Where corp governance was questioned

Apart from the perfectly legal depreciation changes done by companies such as Jet Airways and TCS, what other corporate governance issues have come to light recently? CLSA Asia-Pacific Markets’ Aniruddha Datta elucidates in a note on Friday:

1. Anantraj Industries
A commercial developer in north India, it transferred a part of one of its projects (0.52 million sq ft out of 0.75 million sq ft in a mall in Delhi) to its wholly owned subsidiary and consequently showed equivalent revenues in its standalone results (93% of Q1FY09 revenues). As against standalone revenues of Rs 172 crore and net profit of Rs 152 crore, consolidated revenues are Rs 10.48 crore and net profit of Rs 7.76 crore. Out of the consolidated revenue of Rs 10.48 crore, Rs 6.80 crore (65%) is from the ceramics business.

2. DLF
DLFs non-DAL revenues declined 44% QoQ to Rs 2,250 crore. Around 40% of sales have been to DAL, a group entity; 44% of debtors are DAL and of total debtors, the share of DAL has increased during the quarter with DAL receivables increasing by Rs 1,450 crore QoQ. During Q1FY09, sales to DAL were Rs 1,560 crore, which is marginally higher than the increase in receivables from DAL. We would like to add that DLF’s high level of transactions with group company DAL and high level of receivables has been a point of debate since it went public.

3. Dr Reddys Labs
Dr. Reddy’s has adjusted mark to market losses on outstanding $250 million of hedges in balance sheet, while profit and loss (P&L) reflects forex gains realised. The company also reclassified its contract manufacturing business (CPS) revenues into API and Formulations, which makes it difficult to analyse its segmental performance.

4. Himatsingka Seide
Himatsingka in one derivative contract had mark-to-market losses of $41.5 million as on March 24, 2008 and no provision has been made since the company has filed a case in court against the concerned bank. In case of another derivative contract, mark to market loss of Rs 158 crore as on June 30 has not been provided for since the derivative contract is still open.

5. HCL Tech
HCL Tech has normally had a very large hedge position compared with its revenue base. While the rupee was appreciating, the company reaped benefits of this and reported $79.2 milion in forex gains in FY07. The company has always maintained that it would prefer to lock in a constant INR/USD rate through hedging rather than suffer from the currency volatility.

However, the company unwound $540 million of hedges in June 2008 and booked large Forex losses. We find this change in forex policy surprising and the company has likely brought forward its potential FY09 FX losses to 4QFY08 through this change in policy.

6. JP Associates
Jaiprakash Associates did not provide for FX losses on outstanding FCCBs of $400 million through its P&L and plans to provide for the FX losses/ gains at the end of the year.

7. Prajay Engineers Syndicate
Hyderabad based developer, reported a loss in its fourth quarter results against expectations of a profit. The company “lost” records for a project worth 40% of its annual revenues at the site office. The company in its press release said, “After the year end, basic records relating to sale agreements/ revenue and construction expenses of one of the Projects of property development were lost at the site office, Vishakhapatnam.

The auditors in their report have stated that they were not able to verify the books and records relating to income of Rs 143.77 crore and relevant construction cost of Rs 75.26 crore. Management is making all efforts to locate/ retrieve the lost records.”

8. Ranbaxy
Pharma major has mark to market losses of Rs 909 crore on forex derivative contracts, which have not been provided for because the company believes “the gain on fair valuation of underlying transactions against which the derivative transactions were undertaken amount to Rs 1,030 crore.” This argument is against the principles of conservative accounting wherein mark-to-market losses are being offset against assumed future profits.

9. Reliance Communications
Telecom company has adjusted short-term quarterly fluctuations in foreign exchange rates related to liabilities and borrowings to the carrying cost of fixed assets. The company adjusted Rs 109 crore of realised and Rs 955 crore of unrealised forex losses in the above manner.

In addition, the company has not recognised Rs 399 crore of translation losses on FCCBs, since the FCCBs can potentially get converted, although the FCCBs are out of money. Adjusted for all the above, the company would have virtually no profits in Q1FY09.

10. Reliance Industries
In continuance of its policy, the company adjusted “foreign currency exchange differences on amounts borrowed for acquisition of fixed assets, to the carrying cost of fixed assets, which is at variance to the treatment prescribed in AS11.”
Had AS11 been followed, profits for Q1FY09 would have been lower by Rs 940 crore (23% of reported net profits).

11. Sobha Developers
South Indian developer changed its accounting norms in Q1FY09 for revenue recognition, which facilitates revenue being recognised earlier in a project cycle. According to its press release, had the accounting policy not been changed, the company’s Q1FY09 PBT would have been lower by 20%.

“With effect from April 1, 2008, the company has changed its accounting policy for revenue recognition for sale of undivided share of land (group housing) on the basis of certain minimum level of collection of dues from the customer and/or agreement for sale being executed rather than criteria relating to the project reaching a significant level of completion to align it with revenue recognition policy for sale of villa plots.  This has resulted in additional revenue recognition and higher profit before taxes of Rs 32.1 crore and Rs 15 crore, respectively during the quarter ended June 30, 2008,” the release stated.