Promoters Exit BSE Listed Company Within 4 Years Of IPO: The Curious Case Of Milestone Furniture

In June this year, Milestone Furniture — which manufactures furniture and office design — said in a regulatory filing that it could not finalise its financial results for FY23 because of the sudden disappearance of its chartered accountant Bhupendra Gandhi. 

This was communicated during a board meeting of the company on May 25 where they also took note of the resignation of CEO Ganesh Kumar Sadanand Patlikadan. 

The case of the chartered accountant and that of the CEO’s exit wasn’t an exception. The company had had a history of governance lapses including its promoters cashing out and making a swift exit. 

A series of practices raised red flags — from questionable shareholding disclosures to non-compliance with regulatory requirements, the story of Milestone Furniture is one of mounting concerns and ethical lapses.

The Core has reached out to Milestone Furniture by email with a list of queries regarding the loopholes in its financial documents, and this article will be updated if and when the company responds. 

What were the chain of events that led to the announcement of the chartered accountant’s disappearance and what were the malpractices in the company? Let’s take a look. 

Zero Promoter Shareholding: A Strategic Exit Unveiled

The promoters of Milestone Furniture made a surprising move by cashing out and exiting the company within just four years of an IPO. The promoters Digambar Sudam Songhare (DSS) and Ganeshkumar Sadanand Patalikadan (GSS) held a substantial 65% stake. Between March 2021 and September 2022, they systematically divested their shares, effectively relinquishing their positions within the company.

Two other entities — Sudam Enterprises (whose directors include DSS and the former CFO of the company) and Divya Digambar Songhare (DSS's daughter) — emerged as significant stakeholders after the promoters had sold their holdings. Despite their close affiliations, they were classified as public shareholders. 

In the company's Draft Red Herring Prospectus (DRHP) filed during its IPO, Divya Songhare was initially categorised as part of the promoter group. However, the subsequent actions and the reclassification of her status raised questions. (Refer to Chart 1 below)

Both Sudam Enterprises and Divya Songhare engaged in regular buying and selling of the company's stock, sometimes resorting to contra trades among themselves, which further complicated matters. SEBI regulations has certain laws in place to avoid contra trades in the period of 6 months.

To add to the complexity, the disclosure of the promoter's sale of a 20.96% stake was labelled as non-promoter activity, raising eyebrows and intensifying suspicions.

This unprecedented exit strategy has significant implications and raises serious concerns about the transparency and integrity of the company's shareholding structure. The manner in which the promoters seamlessly transferred their interests to closely related shareholders, only to have them classified as public shareholders, demands a thorough investigation

Revolving Door Of Directors

Both promoters of the company, DSS and GSS, resigned from their director roles in July 2022 and July 2021, respectively. However, this trend goes beyond their resignations. Almost all the directors who were part of the board during the company's initial public offering (IPO) have also resigned. The board and key management personnel (KMP) of the company have seen frequent changes within remarkably short periods. (Refer to Chart 2)

GSS, who served both as promoter and CEO, cited health issues when he resigned as a director. But, he continued as CEO until May 2023. The company has shown a lack of transparency over intimations regarding the resignation of directors.

In some instances, there have been delays of up to 71 days in reporting resignations.

The company's filings have presented incomplete information about resignations. An exchange filing dated August 13, 2018, mentioned the resignations of directors and KMPs effective from July 16, 2018, but  failed to provide specific details about the resignations. The names of these individuals only surfaced in the Annual Report of FY19.

The company has seen four consecutive years of missing revenues and currently has several key positions such as CFO, CEO, CS, and MD (until June 16, 2023) empty.

By failing to meet these required standards of disclosure and transparency, Milestone Furniture has displayed non-compliance with the regulations of the Securities and Exchange Board of India (SEBI). The Regulation 30 and Part A of Schedule III of SEBI’s Listing Obligations and Disclosure Requirements (LODR) mandate intimation of changes in the board and KMP within 24 hours, including details such as the name of the individual, reason for resignation, and effective date of resignation.  

Misuse Of IPO Funds?

A look into Milestone Furniture’s Annual Report of FY19 also revealed discrepancies in the utilisation of its initial public offering (IPO) funds. 

When the company raised Rs 15.58 crores through IPO in May 2018, it had said that the funds would be utilised for specific things such as buying office premises, construction and infrastructure, buying of plants and machinery, installation of equipment and a trial run, among other things. The timeline provided for this was between June 2018 and January 2019.

However, only a few months after the IPO, in December 2018, the company claimed that it had fully utilised the IPO proceeds as stated in the IPO documents. 

In the Annual Report of FY19 when the auditor noted in their report that the company had only partially utilised the IPO proceeds, the  company claimed that it was considering using the IPO proceeds to repay debt, but this would require shareholder approval. In the annual report, the company said it would seek shareholder approval.

