Did SRK undervalue KRSPL's shares by 8-9 times, ED to issue notice soon

The shareholding of the KKR changed again on March 10, 2010 as Juhi Chawla sold her entire stake of 40 lakh shares to SIIL.

Imagine a Bollywood script in which a promoter of a company is transferring his equity shares (quantity in lakhs) at the valuation of Rs 10 per share to his friends and partners. The surprising element here is the original valuation of those shares was not Rs 10 per share but was in the range of Rs 70-99 per share.

So the question arises - how much profit has been made out of this undervaluation and who is the real beneficiary?

This so-called Bollywood script is about the Badshah of Bollywood and owner of IPL franchise Kolkata Knight Riders - Shah Rukh Khan.

In February 2008, Red Chillies Entertainment Pvt Ltd (RCEPL) - the entertainment company promoted by film actor held 9, 900 shares of Knight Rider Sports Pvt Ltd (KRSPL) and his wife Gauri Khan (the nominee of Red Chillies) held 100 shares.

During the financial year 2008-09, the shareholding in the franchise changed was KRSPL. On March 31, 2009, the new equity shares of KRSPL were allotted at par value after the first season of IPL ended successfully in June 2008 and the new shareholding pattern of KRSPL as at March 31, 2009 was as under:

RCEPL - 1,10,00,000 equity shares
SIIL - 50,00,000 equity shares
JCM - 40,00,000 equity shares

On March 31, 2009, on request by the board of directors of KRSPL, a Mauritius based company - the Sea Island Investment Ltd (SIIL) was listed as having 50 lakh shares (Jay Mehta company) and film star Juhi Chawla Mehta (JCM) as getting 40 lakh shares of the total 2 crore shares.

The allotment of shares to SIIL was made on March 7, 2009 at the rate of Rs 10 per share. In its preliminary investigation, the Enforcement Directorate (ED) found that KRSPL received an amount of around Rs 6.06 crore from SIIL, owned by Juhi's husband - Jay Mehta. Of this Rs 1.06 crore was remitted back to the company on March 14, 2009.

Surprisingly, the shareholding of the KKR changed yet again on March 10, 2010 - as Juhi Chawla sold her entire stake of 40 lakh shares to SIIL thus splitting the ownership of KRSPL between the Mauritius Company and SRK along with his wife.

ED found that Juhi had received Rs 4 crore for the sale of the 40 lakh shares on March 26, 2010 (at the selling price of Rs 10 per share, showing no profit, no loss).

In November 2011, ED questioned SRK to explain the details of transactions / aspects of the KRSPL deal, due diligence conducted on SIIL before allotment of shares to them and reasons behind KRSPL allotting 50 lakh shares to SIIL at a value which appears to be understated.

Suspecting undervaluation of KRSPL shares, the ED team appointed a third party chartered accountant company Chokshi & Chokshi LLP to audit the valuation of KRSPL equity shares with required auditing methodologies and find out the real valuation of the transferred shares.

In November 2014, Chokshi & Chokshi LLP submitted its final audit report to ED officials with some shocking conclusions.

IndiaToday.in has accessed the audit report, exclusively. Some of the highlights of this audit report are:

- In case of issue of 50 lakh equity share of KRSPL to SIIL, the fair value per equity share of KRSPL should have been in between 70-86, whereas the equity shares had been issued at Rs 10 per share.

- In case of issue of 40 lakh equity shares of KRSPL from JCM to SILL, the fair value per equity share of KRSPL should have been in between 83-99, whereas the equity shares had been issued at Rs 10 per share.

As per erstwhile Controller of Capital Issues (CCI) Guidelines, the final valuation based on best reasonable judgement will be called the fair value and based on this we have arrived at the fair value (by PECV Method after applying a 15 per cent capitalising rate) as Rs 86 per share.

- Using profit earning capacity value ( PECV) methodology even if the higher discounting rate i.e. 15 per cent was applied, the value per share does not fall below Rs 83 per share.

- It indicates that value of KRSPL being derived after claiming lower expenses (franchisee price being low) to be only Rs 6.58 crore was not a correct representative of appropriate valuation of KRSPL at that point of time.
- We opine there was lack of fairness of valuation methodology applied. Had a fair methodology been applied, the value would have been much higher.

