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‘A third of top 500 firms’ booksdodgy’
The report shows over a third of India’s top 500 companies, including those in the top 100, are “managing” their accounts.
Written bySubhomoyBhattacharjee| New Delhi |Updated: April 10, 2015 4:42 am
A forensic report prepared for the Serious Fraud Investigation Office (SFIO) shows over a third of India’stop500companies, including those in thetop100, are “managing” their accounts.
It finds thatcompanieswhere promoters hold more than 50% oftotalshareholding are more likely to take such steps to impress markets with their performance. Both domesticcompaniesand subsidiaries of multinationals listed inIndiashow similar trendswhen their shareholding is concentrated in a few hands.
The report by rating agencyIndiaRatings, part of the Fitch Group, is the first which raises questions on the overallhealthof thecorporatesector. It is buttressed with extensive statistical analysis.
It has created consternation within thegovernment for two reasons. The reportnotesthat almostall companieswhosefinancialnumbers are questionable underreport tax liabilities. Also,allsuch efforts have been approved by theboardof directors of thesecompanies, raising questions about the effectiveness ofcorporategovernance norms in some boardrooms.
Speaking on the report, lead author Deep Mukherjeenotes“the possible incentives of managementto manage these earning numbers could be to meetmarketexpectations”. The agency analyseddatafor BSE 500companiesgoingbackup to12years to figure ways how the numbers are managed.
The report also states that audit by fourbigfirms of these 500companiesis not necessarily superior to that of home grown auditors to catch these aberrations. Atop revenuedepartmentofficial told TheIndianExpress they are also studying the report and have commissioned an agency to examine the revenue angle further.
Among sectors,FMCG, pharma and automobiles are more likely to see such aberrations since thesecompanieshave significant controls over theirsupplychainpartners. “In aneconomicdownturn, these weak players (partners) may be made to bear the brunt of the slowdown so as to insulate the earnings of large players,” the report stated.
“Questionable operational practice” followed by manycompaniesalso include those on depreciation, interestcost,employeecostand selling and distribution expenses besides their tax scores as shown in theirfinancialstatements.
Someautocompaniesresortto “channel pushing, that is supplying finished goods to distributors so as to book higher revenue during year or quarter end”. It argues for caution in giving weightage to inter-company loans. “One may be cautious of companies, where a significant portion of the promoter holding is pledged for promoter loans.”’
There are significant numbers of black sheep in the BSE 100listtoo. While it does not offer any details, an independent source, analysing thefinancialstatement,notesthat thetotalnumber of suchcompaniesis above 15.
“The factthat acorporatehasmarketcapitalisation in thetop100 does not necessarily mean that the quality offinancialreporting is among thebestin the class… many mega cap companieshave entered intofinancialdistress or have fallen from grace with alleged corporategovernanceviolation,” the report states.
Using stiff statistical tests, the report finds that the common “discrepancy” resorted to by some of thesetopcompaniesis in reporting their interest payments due and of their profit after tax.
Surprisingly,companiesthat are smaller, the mid caps, tend to have better quality of reporting theirfinancialnumbers. “Corporates ranking between 101-200 inmarketcap have relatively the least discrepancies infinancialreporting, as per the statistical tests.”
The report builds on an analysis made in a Sebi-commissionedresearchprojectin 2013 that looked into earnings,managementpractices ofIndiancompaniesas well as an Indira Gandhi Institute ofDevelopmentResearchpaper.
Both surveyed a larger number ofcompaniesbut for less number of years to arrive at similar conclusions.
Allthese reports argue that when the economy takes a nose dive, thesetrendsrise. “Since some of these earnings measures form components of credit metrics and any deterioration of metrics could trigger a covenant breach”, the Ind-Ra report states.
The antidote to keepcompaniesoff such mischief, theIndiaRatings reportnotes, is to bring in more pension,insuranceand mutual funds into the boardrooms.
Deep Mukherjeenotesthat since promoters often have large pledged shares “they could present a less than accurate representation of thehealthof the company” to keep up share prices. Institutional investors, as the reportnotes, will not accept such window dressing.
Because of the sensitivities involved, the credit rating agency has qualified its report at several places. “Flagging a variable does not necessarily imply fraud but indicates a statistical possibility that it may have been biased or managed willingly or coincidentally”.
It also refuses to take an alarmist position stating instead “if a significant number of variables are flagged off in some of these sectors, it is not implied thatallcorporates in thesectorwould have an issue withfinancialreporting. Each of the sectors may have several corporates withhighquality offinancialreporting and disclosures”.
M Damodaran, former Sebi chief, said he wouldn’t agree that promoter shareholding is an issue. “Of more salience is the role of independent directors.Highquality independent directors and notjustmarquee names are critical along with presence of strong audit committees to ensure numbers are faithfully reported.”
For shareholders, the report concludes that compared withdatalike profit and revenue numbers, investors inallcompanieswould be better off by studying cash-based measures. These are cash flow fromoperationsand fund flow from operations. Also,companiesthat have taken on additional debt would be safer. It is becausecompanies which borrow frombanksor fromabroadface added scrutiny from those borrowers and rating agencies.
