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Educomp’s an object lesson in how not to pay directors

Educomp ran into financial trouble as it faced delinquencies owing to the build, own, operate, transfer (BOOT) model where it received staggered payments for hardware and software services as opposed to upfront payments.

Loss-making education company Educomp Solutions has for two consecutive years violated the provisions of the Companies Act with regard to the remuneration paid to one whole-time director, despite auditors drawing attention to the fact. The company reported a loss of Rs 1,642 crore in FY15 on revenues of Rs 518 crore. Lenders restructured Rs 840 crore via the corporate debt restructuring cell in 2013; the company’s gross debt at the end of September 2014 was Rs 3,432 crore.

MD Shantanu Prakash, however, told FE there is no concern as far as the remuneration is concerned. “It is a non-compliance but what is the concern? Every non-compliance is not a concern. We are not concerned about it. The section (of Companies Act) says that a company which is a loss-making company, managerial remuneration has to be approved by the central government. It is a standard process. We have submitted for approval, and the central government or MCA takes months to approve it. Till it is approved, it is a non-compliance. These are technical issues, it’s not a business issue.”

As per the provisions of Sections 197 and 198 read with Schedule V of the Companies Act, 2013, limits have been placed on the remuneration to managerial officials. The limits vary between Rs 30 lakh to Rs 60 lakh plus 0.01% of the ‘effective capital’ in excess of Rs 250 crore.

The provision notes that loss-making companies may, without central government approval, pay remuneration to the managerial person not exceeding the higher of the limits. The auditors, in their notes, did not name the whole-time director whose remuneration violated the provisions of the Companies Act. However, in March 2014, proxy advisory firm Stakeholders Empowerment Services (SES) noted that Educomp proposed to pay the entire remuneration (up to Rs 1.5 crore) as minimum remuneration to Prakash. “SES believes that paying the entire remuneration (including variable pay) as minimum remuneration to a director reduces the link between remuneration and performance and, therefore, SES recommends that shareholders vote against the resolution,” SES said in the report.

Another proxy advisory firm, Institutional Investor Advisory Services (IiAS), also said in a March 2014 report that in view of “the weak financial performance and poor shareholder returns”, IiAS recommended voting against the high salary being paid to its CMD. “He should be paid only the minimum of Rs 24 lakh as prescribed by Schedule XIII of the Companies Act, 1956,” IiAS said.

To reduce its debt, Educomp has already sold its stake in certain businesses that it classifies as non-core including the test preparation business Gate Forum, and the pre-school education business Eurokids. It is looking to exit its international businesses in the US and Singapore as well other Indian subsidiaries like Educomp Professional Education, Vidyamandir Classes, Educomp Childcare, India Education Fund and Greycells18 Media. At a consolidated level the company made losses to the tune of Rs 1,699 crore in FY15 on revenues of Rs 518 crore.

“Effective capital” means the aggregate of the paid-up share capital reserves and surplus; long-term loans and deposits repayable after one year reduced by the aggregate of any investments; accumulated losses and preliminary expenses not written off.

Educomp ran into financial trouble as it faced delinquencies owing to the build, own, operate, transfer (BOOT) model where it received staggered payments for hardware and software services as opposed to upfront payments. As a result of its financial woes, Educomp’s debts are currently being restructured by the CDR cell. In January 2015, the Educomp Solutions board had approved issuance of equity shares to lenders on conversion of funded interest term loan. Educomp also initiated the process for merging Edu Smart Services with itself as part of the CDR restructuring package.

Prakash said that the company has now changed its business model to increase revenue and plans to sell its non-core businesses to pare down debt. He added that Educomp is no more a hardware company installing systems at schools and collecting equated quarterly instalments from schools.

“Educomp’s new model is slightly financially more conservative, because we are not extending credit to schools any more to buy our product. The other thing we did also is to de-link the hardware and the content,” he said. Prakash also explained that the pace of expansions that Educomp undertook prior to the CDR cell recast was too fast as well, and now they will be more measured in their growth plans.

Prakash said that Educomp will now focus on a few core areas like its digital business and schools, while it will exit non core areas like test preparation and vocational training classes.

The company had faced defaults which has led to delayed salaries and laying off of employees. According to Bloomberg data, Educomp Solutions had net debt of Rs 3,270 crore as of September 2014. Its share price had touched an all-time high of Rs5,650 but has fallen to Rs 11.

Apart from the remuneration issue, the auditors have also drawn concerns with respect to the management’s assessment of recoverability of investment in six of its subsidiary companies including Educomp Infrastructure and School Management and Educomp Online Supplemental Service.

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