Kolkata Knight Riders shares undervalued? Shah Rukh Khan summoned by ED over forex violation

The Kolkata Knight Riders have had a good, solid run in the Indian Premier League – they are second in the table with a game in hand. Gautam Gambhir has led from the front and even though they don’t have one standout performer – as a unit, they have been hard to beat. However, they have run into some off-the-field trouble with the Enforcement Directorate (ED) after some startling audit findings indicated forex violation of around Rs 100 crore. KKR owner Shah Rukh Khan has been issued a summons as a result and he will need to appear before the agency before the end of the month. [caption id=“attachment_2241582” align=“alignleft” width=“380”] PTI image[/caption] The audit, done by Choksi & Choksi for the ED in November 2014, had arrived at the conclusion that the transfer of shares between Knight Riders Sports Pvt Ltd (KRSPL) and Jay Mehta-owned Sea Island Investment (SIIL) was undervalued by the entities involved. The audit report stated that when the equity shares of KRSPL were issued to SIIL, the fair value per equity shares of KRSPL should be between Rs 70 to Rs 86. However, the equity shares were issued at Rs 10 per share. “This simply means that shares sold to SIIL were 8 to 9 times undervalued by KRSPL,” the audit report mentioned. Similarly, in the case of transfer of equity share of KRSPL from Juhi Chawla Mehta to SIIL, the fair value per equity share should be between Rs 83 to 99 but was transferred at Rs 10 per share. According to the Foreign Exchange Management Act (FEMA), the price of shares issued to persons residing outside India should not be lower than the price worked out under the guidelines set by the stock market regulator SEBI, in case of a listed company or on the basis of fair valuation of shares by a chartered accountant as per guidelines of the erstwhile Controller of Capital Issues (CCI). Earlier in November 2011, ED had questioned SRK to explain the details of transactions/aspects of the KRSPL deal, due diligence conducted on SIIL before allotment of shares to them and reasons behind KRSPL allotting 50 lakh shares to SIIL at a value which appears to be understated. Interestingly, in a statement given to ED in November 2011, SRK stated that “the concept of IPL being new, they had done rough assessment of the profitability of the venture and from the ITT issued by the BCCI they understood that certain revenue streams were available to the franchisee as share from sale of commercial rights revenue. They were having a stadium which was the largest in India promising higher revenue from the sale of tickets and he was also confident of getting sponsorships because of his goodwill and that Mrs Juhi Chawla and according to their own estimate the franchisee was to break even after an initial period of 4-5 years”. When they were not convinced with the answer, ED appointed a third party chartered accountant company Chokshi & Chokshi LLP to audit the valuation of KRSPL equity shares. KRSPL, in turn, has contested the ED probe and audit finding by claiming that they computed the share issuance under net asset value method (NAV) prescribed under FEMA,1999. The valuation report submitted by KRSPL to ED said, “The company (KKR) is recently incorporated and there is no certainty about the profitability of the company. Hence we believe that market value method known as Profit Earning Capacity Value (PECV) method is not suitable for valuation of the shares of the company.”