Business Today

McDonald's fight with 62-year-old Indian businessman: What's it really about?

The National Company Law Tribunal's strongly worded judgement gives Vikram Bakshi the edge in his battle with McDonald's, but the fight is far from over.
By Sumant Banerji        Print Edition: August 13, 2017
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Vikram Bakshi in front of a McDonald’s outlet in Delhi-NCR. Picture: Vivan Mehra

For 62-year-old Vikram Bakshi, who owns half the stake in the US fast food restaurant chain McDonald's North and East India operations, July 13 (2017) might have been one of his best Thursdays ever. On this day, the National Company Law Tribunal (NCLT) in Delhi ordered his reinstatement as the managing director of Connaught Plaza Restaurants Pvt. Ltd (CPRL), the 23-year-old 50:50 joint venture (JV) between Bakshi and McDonald's India Pvt. Ltd (MIPL). CPRL is the master franchisee for MIPL in North and East India.

Bakshi and McDonald's have been at loggerheads ever since he was unceremoniously ousted as the Managing Director of CPRL in August 2013.

"The proceedings of the meeting of the Board of Directors held on 06.08.2013 relating to re-election of Mr Vikram Bakshi as the Managing Director of the Company are set aside and declared illegal, unjust and mala fide," the judgement says. "The status of Mr Vikram Bakshi as Managing Director is restored."

What led to McDonald's loss of trust in its partner who had once been the very face of the brand in India? Bakshi's real estate business was part of the problem. McDonald's alleged he had leased out his property to a rival company, hinting at a conflict-of-interest scenario.

He was also accused of financial bungling at CPRL. The US firm said Bakshi had pledged 51,300 of his CPRL shares to get a loan of Rs 20 crore so that his company Ascot Estate (Manesar) Pvt. Ltd could develop the Savoy Outlet Mall and service apartments in Manesar. McDonald's said he did not take the company's approval before pledging his shares. It also pointed at a 2007 transfer of Rs 7 lakh from the company's account to his group company called Vikram Bakshi and Company Pvt. Ltd. This action further "highlighted glaring inadequacies with respect to internal control systems", Bakshi's focus on his other businesses and the directorship of 25 other companies. In brief, McDonald's said Bakshi was being selfish and not devoting enough time to CPRL.

NCLT's 134-page ruling is scathing and quashes almost all these allegations. It also seeks to avoid a repeat of August 2013 by appointing former Supreme Court judge Justice G. S. Singhvi as an administrator with the power to vote in CPRL's future board meetings. Justice Singhvi can also, if needed, alter articles of association of the JV to avoid any further attempt at ousting Bakshi as the managing director unjustly and unfairly.

The kid gloves might have come off only after that fateful August board meeting, but the first sign of trouble was there in 2008. It was when McDonald's offered to buy Bakshi's stake for $5 million and later for $7 million (see The Timeline). In response, Bakshi waved a valuation done by Granton Thornton that put the enterprise value of CPRL at $200 million and demanded $100 million for his shares.

As the litigation intensified after August 2013, Bakshi approached the Company Law Board (CLB) against his dismissal while McDonald's went to the London Court of International Arbitration and a second round of bidding for each other's shares started. In early 2014, Bakshi offered to buy McDonald's stake in the JV at a net asset value of Rs 150 crore. The US firm shrugged it aside and countered with a Rs 48-50 crore offer for Bakshi's stake. The latter then insisted on a fair market value and offered to sell his stake initially for Rs 2,500 crore and then for Rs 1,800 crore. These did not elicit any response from McDonald's, and finally petered out.

CPRL Bears the Brunt

CPRL, which runs 168 outlets for McDonald's India, has borne the brunt of the fight between the partners. Since 2013, the firm's expansion plans have come to a grinding halt, and it has faced an employee exodus and loss in market share. Its supply chain and quality control have gone haywire, and profitability has nosedived.

