At Mercedes India, a financing mess

“Thakore directed the finance department to ensure that the company foots the bill. This was just one of the instances where he used his influence to control how things are done at Daimler Financial, “said one among multiple people who have come forward with information about a slew of improprieties at the non-banking financial company (NBFC) .

Any wrongdoing related to the party, however, pales in comparison to other questionable activities at the lender that are gradually coming to light. Some of those activities have now drawn the attention of the Reserve Bank of India (RBI).

In May, the RBI imposed a penalty of 5 lakh on Daimler Financial Services for failing to promptly report a fraud. Domestic NBFCs are mandated to report fraudulent transactions to the regulator within 15-21 days of the illegal activity being discovered, depending on the quantum of loans involved.

Established in 2011, Daimler Financial Services is the captive financier of Stuttgart-headquartered Daimler. The lender offers loans in two broad categories—to Mercedes dealers, and to customers. In the first category, Daimler Financial extends loans to dealers for their showrooms, workshop equipment, working capital and so on. It is in this segment that the company finds itself mired in a bad loan mess, which for long had been brushed under the carpet and has left a hole in its balance sheet.

Daimler Financial Services’ loan book stood at 6,600 crore as on 31 March 2021 (latest available figure) and it reported a net loss of 140 crore in 2020-21. The company’s net non-performing assets (NPA) ratio stood at 17.5% in FY21, up from 15.3% the previous financial year.

Mint spoke to a number of insiders to ascertain why the lender had been penalized by the RBI. While it is not clear which specific incidents Daimler Financial Services has been pulled up for, the Mint spoke sources to reveal a disturbing pattern.

Senior company insiders had alerted the global parent to questionable transactions that took place when Thakore was the chief risk officer and the chief executive. Among other things, these transgressions included refusal to take action against defaulters, evergreening of loans and deploying credit products not approved by the company. The foreign parent had been made aware about these goings-on as far back as 2018, according to a person familiar with the development who spoke on the condition of anonymity.

In one embarrassing turn of events, the company itself found in a legal tangle after one of the defaulters filed police cases against its senior officials. This happened after Daimler Financial Services finally acted to recover loans that were due but reportedly made a mess of the job (more on this later).

An email sent to Thakore seeking responses to the allegations made against him remains unanswered. He also did not respond to a text message seeking comment.

The allegations

Thakore started his career at Daimler in 2000 as a fleet analyst in the US. Thereafter, he took up several managerial roles in the truck credit management division of the financial services arm. Thakore’s LinkedIn profile shows that between October 2010 and January 2018, he was the chief risk officer. A whistleblower alleges that some of the NBFC’s delinquent loans originated during that period. In February 2018, Thakore moved to Singapore as vice president (key account management, regional credit operations) before coming back to India in October 2020 as the managing director. In September 2021, he became the CFO of Daimler India Commercial Vehicles, the trucking division.

The biggest allegations: when Thakore headed the NBFC, the company extended undue favors to two Mercedes dealers: the Kolhapur, Maharashtra-based Ghatge group, which owns Ghatge Motors and KGP Auto; and the Ahmedabad, Gujarat-registered Emerald Luxury Cars.

The loans to the Ghatges were allegedly evergreened while Emerald received loans against little collateral (Emerald denies this).

Evergreening is a practice by which financial institutions attempt to revive a stressed loan by allowing a defaulting borrower to borrow more money to repay prior to dues. Experts say it is one of the biggest challenges bedeviling the financial sector.

“This has led to massive debts piling up with the borrowers, who clearly have no capacity to repay—something the lending institution is aware of. Consequently, this results in a situation where large amounts of bank debt remain unpaid,” said Bharat Chugh, a Supreme Court advocate.

Ghatge group defaults

Like other dealers, the Ghatge companies had also taken inventory loans from Daimler Financial. Loans for inventory are given with the vehicles as collateral. These loans and equipment finance loans are now in default.

Several attempts were allegedly made to evergreen these dues. Daimler Financial even extended personal loans of 6 crore to the promoters, allowing them to temporarily cure their default, insiders allege. Even if Daimler Financial had a personal loan product, which it does not, this probably would not be kosher.

Ghatge group recently proposed to settle its dues by repaying 30% of the entire outstanding amount, said one insider. Entrepreneurs Satish, Mohan and Gaurav Ghatge are directors on the boards of these two companies. An email sent to Satish Ghatge remains unanswered.

Sometime last year, Daimler Financial finally decided to start recovery of loans given to the group. The lender tried to cash in some checks drawn by the promoters and used as security for loans. The bounced check and the non-bank lender decided to pursue legal action against the borrower under Section 138 of The Negotiable Instruments Act, which applies to dishonored checks. However, it turned out that Daimler Financial had tried to cash in checks used as security for a loan that had already been repaid and not related to the loan in default. The recovery tactical boomeranged.

