By Suhani Adilabadkar

India’s auditors - responsible for the health checkup of companies under their purview - had a surprise health check themselves by none other than Prime Minister at the ICAI meet on 1st July 2017. The CA community was urged to implement “Swaachh Bharat Abhiyaan” to drive out black money and crack down on fraudulent promoters. The government on its part had already started the process, by identifying shell companies and de-registering more than 2 lakh companies over the past one and half years. It was the SEBI judgment and fine on Price Waterhouse in Jan 2018 however, that was a turning point for the accounting firms, forcing them to become more cautious.

The developments over the past few months augur well for the Indian corporate and investor community. It is pain in the short term for both auditors and investors, due to the uncertainty around the resignations. But in the longer term, it will bring about higher standards of corporate governance and accountability.

Quick Take

• Vakrangee's numbers called into question, suspicious stock movements
• Manpasand Beverages showed unusual PAT growth compared to peers, low asset turnover, raising questions before auditor resignation
• More than 42 listed companies affected by auditor resignations, as auditors fear SEBI action similar to that on PWC
• Auditors also under fire elsewhere in the EU for collusion between themselves and company promoters

The Rise and Fall of Vakarangee

Vakarangee touched its 52 week high of Rs. 515 on 24th Jan 2018 fuelling rumors, as the stock multiplied more than 1.3 times in a span of just 6 months. Vakarangee boasts a network of 45000 kendras or convenience stores offering real-time services such as Banking, ATM, Insurance, e-Governance, e-Commerce and Logistics in semi urban and rural area.

The financial viability of the company’s business model and growth potential of these Kendras was up for debate from the very beginning.  Acquisition of 2 million shares of PC Jewellers started its downslide on 25th Jan 2018 and with price and volume manipulation rumors, the stock tanked 60% in just 10 days locked in lower circuit.

To arrest the sharp decline, Vakarangee announced a buyback offer of Rs. 1000 crore on 12th February 2018. But distrust with respect to the reported number of kendras, increasing working capital requirements, unrealistic capex and high value of stock in trade made the stock highly volatile accentuating its further decline.

The high point of the whole drama was the resignation of statutory auditors, Price Waterhouse on 28th April 2018 due to what they said was a lack of sufficient information on “election books, bullion & jewellery”. As a result, currently the stock has shed more than 90% of its value from its 52 week high trading at Rs.45.

Manpasand Beverages – An Enigma

Manpasand Beverages Ltd, based in Vadodara, manufactures fruit juices with Mango Sip, Fruits Up, Manpasand ORS and Coco Sip as its main products. The company came under scrutiny with its Rs. 500 crore QIP within few months of its IPO of Rs. 400 crore. Revenues & Profitability numbers were compared with industry peers and debated over the past two years as the company reported staggering PAT growth of 69%, and 44% for FY16 & FY17 respectively.

Doubts were raised with respect to the distribution network, sales numbers and also the company’s unusually low asset turnover ratio.

Even with this ongoing mistrust, the stock touched its 52 week high of Rs. 511 in September 2017 and moved in the range of 370-450 between January & 24th May 2018. Multiple analysts issued buy calls on the stock, including well known brokerages like Motilal Oswal. On 24th May, the downslide started and the stock tanked 20% locked in lower circuit at Rs 345 on 28th May after the company announced statutory auditors Deloitte Haskins & Sells resignation. Currently the stock trades at Rs. 142, more than 60% lower from its 52 week high.

The Day of Reckoning for Atlanta, Hexaware, Inox Wind and others

Atlanta, Hexaware technologies, Inox Wind, CG Power & Sri Adhikari Brothers Television Network are some of the few companies from the list of 42 listed entities where auditors have resigned abruptly before approving the annual accounts. Apart from these outright departures, auditors of Reliance Naval and Engineering, L&T Shipbuilding & Jet Airways have raised concerns on the financial viability of these companies as a going concern which is a rare thing to happen in Indian corporates.  With respect to auditor resignations, all listed companies are required to file a statement with Ministry of Corporate Affairs (MCA) & Registrar of Companies (ROC) and for unlisted companies, with suitable justifications for the reason of resignation.

Price Waterhouse resignations are a consequence of SEBI ban for two years from auditing listed companies in India and disgorgement of Rs. 13 crore. With respect to other accounting firms, the heat of the entire judgment and the recent orders of forensic audit mandated against Essar & Bhushan Steel may have forced them to play safe.

What was extremely unsettling is the vagueness and lack of transparency in the whole process. The Companies Act 2013 & ICAI rules do not discourage any disclosure by the auditors and thus rules of confidentiality or non disclosure agreement should not be applicable to hurt investor interest. The Day Of Reckoning is there.  Auditors cannot just wash away their hands before signing the final documents as they are liable both to the shareholders of the company also to the MCA.

This murky maze of unaccountability persists not just in India. In the EU the Big Four (PWC, Deloitte, E&Y and KPMG) have been fined 23 Mn Euros for collusion, working as a cartel to lower public tenders to win 66 Mn euros COONSIP contract, company held by the Italian ministry.

In UK, liquidation of the construction group Carillion has raised questions over corporate governance and quality of auditing by Big Four which may lead to spinning off their audit businesses as separate entities. The UK regulator, FCA has in fact pulled up KPMG for deterioration in its audit standards and the accounting firm will have to undergo special supervision.

So, are the Indian authorities listening? Perhaps, as MCA has ordered probe in 42 companies listed companies directing the ROC to investigate the reasons behind abrupt resignation of auditors. In this whole process, it’s the investor facing the brunt because of low corporate governance standards and suspected collusion between the promoters & the auditors. But, the government seems to be busy tightening the reins, evident from de-registration of more than 2 lakh companies last year and hopefully we will have a smoother ride in the future. Till then investors need to be alert watching not just the companies, but the watchmen.

Suhani Adilabadkar is a Research Analyst registered with SEBI ((INH200003240)) She has done PGDBA (Finance), MS (Finance) and a Fellowship from Insurance Institute of India. She maintains a blog at oasisfundamentals.blogspot.in.

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