Why is the Jay Amit Shah owned Temple Enterprises/Kusum Finserve Issue a Test Case of Crony Capitalism Favors?

Since The Wire broke the story, much attention has been given to the 16,000 times rise in turnover of companies promoted by Jay Amit Shah, son of BJP president, Amit Shah. The opposition has been quick to claim crony capitalism and favors just like the case of DLF and Vadra deal. Cabinet ministers have jumped on the defense, ASG is representing the “private citizen” and The Wire has been SLAPPed with a 100 cr defamation case.

I wanted to examine the case from cold facts and common business pactices / logic. Here goes.

Facts of the Case — there are two companies that need to be looked at

A. Temple Enterprises

1. Temple Enterprises Pvt Ltd was started in 2004. Jay Shah and Jitendra Shah are directors.

2. AY 2014 (FY April 2012- March 2013), total loss is Rs. 6,230

3. AY 2015 (FY April 2013- March 2014) total loss is Rs. 1,724. No inventory. No fixed assets. It Refund of Rs. 5,976. Trade Payables Rs. 5,618.

4. AY 2016 (FY April 2014- March 2015) Turnover was Rs. 50,000; profit was Rs. 18,728 (37.45% margin). Reserves & Surplus was Rs. 19 lakhs. No fixed Assets.

5. AY 2017 (FY April 2015- March 2016) turnover jumped to Rs. 80.50 crore. Reserves & Surplus Rs. -80.2 lacs. Trade payables Rs. 2.65 cr. Fixed assets Rs. 2.0 lacs. Short term loans 4.14 cr. Inventory Rs. 9 cr. 95% revenue from sale of agricultural products. 51 cr revenue from exports.

6. AY 2018 (FY April 2016- Oct 2016) losses jumped to Rs. 1.4 cr and company was wound down

Here is a summary of the facts as gleaned from RoC documents

How was the jump in turnover funded ?

· Loan: Rs. 15.78 cr (unsecured) from KIFS financial services

B. Kusum Finserve

i. Incorporated in July 2015. Jay Amit Shah hs 60% ownership

ii. Main business — stock trading and marketing consultancy

iii. Last revenue filed — Rs. 24 cr

iv. Diversifying into wind energy

How was Kusum Finserve was funded ?

· ICD Rs. 2.6 cr from KIFS financial services

· Loan: Rs. 4.9 cr (unsecured)

· Credit Line: 25 cr from Kalupur Commercial Cooperative Bank

· Collateral offered: properties worth around 7 cr

· Loan: Rs. 10.35 cr from IREDA for wind power project

BJP’s defense so far

· This is a “private citizen” matter. The same defense that was used by Congress in DLF-Vadra cronyism issue

· All transactions were thru banks and therefore legal. Again same defense as DLF-Vadra issue

· Jay Amit Shah is qualified and seasoned businessman. His partner is already doing over Rs. 100 cr in commodity trading in other company

· KIFS financial services has family relationship with Shah and has been extending credit in past too

· All loans are commercial, are being re-paid with interest and TDS deductions

· IREDA loan was “regular” as company was competent to diversify into wind power

· No undue favors have been done and no loss to exchequer has been created

My Analysis & Questions

Temple Enterprises

1. A dormant company (Temple Enterprises) decided to get aggressive with commodity trading in FY 2015. Jay Amit Shah was able to provide the unsecured loans from KIFS financial services to fund the expansion

2. Since 95% of revenue is claimed from agri products, let us assume this is Rs 76.38 cr. Of this 51 cr was exported. Domestic sales were Rs. 25.38 cr. Rs. 4.02 cr revenue from non-product lines. This itself is impressive given that the erstwhile business of the company was only Rs. 50,000

3. Temple Enterprises seems to have turned-over its capital (Rs. 15.78 cr) nearly 5 times in an year. That’s once every 72 days. With majority of the trade focused on exports. Not bad for a company with no prior experience.

4. The trade payables and deficit on surplus in FY 2016 suggests that the “expertise” on commodities trade wasn’t much successful as the company lost nearly 1.0 cr (from 19 lacs surplus to 80 lacs deficit on reserves). Also they were saddled with 9 cr inventory.

5. The losses seems to have continued in FY 2017 and eroded net worth and the operations were shut down as per the company sometime in Oct 2016 (just before demonetization)

Open Questions

1. Why is there discrepancy in books of Temple Estates and KIFS financial services? Not showing a transaction the correct way is a popular way to avoid taxes at both ends as per my CA friends

2. If Amit Jay Shah’s partner in commodity trading was already doing 100 cr plus turnover why would he look to do another venture with Jay Amit Shah unless there was significant gain to be expected somewhere thru this venture. The benefits to this partner should be explored.

3. If Temple was able to do turnover of 80 cr with loan of Rs 15.78, they turned-over nearly 5 times of capital. That’s a solid accomplishment. Since 60% was exported it must have made huge profit. Why did they lose money? Who exports commodities and makes losses? Certainly not a trader who was well versed in commodity deals. Then why did Temple show losses. Could it be that expenses were inflated to show losses? Could it be that this was a corruption deal dressed up as a commercial transaction? Only an investigation can reveal.

4. If the commodity operations was loss making how did Temple Enterprises return its loans? Here did it get additional funds from ? Why did KIFS not ask for its loans to be returned once the company folder operations. Its not a small loan — Rs. 15.78 cr ?

5. Since KIFS provided unsecured loans without collateral, all companies in the KIFS financial services group should be investigated to see if any company has received undue advantage out of largesse to fund Temple Enterprises.

Kusum Finserve

1. This seems to be the more active company with a healthy revenue and profit in its broking business before they decided to get into wind power.

2. This company raised loans and credit worth nearly Rs. 42.85 cr (see details above). Why did it need huge loans? To fund commodity business of its sister company? What happened to the funds raised? Needs to be investigated.

3. On what basis was it awarded loan from IREDA. To me, this transaction smacks of cronyism the most — Kusum Finserve is eminently dis-qualified to get the loan as per IREDA guidelines

4. What is the status of the power project? Is this only an eye-was and the real purpose was to get land allotment and later sell the company at higher value — just like DFL-Vadra deal, ie Get cheap land and once the conversion has been done sell to a commercial entity to make clean margin. Needs to be investigated.

If there are any other loop holes you find do let me know. If you find any gaps in my analysis, do let me know and I can correct.

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