It does not really augur well for a fund of the stature of ICICI Ventures, which has a 23% stake in Subhiksha Trading Services, when it says it was not aware of the balance sheet problems in the company. ICICI Venture CEO Renuka Ramnath and Subhiksha CEO R Subramanian exchanged war of words on who was in control of the retailer. Subramanian said ICICI Venture was in control of the company, which, if read between the lines, means, the venture fund was partially responsible for the problems the retailer was facing now.

Ramnath, however, refuted this saying the fund owned only a minority stake (below 26%), and was not good enough to stop a special resolution. Interestingly, any private equity fund, when doing a deal, makes sure that they have minority protection rights. Besides, the fund also spends time with the portfolio company to make sure everything is going all right. 

Ramnath now says the fund came to know of the liquidity crunch in the company only in late September 2008. Probably the fund’s investment managers should have spent more time in tracking the company’s performance. Now even Azim Premji, who picked up a 10% stake in Subhiksha, is reportedly complaining that ICICI Venture did not reveal the real picture at the retailer.

In early September ICICI Venture sold a 10% stake to Azim Premji's private equity firm PremjiInvest for Rs 230 crore. 

Subhiksha, which grew to over 1,600 stores at a break-neck speed, has been going through a severe cash crunch in the past few months. The company has not been able to pay its vendors and suppliers, while it has also defaulted on rent and salaries. The problems arose as Subhiksha could not match its cash flows with the growth in number of stores. Subhiksha clearly overstretched itself while there was not enough cash to back it.

Shouldn’t the board have known this? It seems some of the board members saw what was coming. Independent directors of Subhiksha like Rama Bijapurkar resigned from the board of the company on 9 January, Kannan Srinivasan on 26 December and S.B. Mathur on 1 September. It’s not clear if all resignations were connected to the problems at the company.

Seeking Recourse

ICICI Venture is clearly distancing itself from the goings-on at Subhiksha. It has now written to the Registrar of Companies, Chennai, to investigate into the affairs of Subhiksha from April 2007 onwards. The company has also sought an independent audit of Subhiksha for the said period.

“As a responsible investor, despite being minority shareholders and not having management control, we are talking to all the concerned players and trying to seek a possible solution which will be in the best interest of all including the employees,” said Ramnath. “However the solution is contingent on our understanding of the nature and extent of the problem which a forensic audit would throw up,” she said.

However, Ramnath is not deserting the company. She said that ICICI Venture is engaged in discussions with various lenders and investors to explore options for revival of Subhiksha.

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