E X C L U S I V E

How the Local Partners were Cheated by the Gujarathi Business Tycoons

June 8, 2003

Investigation is going on against the Indian businessman and his family members who have allegedly cheated their Arab business partners in a multi million-hotel project and other businesses. The Gujarathi businessman was one of the main partners with an influential business group in the hotel project. The project involved a total investment of $26.25 million (Equivalent to more than Hundred Crores of Indian Rupees?) financed with an equity capital of $7.5 million. Te founder shareholders including the Gujarathi businessman had subscribed to 60 per cent of the share capital ($4.5 million).

Due to the global situation tourism is not an attractive business. Despite the hype generated to make money from the state exchequer in the name of tourism promotion, the hospitality industry is not doing great business. However, building a five star hotel proved to be a lucrative venture for the Indian business partners. The government also supported the project with a soft loan of $7.5 million and there is a commercial borrowing of $11.25 million from banks. Even though the company came out with a public share issue, it could hardly attract any serious investors as most of the big hotels listed on the stock market were showing poor performance. The hotel which planned to offer different room styles to the tourist and business segments did not succeed as the September 11 incident and the subsequent war in Iraq adversely affected the GCC hotel industry. The group tied up with the Singapore based hotel chain, which manages several premium properties in South East Asia. The investment companies and smart investors did not subscribe to the issue due to obvious reasons.

The hotel project is promoted by an Investment company promoted by a member of an influential family, a private company owned by the Gujarathi businessman, who is also an international award winner and his two sons in their individual capacity. Another prominent Non Resident Indian, pension funds and other public investment trusts also invested money in the hotel project.

The hotel introduced a new concept in the Middle East hotel industry . Managed by a Singapore-based Hotels chain, the hotel adores contemporary Arab architecture and is the first hotel from the Singapore group outside Asia offering 80,000sq. m of lush green palms, water ponds and a private beach. The hotel, offers a choice of 161 modern deluxe rooms, private villas equipped with hotel services, swimming pools, tennis courts, art gallery, boutique, spa facilities and a brasserie style restaurant with open kitchens. The hotel has designed two exclusive semi-private rooms for up to 28 persons, which is reserved for business luncheons and romantic dinners. Honeymoon travellers have been one of the targeted groups. The hotel has been providng 50 per cent discount to attract customers.

However, one of the reasons for the investigation is an allegation that the construction cost of the hotel has been highly inflated and many items, which are shown as imported specially for the projects are procured from the local market! It is learned that the project was handled by a construction company with strong links to the Gujarthi business family. Surprisingly, it is alleged that the Gujarathi businessman who took a leading role in promoting the hotel project hurriedly sold his share and got out of a loss making venture leaving the financial burden of liabilities and bank borrowings to the local partners! Realizing well that the hotel sector is not as lucrative as initially projected for unknown reasons, the withdrawal of the original promoter at a critical stage would definitely put the rest of the partners in difficulty. "When things are doing well nobody noticed the inflated project cost. But when the hotel incur losses as happened within the first six months of operatiion, the local partners felt the difference."

Especially if the hotel project has a debt exposure to commercial banks. Banks are already facing serious bad loan problems and the new thrust on corporate governance makes it difficult to write off such loans. Definitely serious questions are asked about the non- profitable investment made by the bank in the project! Once the project is completed and the construction activity stopped, the Indian partner smartly got out of the project. As happened in many other new companies, which came out with public offerings, the hotel is said to be incurring reasonably good loss. It is learned that the award winning Indian businessman is not taken in custody due to health reasons. He is aged and suffers from a number of diseases. Complaints against another investment in a food processing company are also heard. There are complaints that the project did not yield much profit as expected. According to the grapevine, the search light of the regulator is now focused on other prominent Indian businessmen.- Watch this space. -keralamonitor.com