JagvinderBrar, partner of forensic auditbusinessat KPMGIndia, said their analysis of company-wise reportcardshave begun tothrow up identical issues. “The Reserve Bank of India needs to write in a stringent and comprehensive right to audit and inspection clause in bank loan contracts.”
Sandeep Parekh, former executive director of Sebi and founder of Finsec Law Advisors, said he agreed that loss recognition practices don’t alter much between Indian and foreign firms. “Instead it is companies with wider shareholding that would have the incentive to demonstrate transparent business practices.”
If You Listen Carefully, The Bankers AreActually Telling Us What Is Going To Happen Next
By Michael Snyder ofThe Economic Collapse, Tuesday, February 10, 2015 5:00 AM EDT
Are we on the verge of a major worldwide economic downturn? Well, if recent warnings from prominent bankers all over the world are to be believed, that may be precisely what we are facing in the months ahead. As you will read about below, the big banks are warning that the price of oil could soon drop as low as 20 dollars a barrel, that a Greek exit from the eurozone could push the EUR/USD down to 0.90, and that the global economy could shrink by more than 2 trillion dollars in 2015.Most of the time, very few people ever actually read the things that the big banks write for their clients. But in recent months, a lot of these bankers are issuing such ominous warnings that you would think that they have started to writefor The Economic Collapse Blog. Of course we have seen this happen before. Just before the financial crisis of 2008, a lot of people at the big banks started to get spooked, and now we are beginning to see an atmosphere of fear spread on Wall Street once again. Nobody is quite sure what is going to happen next, but an increasing number of experts are starting to agree that it won’t be good.
Let’s start with oil. Over the past couple of weeks, we have seen a nice rally for the price of oil. It has bounced back into the low 50s, which is still a catastrophically low level, but it has many hoping for a rebound to a range that will be healthy for the global economy.
Unfortunately, many of the experts at the big banks are now anticipating that the exact opposite will happen instead. For example, Citibank says that we could see the price of oilgo as low as 20 dollarsthis year…
The recent rally in crude prices looks more like a head-fake than a sustainable turning point — The drop in US rig count, continuing cuts in upstream capex, the reading of technical charts, and investor short position-covering sustained the end-January 8.1% jump in Brent and 5.8% jump in WTI into the first week of February.
Short-term market factors are more bearish, pointing to more price pressure for the next couple of months and beyond — Not only is the market oversupplied, but the consequent inventory build looks likely to continue toward storage tank tops. As on-land storage fills and covers the carry of the monthly spreads at ~$0.75/bbl, the forward curve has to steepen to accommodate a monthly carry closer to $1.20, putting downward pressure on prompt prices. As floating storage reaches its limits, there should be downward price pressure to shut in production.
The oil market should bottom sometime between the end of Q1 and beginning of Q2 at a significantly lower price level in the $40 range — after which markets should start to balance, first with an end to inventory builds and later on with a period of sustained inventory draws. It’s impossible to call a bottom point, which could, as a result of oversupply and the economics of storage, fall well below $40 a barrel for WTI, perhaps as low as the $20 range for a while.
Even though rigs are shutting down at a pace that we have not seen since the last recession, overall global supply still significantly exceeds overall global demand.Barclays analyst Michael Cohenrecently told CNBC that at this point the total amount of excess supply is still in the neighborhood of a million barrels per day…
“What we saw in the last couple weeks is rig count falling pretty precipitously by about 80 or 90 rigs per week, but we think there are more important things to be focused on and that rig count doesn’t tell the whole story.”
He expects to see some weakness going into the shoulder season for demand. In addition, there is an excess supply of about a million barrels of oil a day, he said.
And the truth is that many firms simply cannot afford to shut down their rigs. Many are leveraged to the hilt and are really struggling just to service their debt payments. They have to keep pumping so that they can have revenue to meet their financial obligations. The following comes directly fromthe Bank for International Settlements…
“Against this background of high debt, a fall in the price of oil weakens the balance sheets of producers and tightens credit conditions, potentially exacerbating the price drop as a result of sales of oil assets, for example, more production is sold forward,” BIS said.
“Second, in flow terms, a lower price of oil reduces cash flows and increases the risk of liquidity shortfalls in which firms are unable to meet interest payments. Debt service requirements may induce continued physical production of oil to maintain cash flows, delaying the reduction in supply in the market.”
In the end, a lot of these energy companies are going to go belly up if the price of oil does not rise significantly this year. And any financial institutions that are exposed to the debt of these companies or to energy derivatives will likely be in a great deal of distress as well.
Meanwhile, the overall global economy continues to slow down.
On Monday, we learned that the Baltic Dry Index has droppedto the lowest level ever. Not even during the darkest depths of the last recession did it drop this low.
And there are some at the big banks that are warning that this might just be the beginning. For instance,David Kostin of Goldman Sachsis projecting that sales growth for S&P 500 companies will bezero percentfor all of 2015…
“Consensus now forecasts 0% S&P 500 sales growth in 2015 following a 5% cut in revenue forecasts since October. Low oil prices along with FX headwinds and pension charges have weighed on 4Q EPS results and expectations for 2015.”
