One of the highest accounting fraud in India since Satyam with Delhi-based Lilliput Kidswear under liquidation; Bain brought action against EY for “fraud, aiding and abetting fraud, negligent misrepresentation”

Lilliput Kidswear under liquidation; promoter says has a stay order

Shruti Ambavat, 14 January 2015, VC Circle

The firm unsuccessfully tried to rope in new investors and revive plans for IPO. Kids’ apparel retailer Lilliput Kidswear Ltd, the Delhi-based firm which had locked horns with its PE investors Bain Capital and TPG four years ago leading to an eventual exit of the investors from the firm, is now under liquidation, it is learnt. This could bring the debt-laden firm to the end of the road after it unsuccessfully tried to resurrect by roping in new investors. The company was facing several cases from lenders and other debtors with winding up petitions over pending payments.

As per records of the Registrar of Companies (RoC) the firm is under liquidation. However, Sanjeev Narula, promoter and chief of Lilliput Kidswear, said the firm is still contesting the winding up petitions and said he has a stay order on liquidation from the court. A consortium of bankers led by Allahabad Bank had filed for action against the company under SARFAESI Act 2002. As reported earlier, several lenders including China Trust Bank had filed court cases to recover their dues.

Its troubles started a year after it attracted Bain and TPG to co-invest to pick 45 per cent stake together in Lilliput Kidswear in 2010. In particular Bain invested Rs 265 crore ($59 million) to buy 31 per cent of which Rs 114 crore was invested in the company and the rest to buy previous PE investor Everstone Capital’s stake in the firm.

Bain and TPG Capital had alleged they were alerted to problems with the accounts at Lilliput by an unnamed whistle-blower, who is believed to be a former senior executive at Lilliput. The whistle-blower had apparently approached EY (formerly E&Y) but the red flag was dismissed and the auditor certified the company’s accounts once again.The board nominees of the PE investors in the company took an unusual step and did not approve the annual accounts of the company in a board meeting held in September 2011. The incident put a spanner in the proposed initial public offer (IPO), aimed at generating resources for the company.

Lilliput promoter Narula then counter-alleged that the PE firms were looking to take over the control of the company by derailing the public issue as they did not want to dilute their holdings.

After a legal fight, separate media reports suggested that the two sides had decided to resolve their differences with the PE firms writing off the investment. Lilliput’s Narula had previously told VCCircle that he now owns 100 per cent of the company.

Lilliput later tried to rope in other investors and had also planned to hire Centrum Capital as a banker for a proposed IPO, which never materialised.

Last year Bain Capital revived its fight to recover its written-off investment worth around $59 million in Lilliput Kidswear suing auditing and consulting major EY in the US, over its alleged role in the five-year-old deal which went bad.

This is arguably the most high-profile alleged accounting fraud on one of the Big Four firms since PricewaterhouseCoopers found itself under scrutiny for certifying accounts of IT major Satyam Computers, later confessed to be false by its founder and chief B Ramalinga Raju.

Bain brought action against EY for “fraud, aiding and abetting fraud, negligent misrepresentation, and unfair and deceptive trade practices based on EY’s involvement in the scheme to defraud Bain.”

It pointed out false claims on sales, outstanding debt, investments, cash balance with banks among many other lapses in auditing records of the Indian firm.

It had also alleged the consulting arm of EY, which was running the mandate to bring on board a new investor, misrepresented facts about Lilliput which ultimately induced Bain to invest in the company.

The US lawsuit alleged that Bain, which has a longstanding global relationship with EY, was specifically targeted by EY to invest in Lilliput because the Boston-based firm had the resources to pay a higher investment price and the prestige and knowledge to take the company to an initial public offering.

Read our previous related stories:

TPG Growth Joins Bain Capital In Lilliput Deal

Lilliput Promoters Looking To Bring New Investor To Buy Out TPG, Bain

Tata Capital Files Winding Up Petition Against Lilliput Kidswear

Chinatrust Commercial Bank Takes PE-backed Lilliput Kidswear To Court

Lilliput revives IPO plan, offers shares to vendors for outstanding payments

Lilliput Kidswear hires banker for $74M IPO

Bain Capital sues auditing & consulting giant EY in the US over Lilliput Kidswear


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