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Suckered: Amara Raja to Pay Promoters 40 cr. Upfront to Lease Land It Doesn’t Need

When you’re a shareholder of a company, you’re less influential than the promoter, of course. But with that level of control, can a promoter try to take money away from the company that you should rightfully have a say in?

Look at Amara Raja batteries. The stock’s done well, of course. But now the promoters want to get shareholder approval for the company to pay a large sum as an upfront rent for a 99 year old lease. And guess who they are paying rent to? The promoters!

Amara Raja is doing a postal ballot, with e-voting, on a proposal to take a 99 year lease on a 62 acre property from Amara Raja Infra Private Limited (ARIPL), a company wholly owned by the promoters and their families.

ARIPL is developing a 482 cr. property (in which this 62 acres is being purchased) in Chitoor, AP.

The company will pay Rs. 65 lakhs per acre to ARIPL for the 99 year lease, all of it upfront! Paying for a lease upfront is very strange (and only done when the deal is equivalent to a purchase of the property and the land will be used immediately).

And the interesting thing is: they have no need to use that land today; they are buying it because :

…it would be advantageous to take additional land at this point in time as availability of land in large parcel would be difficult and at huge cost as and when such decisions are taken.

Business Standard has noted that they had done another lease from the same ARIPL, for 10 acres, at Rs. 47.5 lakh per acre, which means this deal is a 33% increase in one month.

It seems a firm called SES has found the contract terms are loaded against the company too. And that the brand Amara Raja is owned by the company but the promoters are using it for their benefit.

Our view

If you’re a shareholder this is quite lousy. The company made about 367 cr. last year, and it does seem excessive to pay 10% of that to the promoters for what is excess land (since the company doesn’t currently have plans to expand, but is buying the land anyhow).

Effectively this is the company paying Rs. 40 cr. to the promoters to lease land they don’t currently want, and by paying all of the money upfront. It’s quite possible that the promoters want to dump the land onto the company, having found no buyers elsewhere.

If you ask us, if we were a shareholder we would vote against the resolution (though since promoters own 52% of the company it is unlikely to fail). But the fair thing would be that the promoters should abstain from voting (since they are interested parties) and to only count the votes of remaining shareholders.

We hope SEBI will take note of such deals – and there are a large number of such deals – where the promoters do things that are equivalent to using their large shareholding and operational control to move money from the company’s pocket to theirs, for reasons that don’t seem to sound genuine.

  • Krish says:

    This is really a sucker punch by Amar Raja. We can never trust businessmen with political connections. I am really shocked to see the reasons given for acquisition.
    I am familiarised with the local region surrounding this company and a price of 65 lacs/acre is outrageous. Worse, it is not a buy but lease. At much cheaper rate, one can buy land and it can become part of the BV. With 99 yrs lease arrangement, the grandchildren of the current promotor can sign once more lease agreement and live royally rest of the lives.
    Could not appreciate the smart move. Create one junk company, buy land at rock bottom prices from distress sale and sell (sorry lease) to own corporate for 10 -12 times the price.

  • Kumar says:

    A SEZ named Sri City is being developed in Chitoor & it’s in huge demand as its very near to Chennai. If AP gets the special status for tax exemptions for 10 yrs as promised during bifurcation then it will be very very difficult to procure this much parcel of land at one place. So if the company had plans to use the land in nxt 5 yrs its better to buy it now if we consider the long term prospects of Company (not in perspective of shareholder aka shortholder)
    Paying upfront lease is not fine, but it’s almost like buying the land (for 99 yrs) as an acre in that area is equivalent to the upfront lease they paid.
    Regarding the 10% of profit cut, they say initially Amara Raja started it’s journey with supplying batteries to railways & govt agencies. So as it’s dealing with govt this 10% can be the consulting fees which they had to distribute to sarkari babus 🙂

  • Mihir Ashar says:

    Shocking. Finally they will develop the land for construction and sale and take the cash flow into their personal infra company.

  • Krish says:

    I am surprised that OP mentioned ‘Lease of 99 Yrs’is equivalent to ‘Buy’. Agreed it is a long term, it benefits the owners of land immensely. First and foremost is once the land is leased, it can not be sold by the leasee. Company plans may change over a period of time. AR may think in future to set up battery unit in North India to capture the market there. It should not be stuck in lease of these lands where money is locked and restrict their expansion to one geography alone.
    One of my company earlier worked happened to take lease from the Govt at throw way price of Rs.50/sq.ft at CBD of B’lore. 20 years passed and the company is damn sure that it had to pay 1000X when the lease expires. Imagine, if you are private player and lease land. Your grandchildren would have secured life by away of steep appreciation, holding large parcels of land and negotiation power.
    If someone ready to lease my land for 99 years and pays the outright buy price, I would never ever sell my land.