After opening 27 outlets in 2012, CPRL came up with 14 in 2013 against a target of 35, nine in 2014 and three in 2015. Last year saw the opening of just one outlet in Ajmer, which was under construction for three years. The time taken to start an outlet has also gone up from four months in 2012 to 12 months in 2014 to 16 months in 2015. Not a single outlet has been opened so far in 2017. Instead, 43 of the firm's 55 outlets in Delhi-NCR were shut down in June as they failed to renew eating house licences.

Now that he is back at the helm, Bakshi says undoing the damage suffered by the brand over the past four years would be a Herculean task. "My priority is to bring CPRL back to where it was in 2013. It was a profitable, fast-growing company at the time but today, it is a pale shadow of its former self," he says, sitting at CPRL's Jor Bagh office in Central Delhi. "I have to get a grip on the problems in operations and tackle the issues of food safety and quality. But first, I have to re-open the restaurants which have been shut down. This company is my baby. I do not need any additional motivation to set the house in order."

Growth in South, West

In stark contrast, Hardcastle Restaurants Pvt. Ltd (HRPL), which manages McDonald's franchise in South and West, is going through a purple patch. Its revenue has grown at an average 20 per cent per annum over the past seven years and seems to be getting better. "For the past eight quarters, we are the only brand in the quick service restaurants category that has positive same-store sales year on year. Even during the demonetisation-affected November quarter, we grew at 5 per cent," says Amit Jatia, Vice Chairman at Westlife Development Ltd of which HRPL is a subsidiary. "We are looking at doubling our base every three to five years, and the number of outlets will grow from 258 to 450-500 with an investment of Rs 700-750 crore."

HRPL's strong growth underlines the potential that CPRL has missed although in 2012, both companies were roughly in the same bracket. Bakshi says CPRL had planned to open at least 100 new stores during 2013-17, which could not happen.

One fundamental difference between the two firms is that McDonald's sold its 50 per cent equity in HRPL to Jatia in 2010, making it the sole owner of the franchise. HRPL posted a profit the very next year. Under Jatia, its revenues quadrupled between 2009-10 and 2016-17, from Rs 274 crore to Rs 930.8 crore (see graphics). His cordial relations with McDonald's also helped him experiment with stores and the menu. For instance, he has brought in some distinctly desi flavour in tune with the local palate. Given the strained relations, this kind of gourmet freedom was missing at CPRL.

Jatia regrets the state of affairs in Delhi but does not think it has affected McDonald's overall image. "I do not believe the brand has suffered in India. If that had been the case, we would not have done so well," he says. "Sure, there are problems in North and East, but it is temporary. The day these issues are resolved, there will be dynamic growth in those regions as well. I will not speculate on whether I am interested [in CPRL]. That is for McDonald's to answer. We will talk when the time comes."

More Hurdles Ahead

Bakshi's reinstatement as the head of the company does strengthen his case, but it is just one chapter in what promises to be a long-drawn-out legal battle. McDonald's has the option to file an appeal against the NCLT ruling in the National Company Law Appellate Tribunal (NCLAT). Post that, either of the parties can go to the Supreme Court. Given the snail-paced judicial system that weighs the country down, it may mean decades before a final binding verdict comes in.

A verdict on the arbitration proceedings in the London Court of International Arbitration is also on the anvil. It will help Bakshi if that goes in his favour, but a contrarian ruling will complicate matters.

"This is by no means the end of the road. McDonald's has many legal options to seek a quashing of the NCLT order. It will surely file an appeal against it at NCLAT," says a lawyer requesting anonymity. "This judgement does tilt the scales in favour of Bakshi and based on this, his lawyers will argue strongly in other forums. But ultimately, the partners could be better off settling the disputes among themselves."

Bakshi, too, is under no illusions of a speedy settlement. "Its [McDonald's] strategy is to play the waiting game and bleed me out, but I have also dug in," he says. "I have won the battle, but the war is still on. But it has given me the confidence to continue my fight." ~

@sumantbanerji

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