In reality, the company obtained approval for raising funds through borrowing, not exceeding Rs 100 crores, during the same Annual General Meeting (AGM) of FY19. (Refer to Chart 3)

This revelation indicates that the earlier filing in December 2018, which claimed full utilisation of the IPO proceeds, was false. After that filing, the company did not provide any further information in its subsequent filings regarding the IPO proceeds. There is no available information on the completion of the planned manufacturing facility. The company neither sought shareholder approval for changing the objectives of the issue nor filed any statement of deviation/variation for the utilisation of IPO proceeds. 

Investors were left unaware of what actually happened to the IPO funds. The company had initially claimed in the Red Herring Prospectus (RHP) that the project would be completed by January 2019.

Interestingly, an amount almost equal to 50% of the IPO proceeds were utilised as "Other Business Advances" in FY19 (IPO year), but no further details were provided regarding this expenditure. (Refer to Chart 4)

 

Questionable Financial

The financial condition of the company also reveals various problems — a missing auditor, no promoter holdings and zero revenues for four consecutive years. 

The revenues of Milestone Furniture were at their peak just prior to the IPO, which could suggest an attempt to present an attractive picture of the company for the IPO. (Refer to Chart 5)

Given the lack of revenue, the company may be facing difficulties in repaying its debt, leading to the receipt of legal notices from lenders. In response to this situation, the company is considering options such as converting the debt into equity and planning for a fresh fundraising effort. These measures indicate the financial challenges faced by the company due to its lack of revenue generation.

Missing Cash Flow Statement - FY19

In FY19, when the company raised Rs 14 crores through its IPO, it failed to file its cash flow statement in both the FY19 results and the annual report for that year. During the same year, 50% of the IPO proceeds were transferred as "Other Business Advances," with details of these transactions only surfacing when the company filed its FY20 annual report. The absence of the cash flow statement is yet another red flag in terms of the company’s financial practices.

Did Promoters Benefit From Company Funds?

According to the RHP, the company provided Rs 3.75 crores as an advance to promoters for  purchasing materials and premises. This amount was converted into a lease deposit of the same value. However, there is no information on the conversion from advances to a lease deposit. The authenticity of this transaction raises doubts, particularly since the company has not made any rent payments related to these leases in the past two years. 

The recoverability of these deposits may pose a challenge as the promoters have already resigned from their directorships and fully exited the company by selling their stakes. These transactions hold significant importance considering the company's market capitalisation is merely around Rs 5-6 crore. (Refer to Chart 6)

Concerns Over Auditor's Disappearance 

The company's claims about the disappearance of its chartered accountant is also a matter of concern for investors. First, while the company's filing mentions that Bhupendra Gandhi, the signing partner from the statutory audit firm NGST & Associates, has disappeared, it does not provide complete details about the fact that the statutory auditor of the company has gone missing.

Second, the company claiming its financial data is unavailable because of a missing chartered accountant is also questionable as  the preparation of financial statements is the responsibility of the company's management. The financial statements should have been available with the company, even if the auditor is not present. 

A look into the auditor's other engagements reveals more concerning information. The auditor, who the company claims disappeared on May 25, 2023, has signed financial statements for four other companies during the same month. This inconsistency adds to the doubts surrounding the situation. (Refer to Chart 7)

The company also appointed a new auditor without disclosing about the resignation / removal of the previous auditor. 

Did the Auditor Raise Concerns?

Despite the company's non-existent revenue for four consecutive years, governance concerns raised by the Secretarial Auditors, and the deteriorating business situation indicated in the financials, the auditor did not raise concerns either through a modified opinion or by including emphasis of matter paragraphs in the audit reports.

Moreover, the audit reports uploaded by the company for FY20, FY21, and FY22 were not in the SEBI-prescribed format. Crucial details, such as the Basis of Opinion, Emphasis of Matter paragraph, Other Matter paragraph, Auditor's Responsibilities, and Board of Directors' Responsibilities, were missing. 

In the past there have been cases where exchanges have sought clarification from companies and requested them to file audit reports in the SEBI-prescribed format, highlighting the irregularities in the company's reporting practices.

Concerns Raised By Secretarial Auditor and Other Issues

The Secretarial Auditor raised concerns about the non-compliance of various provisions of SEBI regulations and the Companies Act, 2013 such as Non-compliance with certain provisions of the Listing Obligations and Disclosure Requirements (LODR) Regulations, 2015.

The company also failed to comply with Section 96 (Annual General Meeting) of the Companies Act, 2013 and provisions of Section 134 of the Companies Act, 2013 regarding the signing of financial statements.

The CEO certification for FY22 was signed by the Mr. Ganeshkumar who was designated as CEO and Executive Director of the company, despite not being the executive director as he already resigned from directorship. This discrepancy raises questions about the accuracy and authenticity of the certification.

The annual report of FY20 designates Mr. Rajesh Jade, who was actually appointed as the CFO, as the CEO of the company in the Board of Directors section of the report. This error highlights potential deficiencies in management proficiency and raises concerns about supervision and control within the company.

These issues further contribute to the overall concerns regarding the company's governance practices.

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