Zorvan Holdings reports cash of Rs 3,000 crore earning 4% alongside debt of Rs 2,500 crore costing 11%. Why is that a red flag, and what would you check?

Nobody sensible pays 11% to borrow while earning 4% on their own cash, so either the cash is not free to use or capital is being misallocated. The overlap costs Zorvan Rs 175 crore a year before tax, about 29% of profit after tax. Check where the cash sits and whether it is pledged. Here Rs 1,000 crore is lien-marked for a group company, so the net cash company is really carrying net debt.

Imagine a neighbour with Rs 10 lakh in a savings account at 4% who is also paying 11% on a Rs 8 lakh personal loan. You would ask why he does not repay the loan. He might have a reason: the money is promised to someone, it is locked in a deposit he cannot break, or it is not really his. A company that holds costly debt and cheap cash together is in the same position: the arrangement loses money every year, so the cash is either not free or the management is not minding the shareholders' money.

Size it. If Zorvan used Rs 2,500 crore of its cash to repay all the debt, it would save Rs 275 crore of interest and give up Rs 100 crore of income: Rs 175 crore a year before tax, Rs 131 crore after, about 29% of the Rs 450 crore profit. That is a large cost to carry without a reason.

First, where the cash sits: parent or subsidiary, India or abroad, and whether a listed subsidiary with minority holders owns it. Second, whether it is free: notes on restricted cash, lien-marked deposits, margin money and escrow. Third, whether it is real: does the interest income match the balance through the year, and do operating cash flows over several years add up to a pile this size? Fourth, the debt: prepayment penalties, covenants, or a seasonal working-capital need. A low yield on reported cash is itself a warning, because cash that earns less than a plain bank deposit should makes you ask whether it was there all year. Compare the yield with what term deposits paid over the period, and confirm current rates rather than relying on memory.

The Rs 1,000 crore of lien-marked deposits explains part of the puzzle, and badly. That money backs a promoter group company's loans: if that company defaults, the banks take Zorvan's deposits. Treat it as tied up, and the reported net cash of Rs 500 crore becomes net debt of Rs 500 crore, with a Rs 1,000 crore guarantee to a related party sitting off the balance sheet. The Rs 500 crore abroad is a milder issue: usable, but bringing it home costs tax and time. Counting only free Indian cash, net debt is Rs 1,000 crore, 1.1x EBITDA.

The conclusion: the red flag was right to raise. The cash is partly not Zorvan's to use, and the reason is a related-party guarantee, a governance question as much as a balance sheet one. A benign answer, such as cash trapped abroad, would have cost Zorvan only tax; this answer puts minority shareholders behind a group company's lenders.