Governance Lapses, Murky Books: Behind The Falling Credibility Of Rajesh Exports' Gold Empire

Like most success stories, Rajesh Exports Limited, a gold refiner and manufacturer, had humble beginnings. Rajesh Mehta, with his brother Prashant, began the manufacturing business from the garage of his home in Bengaluru’s RT Nagar in 1989. 

 Mehta famously began his business in jewellery, a few years before setting up the manufacturing facility, with a loan of Rs 1,200. Making a strategic diversification approach, it expanded its footprint by establishing retail stores, notably under the brand Shubh Jewelers in Karnataka. In a significant milestone in 2015, the company further solidified its position by acquiring Valcambi, a Swiss gold manufacturer, becoming the world's largest gold exporter. 

Today, the company’s market capitalisation stands at a little over Rs 10,000 crore. This is after a value destruction of almost 65% in this financial year. The company's share price declined from the high of Rs 1,030 to the current Rs 351. 

Despite the rosy outward appearance, the company’s value declined massively because of several alleged devious practices including ambiguous transactions, disclosure lapses, misleading financials, and other governance issues. This year, the company made news for all the wrong reasons. 

In 2016, Mehta told Forbes Magazine, “Expansion is in our blood. We can’t sit quietly, we are always doing something.” A deeper look into the company’s books reveals that not all of it was done by transparent means. 

Rajesh Exports, once a shining star in the gold market, now stands as a cautionary tale of governance pitfalls. Despite its esteemed position, the company's descent from its peak market value is a glaring indicator of underlying issues.

Discrepancies In Its Books

Repeated instances of incomplete disclosures suggest a pattern of withholding crucial information. 

Rajesh Exports Limited’s profits and revenue have been dwindling consistently. In the recent quarter, it decreased by almost 50% after news of its alleged wrongdoings made headlines. The relationship between cash flow from operations (CFO) and profit after tax (PAT) is crucial for evaluating a company's financial health. Ideally, CFO should be between 80% to 120% of PAT, indicating a smooth conversion of accounting profits into actual cash flows. A concerning sign is a low CFO/EBITDA ratio, potentially indicating aggressive revenue recognition and extended credit periods to inflate revenue figures. 

For Rajesh Export Limited, the CFO as a percentage of PAT has remained unhealthy and drastically changed in the last few years. It was -1213.25% in March 2021, -0.40% in March 2022 and 32.33% in March 2023. 

Another red flag in the company’s books is a high trade receivables balance, which raises doubts about the conversion of sales into cash and the authenticity of sales. If accompanied by an increase in inventory and a decline in cash and cash equivalents, it also raises concerns about the company's financial practices. This interplay between CFO and trade receivables shows an aggressive revenue recognition and an extended credit period impacting the company's overall financial integrity.

The company has already written off 65 crores of bad debts in the past two years, while most of the money due from trade receivables has been aging for more than six months. 

The company has a low margin profile (less than 1%), attributed to the trading nature of its business, ranking the lowest among peers. Standalone sales for FY 23 were Rs 5,762 crore, while consolidated sales were at Rs 3,39,690 crore, indicating that a majority of its operations are outside India. The consolidated subsidiary in Singapore, contributing 98.5% to consolidated sales, was not audited by the consolidated auditor, and its financials are unavailable on the company's website. 

For three consecutive years (FY20 to FY23), Rajesh Exports' preliminary full-year financials released during Q4 did not align with the final financials published in its annual report. This uncommon and serious red flag in a large-cap company raises questions about the correctness, completeness, and genuineness of its financials.

The table summarises the discrepancies amounting to Rs  5,48,251 million (almost 25% of its balance sheet).  

 

 

Item-wise discrepancies can be accessed here.

Persistent Non-Compliance

Rajesh Exports has also had several instances where it either missed or filed incorrect critical documents while publishing quarterly results, as required by SEBI (LODR) Regulation 33.

In June 2023, when it failed to file its auditor report, a senior official from the company told The Economic Times that the mistake was inadvertent and it would be submitted if the exchanges asked for it. In the September 2023 quarter, the company missed filing the cash flow statement.

