McDonald’s which entered India in 1996 and now runs 319 outlets, sacked Vikram Bakshi in July on the grounds that his diverse business interests were diluting his focus on McDonald’s

Vikram Bakshi’s attention divided, not to extend term as MD: McDonald’s tells CLB

ET Bureau Oct 4, 2013, 04.30AM IST

By Shubham Batra

NEW DELHI: US burger chain McDonald’s has told theCompany Law Board that it decided not to extend Vikram Bakshi’s term as the managing director of one of its joint ventures in India because he has not been devoting enough time for the business. Bakshi has not been able to devote substantial time in the development and performance of the business due to his association with 25 other companies promoted by him and his family, McDonald’s India said before the Company Law Board (CLB) on Thursday. Bakshi had approached the board after McDonald’s removed him as the managing director of Connaught Plaza Restaurants, the joint venture that runs McDonald’s outlets in north and east India, on August 6.McDonald’s in India had signed a 25-year joint venture agreement with both Bakshi and Amit Jatia, its partner for west and south India, which would run till 2020. This changed in May 2010 when McDonald’s decided to sell off its shares in the Jatia venture in favour of its Indian partner.

McDonald’s had earlier also alleged that Bakshi committed breach of agreement by pledging his shares ofConnaught Plaza Restaurants with financial institutions to raise funds for his other hospitality businesses.

Refuting all the charges levelled against him, Bakshi has said that the McDonald’s has adopted “double standards” while dealing with its two partners in the country.

In a rejoinder filed with the Company Law Board, Bakshi has argued that his counterpart in the West and South region, Jatia, is a director of 23 companies, including Fame IndiaInox Leisure and Sterling Resorts, a person privy to the matter told ET. Hence, “MIPL’s allegation that Bakshi has purported conflicting business interests is misplaced and misconceived”, the person said.

Bakshi has pointed out that West Pioneer Properties (WPPL), in which Jatia is executive chairman, operates a mall in Mumbai with more than 20 restaurants, including Kentucky Fried Chicken ( KFC), which is the biggest competitor of McDonald’s in India and globally.

Bakshi argued that this shows the double standards maintained by McDonald’s in handling its two similar joint venture agreements.

On the US firm’s allegation of Bakshi pledging the joint venture’s shares, he has argued that there are documents to show that the transaction was consummated with the said bank and he is in possession of the original certificates of shares, the source said.

Bakshi, in latest affidavit, has also highlighted that while McDonald’s charged CPRL high royalties for using the brand name and for serving food and beverages of the US giant, it never gave CPRL royalty for selling India-developed products includingi McAloo Tikki and Pizza McPuff in the Middle East and South East Asia.


Vikram Bakshi & Amit Jatia: A tale of McDonald’s two franchise partners in India

John Samuel Raja D & Chaitali Chakravarty, ET Bureau Sep 24, 2013, 04.25AM IST

McDonald’s entered India in 1995 via two partners. It played ball with Amit Jatia, but is playing hardball with Vikram Bakshi. The way the two partnerships have unravelled—financially, structurally, behaviourally—are as different as chalk and cheese.

Vikram Bakshi is not lovin’ it. For 18 years, he has been the corporate face of McDonald’s in India, and now his American partner, claims Bakshi, wants to shame him and then swallow him, that too without giving him his due.


In contrast, Amit Jatia is lovin’ it. On a video conference call from his office in Mumbai, Jatia, McDonald’s other partner in India for the same duration, leans back into his chair, and chimes that his relations with McDonald’s are steadfast, the business is growing well and the stock market is noticing.

For the $27.5 billion company that prides itself on churning out burgers and fries with immaculate consistency, the contrast in the current state of being of the two men who have built its business in India is noticeable.

If Bakshi is all outrage, Jatia is all poise. If Bakshi speaks of McDonald’s with acrimony, Jatia speaks of amiability. If Bakshi accuses Jatia of instigating McDonald’s, Jatia politely declines comment. If Bakshi is counting the wealth he could lose because of the hostilities with McDonald’s, Jatia is basking in the glow of new wealth.

Those feelings of contrast are not new, though. They have been simmering in the cauldron of corporate actions—on the part of all three sides—over the last five years. “It’s clear that they (McDonald’s) don’t see a future with Bakshi,” says a former McDonald’s India official, on the condition of anonymity.

A restaurant industry veteran, also speaking on the condition of anonymity, adds: “They (McDonald’s) would rather have a subservient Indian partner like Jatia for one half and manage the other half on its own,” he says. The current state of flux traces back to 1995, when McDonald’s entered India through an arrangement that was not its preferred way of installing its golden arches here, there and everywhere.   Difference in Structure

McDonald’s, globally, does not like to own its ventures or operate them. Its preferred model is a low-risk, low-hassle one: licence out its good name for a fee to a local player; on top of that, charge a royalty linked to sales. So, the more the outlets sell, the more money McDonald’s makes. Of its 34,000 outlets in 118 countries, 80% are through this franchise route.