    • This is true, though in some cases where land cannot be sold a 99 yr lease is considered an equivalent to a sale. Typically this happens when land cannot be sold because the owner has received it for a certain purpose only (many SEZs are like this unfortunately). This is definitely a bad idea in the longer term, but people do it because there is no choice. I don’t know if that applies here 🙁

  • Dhiraj says:

    Multi bragger stock and yet… Greed. Should shareholders dump?

  • amit says:

    even if we stop by voting against the resolution, promoters will find another way to siphon off the money from the company

  • The least the Independent Directors can do in such a situation is to insist that the promoters abstain from voting on the Resolution. The least SEBI Chairman can do is to pick up the phone and tell the Independent Directors that they should publicly clarify their stand on the issue. Corporate Governance should be followed not just in law, but also in spirit. Instead, don’t be surprised if you find SEBI Chairman talking Corporate Governance at panel discussions & seminars at five star hotels with our money.

  • Bhupesh says:

    Just look family took 8.7% cut of companies’ profit as commission/salary ..
    Dr. Ramachandra N Galla 175.99 million
    Mr. Jayadev Galla 293.32 million
    Sri Ravi Bhamidipati 20.83 million
    Profit before tax 5,366.70 million
    while
    Employee benefit expense 1583 million
    there are other related party transactions ..
    Amara Raja Infra Private Limited – Capital advance 172.68 million
    Rent – 61.22 million
    Donations to trust 135.37 million
    Purchase of goods/services 3066.96 million
    Purchase of capital 1677.40 million
    goods/services
    looking at their other business interest, political interest how much time they actually give to this business .. or require to give. I wonder if promoters are required at all at this high cost.
    This resolution (as in this post) received 20% negative votes of all casted votes.
    Kumar wrote, “as it’s dealing with govt this 10% can be the consulting fees which they had to distribute to sarkari babus :)”
    Oh now he is part of Govt and the govt is committed to remove corruption .. so why still these kind of deals are required .. any way company already have other channels established, see: “Purchase of goods/services from related parties.” .

  • Jyothi Swaroop says:

    Thanks Deepak for writing this article. I am shareholder of AmaraRaja for last four years and I sold all my holding after knowing the intentions of the management through this column

  • amitvik.m says:

    Oh my God, was a eyeopener. have been holding AR for quite sometime and it has been a multibagger. Thanks for the info and analysis.

  • Murthy says:

    On the contrary,
    Suddenly everyone became intelligent and asking a number of questions.
    All deals are murkier, if you are an outsider, and all deals are intelligent,if you are an insider. Instead of complaining, why don’t you guys establish a company and see how it can grow!
    AmarRaja is a new kid on the block, there were many others. All suitcase companies…… Not even a battery is manufactured, but they made billions.
    But if I mention the names, people will start selling the stocks on ethical grounds.
    Imagine one company , receiving 125 MW of Solar Projects, against the cap of 25 MW. You know what they did? They made a sister concern in the name of each of their employee, received more than 125MW awarded on their name, got 30% subsidy straight away, ….without even commissioning a single unit. Moreover, they got it at 17 rupees a unit, not the projects are being allotted at grid par. Hey bro, don’t sell Lanco Infra…. If you have.
    X had a 500 Acre estate outside Bangalore, showing this as collateral, he got a loan of 1000Cr.(Fancy Number) from UKnowBank, and got a WFD Badge…..but also shown how the número uno in Indian liquor business can fudge the Financial Statement. people gulping the beverages on a continuous basis, but Hey United Spirits latest financial statement shows losses. If you go deep, you too can see a 200Cr. Adjustment…..don’t sell USL, people will drink to every cause, and there will be good business….ethical?
    Gitanjali Gems, Reliance, Jewelry business, gas power projects(international conspiracy)….. And you think that GE makes a Genuine Business…..

    • True, but the role of people like me is to reveal the murky side of these businesses. Amara Raja has been a fantastic stock, and at the rate they grow I don’t even mind their large management compensation. But when things turn into taking out money into their pockets like this, it’s not done. Everyone knows about the infra biggies, and GE, and Tata, and Reliance, and all that, but it still doesn’t mean we should highlight it and bring things out.
      Many times, such situations help institutional investors to make a case and prod promoters to act. Remember the case of Indo Asian Fusegear? I wrote about it, and many other people did, when they tried to merge a promoter owned company at a ridiculously high valuation, and it appears that larger investors pressured them to cancel the merger. We don’t know if it helps, but even if it helps a little, it’s useful to write aobut it.
      Also, many people here do run successful businesses without doing shady things.