The eighth edition of the prestigious Indian Premier League (IPL), which kicks off on coming April 8th, may turn out to be a seemingly tough season for the Kolkata Knight Riders (KKR) and its owner Bollywood actor Shahrukh Khan. Enforcement Directorate (ED) has stumbled upon some startling audit findings indicating forex violation of around Rs 100 crore.
The audit done by Choksi & Choksi for the ED has arrived at a conclusion that the transfer of shares between Knight Riders Sports Pvt Ltd (KRSPL) and Jay Mehta-owned Sea Island Investment (SIIL) was undervalued by the entities involved. An e-mail sent to KKR and respective entities remained unanswered.
According to Foreign Exchange Management Act (FEMA), the price of shares issued to persons residing outside India should not be lower than the price worked out under the guidelines set by the stock market regulator SEBI, in case of a listed company or on the basis of fair valuation of shares by a chartered accountant as per guidelines of the erstwhile Controller of Capital Issues (CCI).
The ED has surmised that the value of shares issued to the Mauritius-based entity SIIL appears to be inconsistent with the pricing guidelines.
The Enforcement Directorate have written to KRSPL and its shareholders including Shahrukh, Juhi Chawla and her husband Jay Mehta seeking explanation on under-valuation of share price. If they do not answer before the deadline, i.e. by March-end, ED will process the show-cause notice to the respective companies and their owners, a senior ED official told.
In the audit report, the finding says that when the equity shares of KRSPL were issued to SIIL, the fair value per equity shares of KRSPL should be between Rs 70 to Rs 86. However, the equity shares were issued at Rs 10 per share. This simply means that shares sold to SIIL were 8 to 9 times undervalued by KRSPL, says the audit report.
Similarly, in the case of transfer of equity share of KRSPL from Juhi Chawla Mehta to SIIL, the fair value per equity share should be between Rs 83 to 99 but was transferred at Rs 10 per share.
The calculation was done considering the potential future probability of KRSPL, assuming that the franchise agreement remains in force for more than 10 years – that is till 2021. Despite the calculation method, the finding also raised question that why the share price was deliberately undervalued from its market price and hurriedly sold to overseas entity within a year.
In its first questioning session in 2011, ED questioned SRK on the KRSPL deal. ED wanted to know if there any due diligence conducted on SIIL before the allotment of shares to them on March 7, 2009. It also probed why KRSPL allotted 50 lakh shares to Sea Island Investments at a value which appears to be understated the basis of fair valuation of shares as per guidelines CCI.