But when it entered developing countries, McDonald’s often did so via the ownership model. A case in point was India, where it entered in 1995, with two 50:50 joint ventures, one with Bakshi and the other with Jatia. “India then was not a hot market that it has become in the last few years,” says Harminder Sahni, managing director, Wazir Advisors, a retail consultancy.

Yet, even in India, McDonald’s hedged its bets. Rather than have only one partner for all of India, it opted for two partners and carved out the country among them. Bakshi was given north and east, Jatia west and south. This geographical responsibility was largely synonymous with where their other business interests were located.

Both Bakshi and Jatia had a footprint in real estate. “A strong brand and leader like McDonald’s, generally, won’t like to have a partner from the foods or the QSR (quick service restaurant) business wherein they discuss and debate every issue,” says Sahni. “The partner may believe that it too knows the business while they don’t. So, it’s better to have non-industry partners.”

Although Bakshi is widely known as the corporate face of McDonald’s in India, he is a player in real estate in the National Capital Region, and beyond. Says a real estate consultant, on the condition of anonymity: “He is overtly aggressive, obsessed with nitty-gritty. He lacks vision as a business leader and is hard to do business with because he cites outrageous terms.”

Bakshi has a scattered portfolio of properties that pivot around the hospitality business: for example, the Savoy Outlet Mall in Manesar, the Savoy Greens in Karnal…In Delhi, he owns, among many properties, the Mohan Dev Building on Tolstoy Marg, the building in Connaught Plaza that houses Wimpy—the fast-food joint that was, in some ways, a precursor to McDonald’s in the city. “Amit is a shrewd businessman and Vikram an emotional businessman,” says the restaurant industry veteran quoted earlier.

With both, McDonald’s signed a 25-year joint venture agreement, which would run till 2020. Apart from sourcing from the same suppliers and coordinating for marketing spends, the two JVs did not interact much. Structurally, there was no difference between the Bakshi and Jatia ventures in the first 15 years.

This changed in May 2010, when McDonald’s decided to sell off its shares in the Jatia venture in favour of its Indian partner.

This was the exact opposite of what, says Bakshi, McDonald’s was asking of him around the same time. A petition filed on September 9 by Bakshi with the Company Law Board (CLB), the first port of call for corporate disputes, says that twice in 2008 McDonald’s offered to buy him out, but he refused.

According to Bakshi, McDonald’s is trying to buy him out again, this time at the behest of Jatia. That is the reason why, he adds, his tenure as managing director has not been renewed (announced via a public notice on August 30), why McDonald’s is citing irregularities and is objecting to certain transactions done with Bakshi’s other businesses.


To a detailed questionnaire, Danya Proud, director of corporate relations at McDonald’s Asia Pacific Middle East & Africa, replied: “Thank you for your inquiry. However, as we have stated previously, this is an internal matter, and we have no further comment beyond what is outlined in the public notice (stating that Bakshi was no longer MD).”

In a letter dated September 3 to McDonald’s, Bakshi has accused the company of “discriminatory and oppressive behaviour” to “fiscally disable us by hook or by crook, eventually forcibly causing us to sell out” and that it has “entered into a conspiracy” with Jatia.

Difference In Strategy

In May 2010, in the 15th year of its 25-year pact, McDonald’s entered into a new arrangement with Jatia. It sold its 50% stake back to Jatia, and that JV moved to the American company’s preferred mode of franchise fee and royalty—a transition McDonald’s has been making the world over, with India (the Bakshi venture) and China being the exceptions in the developing world today.

Filings with the Ministry of Company Affairs show that McDonald’s received next to nothing for that stake sale. It invested Rs 108 crore (Rs 15.5 crore as equity and Rs 92.5 crore as preference shares) in the Jatia venture, Hardcastle Restaurants.

It realised just Rs 10.8 lakh and booked a loss of Rs 107.9 crore.

When asked why McDonald’s sold cheap, Amit Jatia, vicechairman of Westlife Development, the company that now controls Hardcastle, told ET: “It is not completely correct.” He declined to elaborate, only adding: “We would not like to revisit this. It’s a private deal between us and McDonald’s.”

On August 16, 2013, Jatia effectively merged the McDonald’s business into a listed shell company of the promoters, Westlife Development. The Westlife stock has shot up from Re 1 in June 2009 to hit an all-time high of Rs 416 on August 21, 2013, amid thin public shareholding and trading among the promoter family, raising concerns of insider trading and price rigging. “Many penny stocks exhibit these characteristics and are kept listed as shell companies for the purpose of reverse listing other companies,” says Shriram Subramanian, founder of InGovern Research Services, a proxy advisory firm. “I doubt Sebi and the stock exchanges scrutinise penny stocks rigorously.”

