan, the same person who was a director in Kriya FMCG and became a director in Ausbridge Holdings in February 2006. He became a designated partner, along with Enrico Robert Piperno, in Ausbridge Equestrian LLP in March 2015.

Piperno, a former national tennis player and a renowned coach, became a director in Calcutta South Club, which is considered to be the country’s cradle for lawn tennis, in September 2014, and was a director in Penninsula Properties, along with Samira Piperno.

Like in the case of chess, Karti was also linked to tennis. For example, he became a director in Indian Tennis Players Association in March 2013, along with Aditya Sachdeva. The third director was Jaidip Mukerjea. Jaidip was a renowned professional tennis player. Aditya is a director in three other sports companies, including Team Tennis (India). A past director of Team Tennis was Mahesh Bhupathi, another professional tennis player.

Clearly, Karti was intrinsically linked with Advantage Strategic Consulting, or Advantage India, through a string of common business partners, directors and common interests. Hence, he was closely connected with Advantage Singapore, which was largely held by Advantage India.

Advantage investigators
It’s the case of Vasan-Karti-Sequoia-GIC that gives the various investigating agencies an edge. It’s this complex series of transactions that prima facie may prove that some things were drastically wrong with Karti’s dealings with various players. They have the stink of personal favors, professional direct and under-the-table compensations, and hiding true intentions.

Although complicated, such transactions are commonplace in Indian and global businesses. In fact, they have become the basic building blocks extricate and extract financial favors. They comprise several common elements – equity gifts, stock purchase at seemingly-inflated prices, boost book valuations that can be leveraged or monetised later, and compensation in paper, not cash.

Our story begins in late 2008, although its genesis lies years earlier. For the sake of simplicity and brevity, we can safely start from October 29, 2008, when Dwarkanath acquired 300,000 shares of Vasan Healthcare (or Vasan Eye Care) for Rs. 200 a share. Twenty four hours later, according to media reports, half of these, i.e. 150,000 shares, were resold to Karti’s firm, Advantage Strategic Consulting, at, “intriguingly”, half the price (Rs. 100).

There can be several reasons for the huge discount. May be Dwarkanath was desperate to raise cash for personal, medical or some other reason. May be Karti, or his company, had helped him in the past pro-bono, and this deal was a way of past compensation. The shares of unlisted companies are used for such purposes.

For the readers, the crucial thing to note is that Dwarkanath was the father-in-law of AM Arun, the founder-promoter of Vasan Healthcare. More important to note is that, by 2008, Arun’s empire was hot property. According to reports, by March 2008, the annual turnover was nearer to Rs. 50 crore, and the group had 14 eye-care centers in Tamil Nadu and Kerala.

More crucially, in 2008, a leading global private equity firm, Sequoia Capital, evinced an interest to buy a stake in Vasan Healthcare. The timing was coincidentally perfect—a growing corporate, possibility of buzzing valuation, interest by a global investment firm, and sale of 150,000 shares at discounted prices to Karti’s firm.

In early 2009, Sequoia Capital invested Rs. 50 crore. One isn’t sure but the deal was struck at Rs. 912 per share, which translated into just over 548,000 shares. The valuation was over 4.5 times what Dwarkanath paid a few months ago, and over nine times the price paid by Karti. Yet again, the dynamics were uncertain.

There could 1001 reasons why the private equity giant paid a huge premium. It looked at the future cash flows and profitability. It realised what Vasan Healthcare could achieve with fresh cash infusion, which could be leveraged to raise more money from equity players and lenders and, hence, further propel growth.

One can also analyse the Vasan-Sequoia deal in two other ways. The trick in the case of unlisted companies is the timing. A few weeks here and there can make a huge difference in valuations. A few months is like an eternity. This is also true of listed companies, and the manner in which valuations zoom in the case of high-profile and competitive global M&As is an indicator.

Let’s take two examples. The first is the case of an unlisted FMCG retail chain, which went public in early 2017. Just over a year earlier, it had issued shares at between Rs. 15 and Rs. 24 a share. The issue price was Rs. 299, and it was listed at Rs. 604, hit an intra-day high of Rs. 650, and closed at Rs. 640.75, after over 14,500,000 shares were traded on the first day at the Bombay Stock Exchange.