While it delayed its cash flow statements in March and September 2021 and March 2022, in March 2023 it was not submitted in the SEBI-approved format. It missed filing its cash flow statement in September 2023. Its audit report for March 2023 also needed to be included. 

 

The NSE noted other governance lapses such as late submission of the secretariat compliance report, e-voting results of the AGM, delayed board meeting intonation, and shareholding pattern submission in FY21. Also fined by NSE for various non-compliance of LODR regulations for FY20.

Delayed AGMs

Companies are supposed to hold annual general meetings (AGMs) within six months of financial closure i.e. by September 30. However, between 2020 and 2023, the company has only met the deadline once. 

The company has not only failed to communicate this to shareholders but there are no records of it seeking extensions from the Registrar of Companies. 

Odd Employee Details 

Can you imagine a company with as massive a turnover as Rajesh Exports could only function with just over 100 employees? If its Business Responsibility and Sustainability Reporting is to be believed, the company has only 141 permanent employees. 

 

 

The remuneration of its employees is also quite high for industry standards. According to its books employee benefit expenses stood at Rs 215 crore for 141 employees. That means each employee is earning an average of around Rs 1.5 crore per annum ( Rs 1.3 cr if salary and wages are considered).  

 

What makes these details even more murky is that the company said no employee receives over Rs 60 lakhs per annum in its annual reports. 

According to the company's website, it operates 80 stores under its retail brand, Shubh Jewellers, in Karnataka. Conventional wisdom suggests that retail gold stores typically require a significant number of personnel for security and sales functions. Surprisingly, this does not appear to be the situation with Shubh Jewellers.

Shady Related Party Transactions 

The regulation requires the disclosure of the balances of related businesses and their transactions. The documents of Rajesh Exports Limited show that on this front too, the company hasn’t been transparent. 

In multiple exchange filings on related party disclosures, the company claimed it doesn’t have any related party transactions. But, multiple transactions in the annual report showed several related party transactions and balances.

 

 

They are not even mentioned in the Related Party Transaction section of the annual report. No mention was made of the Rs 200 crore investments made in Elest Private Limited (an entity related to promoters and directors) but the same was not disclosed in the RPT section.

There are multiple subsidiaries and associate entities mentioned in the various transactions in the annual report but Form AOC-1 which gives details of subsidiaries, JVs, and associated companies has disclosed only one subsidiary

 

Unsettled Receivables Balances

In the disclosure about related parties, the amounts owed by two affiliated companies, Laabh Jewels Gold Pvt Ltd and Shubhlaabh Housing Pvt Ltd, have been struck off However, even though these balances were removed, the money owed by these companies has not been cancelled and is still shown as outstanding.

Extract from FY 22 Annual Report:

 

 

The shareholding structure in the Valcambi gold refinery in Switzerland, which the company bought in 2015, is complex and raises further governance issues. Valcambi USA Inc is owned by Valcambi Suisse which is owned by Global Gold Refineries Ltd (GGL). GGL is owned by REL Singapore PTE Ltd and Rajesh Exports Limited.

Non-Cooperation With Rating Agencies 

In the most recent rating action by Brickwork on November 24, 2023, the borrowings have been rated as BWR D, with the company continuing to be categorized as "ISSUER NOT COOPERATING." This further underscores the apprehensive stance surrounding the company's financial status and cooperation with rating agencies.

Interestingly there is pending litigation concerning their sole banking partner - Canara Bank for payables and receivables.

On the CSR front - the company has not spent 2% of its PAT on CSR for consecutively two years because of a lack of CSR projects.

What Next? 

After the acquisition of the world’s largest gold refinery company Valcambi in 2015 for $400 million, the company strategically set its sights on the next phase of growth, envisioning an expansion into retail stores. The 2016 Forbes article on Mehta said that he had grand expansion plans for the next decade which included 2,000 stores. The actualisation of this has remained elusive as the actual store count is just 80. 

Its vision of the future seems to be in disarray as well. In January 2022, the company was selected for the government’s Production Linked Incentive Scheme to make advanced chemistry cells for lithium-ion cells and batteries. For a gold trading company facing various financial issues, diversifying into completely unrelated businesses also raises questions on capital allocation. Notably, there is a conspicuous absence of shareholder approval sought for the diversification into unrelated businesses.