Lilliput case-study – A warning for India investing

Last September, less than two weeks after

an IPO plan was approved, the private equity owners of Lilliput Kidswear, Bain Capital and TPG got an anonymous call stating irregularities in Lilliput’s accounts. This set off a chain of reactions. Though India’s retail sector is open for foreign investment… 100 per cent in single brand, investors’ woes continue as corruption, scandals and delayed policy decisions coupled with flagging growth and high inflation affecting the investor confidence.

Bain Capital and TPG accused India’s largest kids’ wear company of fudging accounts, in a case filed with the Delhi High Court. The court in November appointed SS Kothari Mehta & Co to conduct an independent audit of Lilliput’s accounts, but the report remains incomplete since the company refused to co-operate. The Lilliput vs PE Investor’s case is a classic example of how Indian entrepreneurs are not ready to successfully team up with a foreign private equity group, which is increasingly becoming common in Asia’s third largest economy.

While PE Investors Bain and TPG’s reputation in India is at stake with Narula accusing the firms of crippling the company, for the Indian private equity market the danger is even larger because if an accounting fraud is proven, it would be another red flag to investors.

The excitement of private equity opportunities in India, which reached fever pitch in 2007-2008, has crumbled. In 2008, 49 private equity funds with a focus on India raised USD 13.9 billion (over Rs 76,000 crores), according to Preqin, an industry data provider. Last year the number of funds dropped to 27, raising just USD 5.3 billion (over Rs 2,9000 crores). For India specific funds, the number of companies invested in dropped to 38 last year from 155 in 2007, according to Thomson Reuters data.