Subramanian points out that there were inter-se promoter transfers at around Rs 40 per share in March 2012 and Rs 150 in December 2012, against the traded price of between Rs 10 and Rs 40. “The inter-se transfer at such a high price may have resulted in capital gains tax to the individual, had the trades not been executed on the stock exchange,” he says.

According to Jatia, the transfers were part of the promoter group restructuring as a part of the overall consolidation process. “I don’t see any big deal with it,” he says. “I don’t need to explain to the public.” Asked whether it was done to bypass Sebi’s threshold norms for illiquid stocks, he says: “110%, it’s not done to bypass Sebi.” On September 28, Westlife, in which the promoter group currently owned 62% as of June 30, had a market capitalisation of Rs 5,448 crore ($872 million), largely derived by unlocking value.

Difference In Valuations

This has become a valuation benchmark of sorts for Bakshi to discuss any exit. His CLB petition says that McDonald offered to buy him out for $5 million in August 2008 and $7 million in November 2008. In 2009, Bakshi commissioned Grant Thornton to value the JV, and it computed a price of $331 million.

In the same petition, Bakshi says the recent action by McDonald’s is intended to “coerce” him to sell. A clause in the JV agreement suggests that the removal of Bakshi as the MD gives McDonald’s the right to buy his stake. This clause states: “(McDonald’s can buy if) …partner terminates or suffers the termination of his relationship as managing director of JV company, other than by reason of his death or incapacity.”

Besides the cal l option, McDonald’s could also invoke a clause in the JV agreement which prescribes a valuation formula for share transfer among partners and which it waived off for Jatia.

Unlike traditional valuation methods, which are grounded in the future value of a business, the underpinning of this formula is historical financial metrics of the JV.

A back-of-the-envelope calculation done by ET shows this formula values the Bakshi JV at about Rs 400 crore, way below his expectations.

In the CLB petition, Bakshi says this business has a long gestation period. “We are willing to wait for another seven years,” says an official close to Bakshi not wanting to be named. “By that time, the valuation would reflect the correct value. The first 15 years is to get the business model right, thereafter the cash flow increases.”


Difference In The Future

After acquiring 100% control, Hardcastle has turned around, with outlets and sales nearly doubling. From a loss of Rs 19 crore in 2009-10, amid a growing topline, it has posted a net profit of Rs 18.8 crore, Rs 42.5 crore and 30.8 crore in the three following years. In the process, it has overtaken the Bakshi venture in number of restaurants, turnover and profitability.

Buying out McDonald’s has also helped Jatia do things that were not possible earlier. In the 50:50 venture, much of the funds for expansion were coming from McDonald’s, as also letter of comfort for banks to avail working capital loans. For example, in the Bakshi JV, of the Rs 206 crore capital, only Rs 15 crore came from Bakshi. Likewise, in the Jatia venture, till May 2010, only Rs 16 crore of its total capital of Rs 124 crore came from Jatia.

Much of the rest came from McDonald’s, that too in the form of preference shares, on which the Indian JV was paying a dividend of bank rate (currently 10.25%) plus 3 percentage points. This dividend payment, plus other interest costs, ate into the bottomline. After McDonald’s exited the Jatia venture, in 2010, three investors put in Rs 240 crore into a group company that indirectly controlled Hardcastle, which was used to make Hardcastle debt-free.

Bakshi envisioned something similar for himself. In the past, he’s been pushing McDonald’s into expanding faster and also taking decisions proactively. Some of these decisions have not gone down well the American company: like opening two vegetarian restaurants in pilgrimage areas and allowing other food brands on the top-floor of a Noida outlet, its largest in India, to name just two. “Somewhere, down the line, Vikram became too passionate about the brand,” says the restaurant industry veteran quoted earlier. “He forgot that the brand that gave him stature and opened all doors was ultimately not his.”

In his letter to McDonald’s, Bakshi says that McDonald’s plan is to buy his stake and give Jatia control over all India. He claims that Jatia even approached him in 2011 for such a deal. “It’s not my business to comment; I will not comment,” says Jatia, on whether he is interested in Bakshi’s part of the business. Meanwhile, the rift between Bakshi and McDonald’s is set to grow. The 25-year agreement between the two is not an exclusive one, which means McDonald’s can appoint another franchise.

Also, while the JV agreement allows for arbitration in London, the Bakshi camp is saying the articles of association of the company does not allow for arbitration, and any dispute will have to go to the Company law Board and then the Indian courts.

All this at a time when the Indian market is growing. With around 320 restaurants and combined turnover not more than $300 million, the contribution of Indian market to McDonald’s global revenue is minimal. But the growth potential is huge— a Crisil report says it will double between 2012-13 and 2015-16, to Rs 7,000 crore. “McDonald’s is set to be a far bigger business in the coming years, and local partners have done a lot to set it up,” says Wazir. “And that’s what the whole fight is all about.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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