In simple words, out of 2 crore equity shares - 90 lakhs equity shares of KRSPL exchanged hands between SRK to Jay Mehta and JCM at the price of Rs 10 per share i.e at Rs 9 crore.

But, if the valuation of KRSPL's per share at that time was in between Rs 70-99 per share (on average Rs 90 per share), than total transaction done between them was of around Rs 81 crore. If Rs 9 crore is deducted than the difference of amount comes to Rs 72 crore (please note : the real amount could be more or less than this amount).

Under FEMA, the prices of shares issued to persons residing outside India (Jay Mehta) should not be lower than the price worked out under SEBI guidelines in case of listed company or on the basis of fair valuation of shares by a CA as per guidelines of the erstwhile Controller of Capital Issues (CCI).

Interestingly, in his own statement given to ED in November 2011 (IndiaToday.in has accessed it), SRK has stated that "the concept of IPL being new, they had done rough assessment of the profitability of the venture and from the ITT issued by the BCCI they understood that certain revenue streams were available to the franchisee as share from sale of commercial rights revenue. They were having a stadium which was the largest in India promising higher revenue from the sale of tickets and he was also confident of getting sponsorships because of his goodwill and that Mrs Juhi Chawla and according to their own estimate the franchisee was to break even after an initial period of 4-5 years".
Contrary to that later as per the valuation submitted by BPC, "Given that the company has incurred loss for both the immediate preceding years, the PECV has not been computed and is regarded as nil, in line with Clausr 7.6 (4) of the erstwhile CCI guidelines."

Further auditing and investigation revealed that showing losses SRK was trying to justify his Rs 10 per share valuation, which was later found baseless.

With a suspicion that on behest of SRK, crores of money (approximate Rs 70-72 crore or may be above) has been diverted to SIIL in Mauritius and later, a round tripping might have been done, the ED is currently investigating this case under FEMA Act.

Moreover, in the audit report it is also been mentioned that Juhi Chawla has evaded paying 20 pc capital gain tax to IT department by not disclosing real profit made after transfer of 40 lakh shares to SIIL. This angle needs to be explored more by agencies.

Surprisingly, even after having this audit report in hand, the ED has failed to question SRK and his CA again.

Few informal letters and reminders were sent to SRK's CA to remain present before ED official with all clarifications, but it seems SRK and his team are least bothered to take it seriously.

Source says, "Case details with fresh audit report has been submitted to ED headoffice in Delhi, seeking permission to issue summons to King Khan for the further questioning, but still the final go ahead is awaited".

Instead of that now ED has decided to issue a show cause notice against SRK and related parties soon.

To get the other side of story and more perspective on it, Indiatoday.in had sent detailed queries to Shah Rukh Khan, Jay Mehta, Juhi Chawla Mehta and Venky Mysore, MD of KKR, but received no response from them, yet.

In a telephonic conversation, Jay Mehta confirmed IndiaToday.in that they have received the queries, but declined to give any clarifications. Mehta said, "We would not like to comment on this case. In fact, no body from our end would have anything to comment about it."

Even Juhi Chawla in her SMS reply said, "To be honest, I have no idea what you are speaking of....but here is my email id....". Queries were sent on her email id as well, but no response.

However, Shah Rukh Khan and his PR team choosed to remain silent on this crucial case.

The SRK's IPL franchisee is not the only one under ED scanner, work is going on against few more IPL franchises who had implemented same modus operandi to transfer its company's shares and hidden its real valuations.

Off late, the ED has issued show-cause notices to four IPL teams in connection with a foreign exchange violation case during the second edition of the T-20 cricket extravaganza of IPL in South Africa held in 2009.

Officials confirmed Indiatoday.in that the notices have been issued to Indian Premier League (IPL) teams of-- Kings XI Punjab (Jaipur IPL Cricket), Rajasthan Royals (KPH Dream Cricket), Mumbai Indians (Indiawin Sports) and Chennai Super Kings (Ms India Cements) under provisions of the Foreign Exchange Management Act (FEMA).

"The notices have been issued in connection with the violation of RBI regulations vis-a-vis handling and transfer of cash funds to overseas locations by these teams through their holding or owner companies", the source said.