PE firm Actis has detected an alleged fraud in one of its large investee companies ? Super-Max ? in which it reportedly invested close to $125 million in February 2011 and holds a significant minority stake, say sources.

Super-Max is a razor blade manufacturer, which claims to have a market share of 50% by volume in the market in India, and is second to Gillette globally. The company is owned and promoted by NRI businessman Rakesh ?Rocky? Malhotra and his family. Since Super-Max is a private limited company, its financials are not in the public domain. However, in August 2011, the then CEO Ajay Bindroo was quoted as saying the company is close to reaching a revenue target of R1,000 crore from the South Asian region.

Sources tell FE that the investment team at Actis was alerted a few months ago when Super-Max approached the fund for additional money citing working capital needs, barely 18 months after Actis’ relatively big investment in the company. In the course of those negotiations, red flags were raised about the high sales growth being shown by the company even as cash flow seemed to have dried up.

As the Actis’ investment team pored over the financials and sought clarifications from the company, it was soon clear that the numbers did not add up. Sensing trouble, the Actis team pushed the promoters into appointing special auditors to ascertain the nature of irregularities, thereby bringing in the E&Y Forsensic team, which has now been investigating the case for over three months.

In response to a query sent by FE to Actis asking whether it was aware of financial irregularities at Super-Max and what they were doing to protect their investment, JM Trivedi, head of the Actis team in India, responded: ?Actis invested in Super-Max in 2011, backing a high-growth quality business in an attractive sector. This investment builds on Actis?s proven track-record of partnering with successful Indian FMCG companies.? While not directly responding to any of the specific queries, they went on to add: ?We have confidence in the Super-Max management team which has many years of experience with respected multinationals.?

Corporate governance woes, which have spread across corporate India, have not left large global private equity investors untouched. In September 2011, Bain Capital & TPG had detected an alleged fraud in one of their investee companies, Lilliput, which had nearly wiped out their investment and forced the PE investors to drag the company to court.

In the case of Super-Max, while investigations into what went wrong are still on, early findings tell a story of the ambition to grow quickly, which seemed to have gone wrong. Sources say the company was allegedly producing excess inventory to show stronger sales numbers. This inventory, which was held with stockists and distributors and even partly in the company’s own warehouse, was being reported in the profit and loss account even though a large chunk of sit remained unsold.

The result was cash being burnt to produce inventory even though revenues were not flowing in. This cycle is what led the company back to Actis ? its private equity partners ? seeking additional funds. Other aspects such as whether funds were siphoned off are still being investigated.

Even before the investigation is complete, key management changes at the company have been announced. Ajay Bindroo, who was CEO at the company, has left and a senior director in the finance department has also been moved out into a consultant role. Pushed by Actis, a new CEO Simon Cooke has been appointed in place of Bindroo. Cooke comes with strong credentials, including a stint at P&G and Reckitt Benckiser, say sources.

In a telephonic conversation from London, Super-Max promoter Rocky Malhotra denied allegations of any wrongdoing by the company and said that Bindroo left due to health reasons. While he did not confirm that E&Y was conducting a forensic audit on the company due to the alleged fraud, he said that special auditors are often appointed to make sure all the loopholes are plugged. ?I wish there was something as exciting as you suggest but there isn’t,? added Malhotra.

Actis is now working closely with Malhotra to clean the business. Sources also tell FE that Actis has pumped further cash into the business ? taking their stake in the company to nearly 40%. Actis did not confirm their total investment in the company or how much stake they hold in it.