Squabbling between private equity investors and companies often ends up at the doorsteps of regulator and court. Rarely, if ever, do such bickerings boil over and end up at a police station. One such dispute involving Baring Private Equity Asia — one of the most aggressive PE funds in Asia with over $5 billion of assets under management — is an exception to the rule.
Global Schools Foundation, a Singapore-based firm run by a group of NRIs, led by Atul Temurnekar and Kaustabh Bodhankar, has filed a criminal complaint with the Economic Offences Wing (EoW) of the Mumbai Police against Baring Asia, some of its associates and seven senior officials, including managing directors Jimmy Mahtani and Kosmos Kalliarekos, and CEO Jean Eric Salata.
The allegations: Baring and others conspired to hold back Global from going ahead with a series of profitable acquisitions, with the intent of taking control of the company on the basis of an agreement that linked the PE fund’s shareholding in Global to the company’s profits. As profits dipped in the absence of growth from fresh acquisitions, the particular clause in the shareholding agreement would have allowed Baring to substantially raise its stake to more than 47% in Global and even acquire control of the company at a cheaper price. The PE fund rubbishes all these charges.
Global, established in 2002, runs a chain of schools across South East Asia, Africa, MENA and India.
Deals between private equity houses and investee companies are often structured to give PE investors veto powers to block acquisitions they do not approve of; also, the fortunes of the promoters and future shareholding are tied to financial milestones.
The dispute between Baring and Global is already being heard in an arbitration court in Singapore. Indeed, sources said, Baring representatives last week met EoW officials to put across their point of view.
But lawyer A Majeed Memon, who is advising Global and has signed the complaint on its behalf, asserted that Baring had a criminal intent. “We have reasons to believe that the stalling of the acquisitions was intended to derive wrongful gain and inflict wrongful loss to the complainant… Even if there is an arbitration proceeding in Singapore, the crime does not die,” Memon told ET.
Responding to an e-mail query, an external spokesman for Baring Private Equity Asia described the complaint as “unfounded” and “frivolous” and “relates to a commercial dispute that is the subject of arbitration in Singapore”. “Given that the arbitration process requires confidentiality, Baring Private Equity Asia is unable to provide further details at this time. There is no basis for any liability, whether civil or criminal, on the part of Baring Private Equity Asia, its employees or any related entity in connection with this matter. We will deal with this complaint with full force of the law,” said the spokesman.
According to Global’s complaint to the EoW, the blocking of the acquisitions caused a loss of Rs 65 crore to the company. In the course of negotiations during 2010-11, Baring decided to invest up to $75 million in three tranches of $25 million each; the maximum stake the PE fund would have got after exercising the three tranches was 47.69%. It was also negotiated, that at the option of Global, an additional fourth tranche of $25 million would be invested. In 2011, Baring through its investment arm Minerva invested the first tranche of $25 million in the form of convertible note — the conversion of which was linked to the PAT of the financial year ending December 2012. The company had to exceed the PAT target of $9.8 million for its valuation to remain unchanged at $73 million, which would have given Minerva a minimum 15% yearly return on each of its convertible instrument (read note). But if the PAT was lower than $9.8 million, then the valuation of the company would have reduced, allowing Baring to get more
shares of the company for the same investment amount of $25 million. The shareholder agreement included clauses for the veto rights of Minerva, including the right to veto any investment (by Global) above $1 million.
So far, Global has got only the first tranche of investment. Baring also used its veto right to stall Global from drawing down a loan from IFC Washington to fund one of the acquisitions. In July 2012, Global informed Baring that the agreement has been cancelled. Relationship between the fund and the investee company has soured to a point that no board meeting has taken place since then. Even two rounds of settlement meetings for an amicable parting have achieved little.
Global has further alleged that the fund’s plans were also driven by its intent to eventually merge Global with Nord Anglia Education, another Baring-backed chain of premier schools, which recently raised $350 million through an NYSE listing.
Sources in the PE industry, however, dismiss the allegation, claiming the two rival chains offer different product propositions and merging the two would substantially dilute their brand equity.