First Lease, Last Lease

Written by Sushila Ravindranath | Sushila Ravindranath | Updated: Apr 2 2014, 02:50am hrs
The story of First Leasing Company of India and its founder & managing director Farouk Irani is truly a Greek tragedy. The company has been barred by RBI, following inspection of its books and records, from conducting any business. The company cannot sell, transfer, create charge or mortgage or deal in its property or assets without RBIs permission. There is a gaping R1,000 crore asset-liability mismatch in its balance sheet which led to this move.

First Leasing Company was literally the first leasing company set up in India. Its founder then was a young banker who had studied leasing in Hong Kong and Singapore when he was working for the First National City Bank. He adapted what he had learnt for India and hoped that his employer will help him introduce the service in India. The bank felt India was not yet ready for leasing.

The young banker was Farouk Irani who threw up his job to start a leasing company in Chennai (then known as Madras) in 1973. His good friend AC Muthiah (promoter of the Southern Petrochemical Industries Ltd, or SPIC, group of companies ) was willing to put money in this project. Muthiah had been the chairman of the company until he stepped down recently.

First Leasing was set up with a paid-up capital of R25 lakh largely raised through private placement. It was all very straightforward those days. Madras was the chosen location instead of Mumbai as the company did not want to take big risks. We did not have any predecessor from whose mistakes we can learn from, said Irani then. When First Leasing completed 25 years in 1998, Irani had declared that Muthiah was a big asset. He is very receptive and never interferes. Although Muthiahs holding in the company was larger than Iranis, First Leasing had total independence. It never wrote a lease for SPIC or other companies. Nor did Muthiah sign any guarantee for First Leasing.

In those 25 years, First Leasing became the market leader until the big boys moved in. Irani came to be celebrated as the father of leasing in India. He battled for 20 years on behalf of the industry to establish a leasing companys claim to investment allowance. He set a precedent by getting institutional finance for the first time for the leasing industry.

Ironically, leasing as a concept was fading around this time. In the 1980s about 400 companies got into the leasing bandwagon, went public and went bust. Big leasing companies like 20th Century Leasing, Lloyd Finance, CRB all collapsed, merged with subsidiaries or shut shop. Leasing worked in the pre-liberalisation days when foreign companies were not allowed to own assets. Those were also the days when funds were scarce. Many in the more conservative finance companies always doubted leasing companies accounting of recurrent income. They felt there was a lot of accounting jugglery going on. But Irani had an unshakable faith in leasing as a financial instrument.

In 1998, RBI introduced such stringent norms for leasing industry that the entire concept slowly died. However, First Leasing plodded on. It tried its hand in mutual funds, consumer credit profiling and so on, but these did not take off. Irani says, Our activities got us into a leveraged position that required recapitalisation. Several large companies, especially Tata Capital, GE Capital and an Australian bank Macquarie, were seriously interested in a takeover of the company, he says. Tatas were having extensive discussions with First Leasing and they withdrew eventually. The capital shortfall could have been one of the reasons.

Irani decided to disclose the companys problems to RBI to help them resolve the crisis. RBI did not buy Iranis statements and his offers to make good the missing capital. The company had posted a net profit of R34.72 crore in 2012-13 on total income of R234.66 crore. According to its annual report for 2013, its long-term borrowings were R181 crore, short-term borrowings R1,218 crore, and receivables under lease and hire rentals at R1,088 crore. However, last month, RBI served a showcause notice to FLSI asking why the certificate of registration granted to the company should not be cancelled. It pointed out that the special audit has found falsification of accounts of the company.

First Leasings board meeting on March 5 had said that it proposes to initiate both criminal and civil action against the persons based on the findings of the forensic audit report which is being conducted by RK Raghavan, former director of CBI, to unearth the money trail. Both Muthiah and Irani resigned from the Board.

Irani feels that he is being blamed for all the things that went wrong. He has issued a statement saying the crisis at First Leasing is primarily owing to a vicious circle of spiralling interest costs, the outflow of crores of rupees of deposits placed with First Leasing earlier because of Mercantile Credit Corporation (a company which was promoted by Muthiah) going belly up in the late 1990s. The erstwhile chairman (Muthiah) could not contribute to rights issues as his finances were strained after the serious financial difficulties of SPIC and the closure of most of his companies.

He said his personal shareholding in the company was less than 0.3% and that he would not benefit or aggrandise himself by indulging in malpractices. He says that the companys financials have been endorsed by the CFO, the directors, the chairman, and approved by the statutory auditors and the audit committee. He claims that the accounts have been tampered with without his knowledge. AC Muthiah says that Irani had kept the Board and the chairman in the dark and he is solely responsible for the present state of affairs of the company.

Whatever the outcome of the forensic audit, it is highly likely that the First Leasing Company of India may end up being the last leasing company in the country.