E&Y to pay 35 million dollars to Bain Capital in Lilliput Kidswear fraud case

Ernst & Young (E&Y) has been accused of providing shoddy advice to private equity major Bain Capital to invest in the Indian firm Lilliput Kidswear. Now it has to pay 35 million dollars (Rs 235 crores) to settle a Massachusetts lawsuit against it. The 2014 lawsuit alleged that EY’s auditing helped an accounting fraud and sought damages from the consulting giant. Bain Capital is said to have lost 60 million dollars (Rs 402 crores) in Lilliput in which it had acquired a 31 per cent stake in 2010.

This out-of-the-court settlement talks, now at an advanced stage, will set a precedent for risk investors who have lost money to corporate fraud in Asia’s third largest economy. The final settlement figure will be in the range of 50-60 per cent of the claim raised by Bain.

The settlement talks put a stress on accountability factor while advising in investments into privately held companies in India. Bain Capital and the other private equity fund TPG wrote down their investment in the New Delhi-based Lilliput to zero after a whistleblower exposed inflated revenues of the company. Both the firms had invested together 85 million dollars (Rs 569 crores) in Lilliput in separate transactions acquiring 45 per cent stake six years ago.

EY is the world’s third largest professional services firm after PwC and Deloitte. Of late, private equity firms have become more aggressive on due diligence of target companies after a string of investments went awry in recent years. Private equity firms which have provided long-term capital in excess of 80 billion dollars (Rs 5,361 crores) to Indian companies in the last decade have several unhappy experiences. Many investors such as Goldman Sachs, NEA, New Silk Route, SAIF, India Equity Partners among others have landed in trouble because of their promoters.