Home Listing rules More than 12 listed companies under Sebi’s lens for accounting fallout

More than 12 listed companies under Sebi’s lens for accounting fallout

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By Ashley Coutinho

The Securities and Exchange Board of India (Sebi) is believed to be looking into cases of manipulation of financial positions by more than a dozen listed companies, including related party transactions.

Issues that have been highlighted include accounting treatment of debt and unapplied interest in accordance with GAAP and fraudulent manipulation of financial position; provisioning of bad debts and sale of these the following year; concealment of audit qualifications in quarterly disclosures; non-disclosure or improper disclosure in annual reports and misrepresentation of receivables, and corresponding provisioning to mislead shareholders about the companies’ financial health, according to a knowledgeable person.

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Companies enter into transactions with related parties in the form of the sale of goods or loans. The same money is transferred from one entity to another and then rerouted to the listed company or its promoters through these companies. In the process, all related companies see their capital or net worth increase and are able to obtain more financing from banks.

“The money ultimately goes to the promoter. In the books of listed companies, it is recognized as a provision for loans or loans and transactions are amortized by depreciation of trade receivables. Depreciation is then disclosed through the help of audit firms in the notes to the accounts in the company’s financial statements. So effectively the company will say it’s all in the ordinary course of business and attribute it to adverse economic and business factors,” the person said.

The person added that companies go so far as to hinder the sale of an entire affiliate for a pittance.

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“There has generally been concern among investors and regulators about the use of related party transactions to transfer economic resources and benefits to a group of shareholders and their related entities to the detriment of other minority shareholders. promoters or not,” said Sai Venkateshwaran, Partner, KPMG in India.

According to him, this has led to a periodic review of the regulatory requirements regarding the approval and disclosure of related party transactions, so that there is greater transparency and oversight of these transactions. “Stricter regulations also act as a deterrent to companies engaging in abusive transactions with related parties,” he said.

Recently introduced changes to Sebi’s listing rules, which are partially effective now and fully effective from April 1, 2023, move away from a rules-based definition of related parties and covered transactions. principle-based approach and moving from the legal form of arrangements to examining their substance, experts said. Under these new rules, transactions undertaken with unrelated parties, where the ultimate beneficiary is a related party, would be covered.

“Greater requirements for oversight and approval by the publicly traded parent company’s audit committee and increased regulatory reviews of company filings, both by Sebi and NFRA, will also bring greater great rigor to compliance in this area and will deter any undesirable practice,” Venkateshwaran said.

“In a bull market, when valuations are based on earnings or multiples of earnings, this kind of shenanigans are inevitable, whether in the private or listed markets. This will be especially common in mid- and small-cap companies. which are generally under-researched,” said Shriram Subramanian, Founder and MD, InGovern Research Services.

According to him, investors are often guilty of simply watching the headlines and not doing adequate research. “Financial influencers have also been guilty of driving up stock prices by focusing only on metrics such as multiple PEs, RoE and RoCE without digging deeper or performing channel checks. It’s only in bear markets that most of these manipulations come to light,” he said.

An email sent to Sebi late in the evening did not immediately receive a response.

Sebi had recently settled a case with property company Sobha and four people in a case related to fraudulent transactions and disclosure failures for Rs 2.92 crore. Sebi had investigated certain dealings of Sobha with DK Shivakumar and his family for fiscal years FY17 to FY19. It was alleged that Sobha fraudulently misrepresented the claims relating to the construction of the DKS residence during those years and the corresponding provisioning for it during that time. This reportedly led to the publication of manipulated financial results for all three years, which painted the wrong picture of the company’s financial health.