Promoters of apparel retail firm Koutons Retail are fast losing the grip on their company with lenders invoking the pledged shares and significantly diluting promoter holding. The DPS Kohli-led promoter group that held as much as 67 per cent stake in the firm at the time of its stock market debut in late 2007 or at the peak of market valuations, had lost over two-thirds of the holding since early 2009 and almost the entire chunk of the remaining stake is also pledged, thus making the firm prone to a takeover.

The latest lender to invoke a large chunk of shares is IFCI that now holds 10.24 per cent stake. Promoters held 32 per cent as of December 31, 2010, of which 31.36 per cent was pledged. This implies that the promoters’ holding has now dropped to just around 21 per cent.

They can now only look back at a failed strategy to diversify the business at the wrong time. Apparently, the genesis of the trouble for the promoters started in 2008 when they pledged shares to borrow money for financing a retail-cum-hospitality venture to develop a shopping mall that would have also housed a hotel.

Although the core apparel retail business managed to steer through 2008-10 period with a reasonable 20 per cent and above topline growth, profit-generation floundered. The year 2010-11 has brought twin trouble with shrinking sales and the company slipping into losses (on a standalone level, as it is yet to disclose the consolidated figures).

The promoters’ plans to get a grip of the situation over the last two years don’t appear to be making much of a headway either. Plans of pledging or selling realty assets to shore up resources and plans of raising funds from other financial investors have not borne fruit yet.

Not surprisingly, the early financial backers of the firm have called it quits. Early this year, Ascent Capital (formerly UTI Ventures) sold its entire stake with a heavy loss. It first made a part exit from its four-year-old investment in Koutons Retail by selling a third of its 8.3 per cent holding at Rs 90-91 per share, with an estimated 58 per cent haircut. It sold the rest of the holding in January when the share price had fallen further to around Rs 40-45, as against the investors’ cost of purchase of around Rs 213.5 per share. Ascent Capital had invested a total sum of Rs 54.6 crore through two rounds of investments in June, 2006, and November, 2006, a year ahead of the company’s IPO.

Argonaut Ventures is another pre-IPO investor in Koutons Retail that has apparently exited with a huge loss, having co-invested with Ascent Capital with an average cost of purchase pegged at Rs 266 a piece. Although it part exited during the July-September period when the price was hovering around Rs 170-350, possibly at par value, the remaining stake was sold in the following quarter when it would have taken a haircut as prices had crashed.

Another pre-IPO investor, Passport Capital, also singed its fingers with Koutons Retail. It had exited when the share price was hovering between Rs 300 and Rs 450 against the cost of initial purchase of Rs 350 a piece, but bought more shares from the market when the stock was trading around Rs 800-Rs 1,000 in the first quarter of 2008, thus pushing up its cost of acquisition. It is also expected to have exited at a loss.

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