Others are even more pessimistic than that. According to Bank of America, the global economy will actually shrinkby 2.3 trillion dollarsin 2015.
One thing that could greatly accelerate our economic problems is the crisis in Greece. If there is no compromise and a new Greek debt deal is not reached, there is a very real possibility that Greececould leave the eurozone.
If Greece does leave the eurozone, the continued existence of the monetary union will be thrown into doubt and the euro will utterly collapse.
Of course I am not the only one saying these things. Analystsat Morgan Stanleyare even projecting that the EUR/USD could plummet to 0.90 if there is a “Grexit”…
The Greek Prime Minister has reaffirmed his government’s rejection of the country’s international bailout programme two days before an emergency meeting with the euro area’s finance ministers on Wednesday. Should Greece stay firm on its current anti-bailout course and with the ECB not accepting Greek T-bills as collateral, the position of ex-Fed Chairman Greenspan will gain increasing credibility. Greek Fin Min Varoufakis said the euro will collapse if Greece exits, calling Italian debt unsustainable. Markets may gain the impression that Greece may not opt for a compromise, instead opting for an all or nothing approach when negotiating on Wednesday.It seems the risk premium of Greece leaving EMU is rising. Our scenario analysis suggests a Greek exit taking EURUSD down to 0.90.
If that happens, we could see a massive implosion ofthe 26 trillion dollars in derivativesthat are directly tied to the value of the euro.
We are moving into a time of great peril for global financial markets, and there area whole host of signsthat we are slowly heading into another major global economic crisis.
So don’t be fooled by all of the happy talk in the mainstream media. They did not see the last crisis coming either.
Satyam case has made accounting practices better in Indian IT firms
ByAnirbanSen, ET Bureau | 10 Apr, 2015, 10.18AM IST
Experts also said that despite all the checks and balances put in place by top IT firms, a fraud like Satyam is impossible to prevent when conspiracy and collusion are involved.
BENGALURU: Global experts and customers tracking India's $146billion information technology (IT) industry hailed a special CBI court's decision on Thursday to sentence BRamalingaRaju, cofounder of erstwhileSatyamComputer Services, and nine others to seven years of imprisonment and fine them Rs 5 crore each.
Often referred to as India's equivalent of the Enron scandal, the Rs 7,136-crore Satyam scam that came to the open in January 2009 sent shock waves through the IndianITindustry and spooked investors, who sold the shares of the company and those of rival software exporters.
The episode prompted an overhaul of accounting practices of companies across the sector and forced regulators to crack down harder on IT firms and their financial disclosure practices.
"What happened at the time (of the Satyam scandal) was a struggle for the whole industry, because it raised a lot of questions and a lot of issues on accounting practices in India -at the time it caused a bit of a scare and a bit of consternation on the part of clients to verify and feel comfortable about the checks and balances that exist in India," said Frances Karamouzis, vice-president and distinguished analyst at Gartner.
Experts tracking the incident and the IT industry feel that Indian IT firms have taken a lot of steps since then to reassure top outsourcing customers of watertight accounting practices at their companies.
"I think a lot of work was done back then to alleviate fear after the scandal happened. But since then, I don't think people have given it a lot of thought and now that the verdict has come out, I don't think it'll have a major impact on the industry," said Karamouzis.
Fred Giron of Forrester Research said, "A lot of ink has been put on paper around this case -from an investor perspective, the players are taking steps to clean up and get their act together. So, I don't think there's much to worry about as far as the future is concerned."
Customers of India's outsourcing industry said the Satyam case had a lot of lessons for top Indian IT firms, which need to keep improving their internal financial processes. "I think you can't have double standards as far as ethics and processes and operations are concerned -because everyone gets impacted in this kind of businesses. Companies like Satyam, now Tech Mahindra, need to think longer and harder about the consequences of their actions on stakeholders and how they affect everyone across the board," said the CIO of a top US-based insurance firm, which outsources back-office projects to Indian IT firms.
He requested anonymity as his company does not allow him to speak to reporters.
Experts also said that despite all the checks and balances put in place by top IT firms, a fraud like Satyam is impossible to prevent when conspiracy and collusion are involved.
"The reality is that what happened in the case of Satyam was collusion and fraud in general. If people want to perpetrate a certain fraud and there's collusion involved, there isn't a mechanism in place to necessarily find that out," said Karamouzis. "A fraud like this can happen anywhere."
"This case harbours several key learnings: First, illegal and unethical business practices come with serious consequences. While compliance is getting a lot of attention these days, an organisation culture based on professional integrity and an ethical mindset is really what guides decision-making and behaviour, and can effectively impede these kinds of problems," said Peter Schumacher, chief executive of Germany-headquartered Value Leadership Group.
"The second learning is that effective crisis management is critical and can mitigate the fallout.Immediately following the blowup, key managers rose to the occasion and did an outstanding job addressing the crisis," he said.