Exactly three years after Anil Ambani-controlled Reliance Infrastructure decided to acquire management control of Pipavav Defence and Offshore Engineering Company, the former has issued an arbitration notice against Pipavav Defence founder- promoters Nikhil Gandhi and Bhavesh Gandhi. The arbitration notice is for indemnity claims aggregating ₹5,440.38 crore.

“Notice has been issued for breach of warranties under purchase agreement by the founder promoters for the acquisition of Pipavav Defence shares,” the company said in a regulatory filing.

According to the notice, which was issued to the stock exchanges on Monday, the arbitration proceedings will be filed at a tribunal “'pursuant to SIAC, Singapore Rules'”.

Along with the promoters, the arbitration notice has been issued to SKIL Infrastructure Ltd, Grevek Investments and Finance Private Ltd and SKIL Shipyard Holdings Private Ltd, all of who have been named as founder promoters of Pipavav Defence.

Legal proceedings

Commenting on the timing of the arbitration, legal sources aware of the case proceedings alleged, “The company has discovered that there have been serious breaches of warranties and representations made by the founder promoters. As per the share purchase agreement, the company is entitled to claim the loss caused, in an arbitration.”

Explaining ‘the breach of warranties’, legal sources pointed out “warranties are assurances of the state of affairs and governance standards of the company and any breach leads to a claim”. Though it is unclear, as of now, what breach of contractual obligations the company is referring to, sources in the know said: “the issue is serious enough for the company to file for claims of over ₹5,000 crore, which is more than double of what the company effectively paid for a controlling stake in Pipavav Defence”. Nikhil Gandhi could not be reached for comments. At the time of the acquisition in March 2015, which marked Anil Dhirubhai Ambani Group's entry into the emerging business of defence production, Reliance Infrastructure had shelled out around ₹2,082 crore for the controlling stake in Pipavav Defence.

“The acquisition was not meant to just buoy hopes to tap into $20-billion defence business over the next five years,” sources said. “The buy helped the company gain a stranglehold in the burgeoning defence sector, since Pipavav Defence was the first company in the country to obtain a contract and licence to build warships.”

However, three years later the arbitration proceedings indicate the deal has started to fall apart. With no fresh shipbuilding orders coming the way of the shipyard, Reliance Defence reported a weak set of numbers for Q3FY18. While revenue declined 55.9 per cent year on year, its net loss widened from ₹133 crore in Q3FY17 to ₹166 crore in Q3FY18.

The current order book of Reliance Naval includes five Naval Offshore Patrol Vessels (NOPVs), (of which two have been handed over), one Cadet Training ship, two oil rigs, and also refits of Naval ships Jamuna, Savitri and Deepak. The company is also working on offshore supply vessels for ONGC, one Panamax Bulk Carrier and 14 Fast Patrol Vessels. The orders are slated to be completed by January 2021.

‘Operational problems’

A shipping industry consultant, who was associated with the yard but declined to be named, said the NOPVs has been delayed. “Reliance took over the yard which was in bad shape. It had a lot of operational problems. How many of the new orders have fructified? Was there no due diligence done at the time of the acquisition?” he asked

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