THE difference between Rs. 15 and Rs. 640.75 is almost 43 times; the difference between Rs. 24 and Rs. 640.75 is almost 27 times. Therefore, it isn’t unusual—or may be these are areas of greater investigation—for share prices, especially in the case of unlisted companies to zoom within short periods.

Now, let’s go back several years, actually, over a decade ago, when Tata Steel bid for the European Corus. Within a few months, thanks to a competitive bid, Tata had to hike its purchase price from under $8 billion to just over $12 billion. This was an unprecedented price, and not too many could justify it.

Like we have done before, one can give several reasons for it. The buyer wanted the target company badly, and at any cost. The buyer realized that Corus was worth more than it had thought. For Ratan Tata, who was the head at that time, a global acquisition was the key to take Tata Steel’s fortunes, as well as his Group’s, on another higher-level trajectory. One can go on and on.

Coming back to Vasan Healthcare, Karti and Sequoia Capital, one shouldn’t be worried about the respective prices the latter two paid for the former’s shares. What’s more interesting is the deal that happened next. The years 2009 and 2010 proved to be the ones of frenetic, almost-unstoppable growth for Vasan.

Revenues jumped almost three times, to Rs. 158 crore, by March 2010. EBIDTA, or earnings before interest, depreciation and tax, stood at Rs. 54 crore, or over a third of revenues, and net profit was placed at Rs. 25.6 crore, or an attractive over 16 per cent of the annual turnover. Clearly, the valuation of Vasan Healthcare had skyrocketed.

The whoosh in the valuations became clear in October 2010, or two years after Karti acquired the shares. Sequoia Capital purchased 30,000 of his 150,000 shares at a stupendous Rs. 7,500 per share, or a 75 times jump over the acquisition price of Rs. 100. One media report conservatively dubbed it as a “significant premium”. Another claimed that Karti “made a killing” of over Rs. 22 crore.

It must be remembered that within 20 months, Sequoia paid almost eight times the price (Rs. 912) it had paid in February 2009. We can yet again speculate about the reasons. Was this a genuine deal? Only the internal documents of the private equity firm can show its calculations about future earnings discounted to present value, the growth it assumed over the next 5-10 years.

Was this a deal to compensate Karti for some other work? Only detailed investigations can prove if Karti, or his company, helped Sequoia in some other form, and had to be paid indirectly through this mechanism to hide the real intentions. The fact is that both are in the realm of possibilities—a better possibility is that the first may be unlikely, and the second more realistic. The only way to be surer is to look at the next sale of shares, which had nothing to do with Karti or Advantage Strategic Consulting.

By March 2012, the annual revenues of Vasan Healthcare continued its extreme northward trajectory, and went up almost three times to Rs. 451 crore. EBIDTA seemed to be on course at Rs. 79 crore.

The only warning signal: a low net profit of Rs. 9.5 crore, much lower than Rs. 25.6 crore on Rs. 158 crore in March 2010. But still, the eye-care company had over 100 eye hospitals, and 27 dental centres. Suddenly, the Indian biggies queued up to invest.

ONE of them was none other than the biggest—GIC. It wished to invest a whopping $100 million, or Rs. 500 crore then. All the existing stakeholders were excited. The market and sector was electrified. Everyone waited for the GIC’s valuation with baited breath. One doesn’t know the price at which the shares were purchased. But we do know who made how via media reports.

Sequoia Capital and Arun, the promoter, sold a part or whole of their stakes for Rs. 170 crore each. Vasan Healthcare saw an infusion of a mere Rs. 90 crore. The remaining amount allowed doctors and senior employees, who had stock options, to cash out. Everyone was richer in the process. Even the non-seller saw their paper profits zoom.

For the investigators, these transactions should form the crux of the matter. If they can prove that GIC’s valuation was much lower than Sequoia’s, when the latter bought a part of Karti’s holding, they have the case in their hands. It will imply that there were external reasons why Karti was overpaid. But this will be the first step.

The most important evidence will be the quid pro quo. Why was Karti paid a huge premium for his shares? What did he do for Sequoia? How did Karti’s father, P Chidambaram, the former Finance and Home Minister, fit into this scheme of things? It’s now up to the investigating agencies and courts.

Alam Srinivas

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