On 27 February, the Ghatges filed two first information reports (FIRs) in Shahupuri Police Station in Kolhapur against the directors and other senior officials of Daimler Financial Services. Mint has seen a copy of the police complaints. The FIRs name Brendon Sissing (managing director and CEO), Harish Chand Jain (chief financial officer), Ingo Krueger (head of credit and risk management), Latha Venkatesh (chief information officer), Anita Iyer (company secretary) and Madan Gopal Bharadwaj (head of wholesale credit). According to one of the people who revealed details of the case, the directors and others named in the report have taken anticipatory bail.

Following the reports, Daimler Financial, followed the senior police with the Bombay High Court advocate Abhishek Singhvi Singhvi arguing on its behalf. On 1 July, the high court called for mediation in the case and justice SJ Kathawalla, a retired judge of the Bombay High Court, was requested to act as the mediator. Separately, last December, Daimler Financial filed four petitions with the Mumbai bench of the National Company Law Tribunal (NCLT) against the Ghatges under the Insolvency and Bankruptcy Code.

After reporting losses of 19.9 crore in FY20, Ghatge Motors made a profit of 12.06 crore in FY21, date from regulatory filings by the company shows.

Earlier this year, the company’s auditors resigned, citing delays in sharing financial statements. On 28 February, Abhijeet Bhagwat, a partner at chartered accounting firm PG Bhagwat LLP, sent a resignation letter to the board of directors of Ghatge Motors. According to the resignation letter, in 2020-21, there was considerable delay in providing financial statements and other details required to complete the audit.

“There is inadequate staff available in the accounts department….we have had to spent (sic) considerable man days on this audit. We had requested the management for 50% hike in the audit fees of 350,000 to align with our audit efforts, which until date has not been accepted nor confirmed,” stated the letter, a copy of which has been reviewed by Mint.

After PG Bhagwat resigned, Ghatge Motors appointed Mahesh Kurhade and Company as its auditor. The company’s outstanding dues to Daimler Financial Services stood at 26.34 crore as on 28 August 2020, the company’s new auditors stated in the FY21 annual financial statement. “…the company has not defaulted in repayment of dues to a financial institution, bank, and government except in case of loans for vehicle inventory funding and equipment funding from Daimler Financial Services,” the new auditors said.

A spokesperson for Daimler Financial Services said in a statement that as the Ghatge case is sub-judice “please understand that as a matter of principle we do not comment on pending legal cases.”

In a similar statement, Daimler India Commercial Vehicles said: “Please understand that as a matter of policy, we do not comment on speculation, ongoing investigations or open legal cases.”

Emerald Luxury defaults

In January 2020, senior executives of Daimler Financial Services India urged Thakore to approve action against Mercedes dealer Emerald Luxury Cars for not repaying its dues on time.

“Thakore and the dealer had multiple in-person and telephonic meetings when the dealer was in default. The local management, including team leaders, had suggested legal action but it was delayed on some pretext or other,” said an insider who didn’t want to be identified.

The company only acted after six months, in July 2020, recalling the entire loan of 64 crore.

Unable to repay the loan once it was recalled in July 2020, Emerald sold the dealership to another Mercedes dealer that November, based on a tripartite agreement it inked with Daimler Financial and the second dealer.

Even after the sale, disputes cropped up between Emerald and Daimler on overdue loan repayments. In 2021, Daimler Financial filed an arbitration case in the Madras High Court against Emerald Luxury Cars, and two of its directors: Kanaiyo Thakkar and Khushi Thakkar.

The High Court order issued on 13 August 2021 showed that Emerald had informed the court that sales at both its showrooms—in Ahmedabad and Surat—and work at its service stations came to a halt during the covid-19 lockdown of March 2020. According to Emerald, while the loans were supposed to be paid over several years, the loan recall caused economic duration, forcing it to sell the assets to another dealer.

“I specifically deny that there was any favoritism to me or Emerald; rather we were the victim,” Kanaiyo Thakkar asserted in an emailed response to Mint.

He added that Emerald was awarded a Mercedes Benz dealership in 2017 the automaker insisted the company take loans only from Daimler Financial. Thakkar also said the lender provided finance against assets, and “took huge collateral over and above assets, at (a) high rate of interest, much higher than Indian banks”.

head in the sand

In early 2018, after Thakore moved to Singapore in his new role within the company, he was replaced by Asmaa Jamil, who was earlier posted in Singapore. It was Jamil who found out about the two defaulting accounts, say company insiders.

“She escalated the matter to her seniors abroad and it led to a few internal inquiries as well. But, it did not lead to anything substantial,” said one of the people cited above.

The issues at Daimler Finance have put the spotlight back on lenders and specific individuals trying to kick the NPA can down the road. Loan frauds by some borrowers are also a pertinent issue in the context of the Indian financial system. Although such frauds occur at both banks as well as non-bank lenders, conversations largely occur only on the large defaults perpetrated on banks.

“Although reforms by the RBI have bridged the regulatory gap between NBFCs and commercial banks, only time will tell whether these measures are sufficient to plug the gaps exploited by unscrupulous fraudulent borrowers,” said Sanket Jain, partner at law firm Pioneer Legal.

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