The advertiser who claims ‘something special for someone special’ has brought out its audited annual report for the year ended 31 March 2022. It is a special one to read and relish as long as one is not a shareholder of the wool spinner!
The standalone accounts has debited an exceptional loss of Rs 907 crore pertaining to different components arising from the loss in the value of the assets of the subsidiary company Raymond Apparel Ltd (RAL).
A quirky accounting approach has helped to reflect a considerably lower amount of Rs 244 crore in the consolidated accounts. These figures can be corroborated from the relevant notes with the break up of the various items categorised as exceptional losses in both the standalone and consolidated accounts for the period ended 31 March 2022.
The background to the above issue lies in certain corporate actions as detailed herein.
Vanishing Trick…
The Board of Directors [BoD] of the parent company, Raymond Ltd, in its meeting on 27 September 2021, approved a scheme to consolidate the business of RAL under a scheme of arrangement (SoA). This SoA was structured as a demerger, such that RAL will continue to survive, though as would be explained in greater detail, as a skeleton or even less!
Intriguingly, the BoD of the parent held on 7 November 2019, had approved a composite scheme; one of the components of the same was the full merger of RAL with the parent company! The scheme was pending with NCLT. The BoD meeting held on 27 September 2021, decided to call off the earlier one and came up with the new scheme.
The scheme was finally implemented with the appointed date as 1 April 2021 and the financials for the year ended 31 March 2022 of the parent company reflected the consolidated numbers of RAL for the full year; as a corollary RAL’s books showed an empty wardrobe!
RAL gross assets which stood at Rs 1304 crore as on 1 April 2021, were effectively taken at around Rs 328 crore reflecting an approximate erosion in the value of Rs 938 crore mentioned above (subject to some adjustments to balance the difference).
The scheme had a peculiar carve out for the amount of nearly Rs 600 crore due to the parent, termed as quasi-equity and not adjusted under the SoA as it should have been. The scheme was contrived as a demerger by leaving behind some token assets that have little real value and including some fictional intangibles.
Thus RAL books had merely the said amount due and equivalent negative equity of Rs 600 crore!
Woolly accounting and auditing
The scheme and the associated actions raise several questions on the conduct of the BoD and the auditors of the two companies.
An erosion of almost 75 per cent of the value of the assets of RAL could have hardly been occasioned over a year. It is also not easy to lose so much money in actual business transactions!
The directors’ reports and the auditors’ reports of the parent and of RAL for the previous year ended 31 March 2021 did not even whisper about a potential loss! Even the directors’ report of the parent for the current year makes no mention of the amount written off ultimately. The notes to the accounts merely tabulate the heads under which the write-off is taken running into a few thousand words but shedding very little light.
There is no explanation as to why the BoD aborted the earlier amalgamation of RAL and changed it to a demerge. This looks most questionable from a compliance angle.
RAL, which is a mere carcass or not even that, has increased its authorised capital from Rs 23.5 crore to Rs 601.30 crore after the demerger! The amount that should have been paid towards this exercise is not figured in the accounts of RAL!
RAL accounts show a debit for the interest of Rs 26.47 crore during the year when the only balance in books is the quasi-equity of the parent of approx. Rs 600 crore.
RAL has no revenue and no business to carry on during the entire year after effecting the demerger. Yet the auditor had little difficulty in appeasing his conscience over the efforts of the management to convert zombie loans into equity! The going concern aspect was not something to lose sleep over!
The lack of ‘concern’ for the going concern when the substratum of the company is completely lost and with a fake balance sheet that could have been simply pulled out of the exam answer sheets of a failed CA student is perhaps the greatest testimony to the independence of the professional who signed it!
Fat fees for auditing no financials!
Incidentally, the auditor of RAL with no financials to audit was paid Rs 37.71 lakh as fees as against Rs 35.6 lakh paid in the previous year when the turnover was above Rs 500 crore! It is not that he audited the business that was consolidated with the parent. The parent’ auditor was paid separately Rs 20 lakh for that effort!
The directors’ report of RAL, which had no operations in the year ended 31 March 2022, has the following observations:
“The Company had entrusted the internal and operational audit to M/s Mahajan & Aibara Chartered Accountants LLP up to Quarter ending June 30, 2021 and then appointed Messrs. Ernst & Young LLP, a reputed firm of Chartered Accountants for the period July 1, 2021 to March 31, 2022. The main thrust of the internal audit process is test and review of controls, independent appraisal of risks, business processes and benchmarking internal controls with best practices. The Company has a robust Management Information System, which is an integral part of the control mechanism.”
It beats one’s credibility hollow as to the nature of internal control audit a globally reputed firm could have undertaken on a company that had no operations, may be no staff and office space and has only produced some accounts that is the figment of the wildest imagination!
Like parent, like child
Departing from RAL and shifting to its parent, the quarterly results published for the first three quarters during the year 2021-22 are deafeningly silent on the upcoming write-off! The standalone results of the fourth quarter are represented by a solitary incomplete page on the website of company! Hence no verification of what is supposedly contained in the other three sheets is possible.
The complete absence of any word from the otherwise noisy community of equity analysts, proxy advisors, press and TV, makes one wonder if the same has come at the price of a few suit lengths of the choicest Baby Cashmere Wool!
In the well-known fairy tale written by Hans Christian Andersen of the title The Emperor’ New Clothes, it is an innocent child that exclaimed that the king was walking naked when everyone else faked seeing a miraculous garment adorning the king’s person!
One hopes that at least one out of the half-dozen regulators in the field, would be like the child and ask the questions that should most deservedly be asked in this case!!
