Beyond the Rs 35 crore: Why MapmyIndia's governance crisis won't end here

Even if MapmyIndia gives up its plans to invest Rs 35 crore in the business-to-consumer (B2C) venture of its former CEO, market analysts say it won't wash away the stains on the company's reputation or fix its deeper governance problems.

The controversy stems from CE Info Systems' recent exchange filing about its CEO Rohan Verma. According to the filing, Verma would leave MapmyIndia to start a new business-to-consumer (B2C) venture. What caught investors' attention was the investment structure: CE Info Systems, MapmyIndia's parent company, would invest in this new venture through two channels—first taking a minority 10% stake for Rs 10 lakh, and then providing a much larger investment of Rs 35 crore through compulsory convertible debentures (CCDs). This meant Verma would retain 90% ownership of the venture while accessing significant funding from the listed company.

CCDs are a combination of debt and equity that can later be converted into equity shares. They are commonly used by startups seeking capital while maintaining control over equity distribution.

Shriram Subramanian, Founder of proxy advisory firm InGovern Research Services, cuts through to the real issue. "The promoters have misunderstood that the Rs 35-crore investment to support the B2C business is the concern for minority shareholders. On the contrary, it is the 90% promoter ownership of a business that was incubated and will derive all resources from the listed company, that is the concern," he points out.

He further warns that "investors will always suspect that funds from the listed company will be used on the sly."

This structure means any profits would benefit the promoter, while the listed company bears the operational costs and risks.

Deepak Shenoy, Founder and CEO of Capitalmind, a SEBI registered portfolio manager, drives home the governance concerns "The issue is of governance because now shareholders cannot participate in the growth of the consumer business. Therefore, most of the value added that's created in the consumer business is lost essentially."

For MapmyIndia, founded in 1995 by husband-wife duo Rakesh Verma and Rashmi Verma, the fallout has been severe. Subramanian delivers a stark assessment: "Reputation and goodwill with investors built over 30 years has now been lost. Investors that consider good governance will not touch the company with a bargepole."

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Market impact

The market's verdict was clear. CE Info Systems' shares hit a 52-week low of Rs 1,534 during Tuesday's trading, before closing at Rs 1538.65 on BSE. The decline extended losses from Monday, following the weekend announcement and subsequent conference call. They were trading at Rs 1,560.75 at 12:20 pm on Wednesday.

During the Monday conference call, the company described its consumer business as a "distraction," suggesting the separation was intended to protect MapmyIndia's profit and loss statement from the new venture's losses. This comes as MapmyIndia reported an 8.2% drop in consolidated net profit at Rs 30.3 crore, despite revenue from operations climbing 14% to Rs 103.7 crore in the quarter ended September 30, 2024.

While Rohan Verma told The Economic Times that he'll fund the B2C venture himself instead of taking the Rs 35 crore from the parent company, experts say the company's approach to its consumer business needs rethinking.

Queries sent by YourStory to Rohan Verma were unanswered at the time of publishing this copy.

Alternative solutions

The company's rationale for separating the B2C business hasn't convinced investors. Shenoy dismisses the current reasoning as weak and points to the Jio Financial-Reliance model as a better solution: "If you wanted to separate it because it has low margins, you should demerge it and get all shareholders to own a part of it. Those shareholders can then sell those shares whenever they want."

He elaborates that a demerger would allow the business to develop independently and raise additional capital without impacting the parent company's margins. "The business can take new hues and not be consolidated with the current business because it is demerged. Therefore, there is no fear that those margins will come and impact the parent company. You will be able to build that business independently and raise more money independently," he explains.

Subramanian says, "If they wanted to spawn a B2C business it should have been spun off as a 100% subsidiary and external capital raised in that subsidiary." This structure would ensure the venture remains under CE Info Systems' control, rather than being primarily owned by Rohan Verma as initially proposed.

He also emphasises accountability: "The board of directors, especially the independent directors, are accountable for signing off on such a structure."

The copy was updated to correct a typo.