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Two recent orders by market regulator, the Securities and Exchange Board of India, on Manpasand Beverages Ltd (MBL) and Add Shop-E Retail are disturbing and reveal how promoters can go to any extent to manipulate the company’s books to dupe the entire system.
According to SEBI, Manpasand created 38 bogus/paper firms to inflate its turnover, with inward and outward transactions with such bogus firms amounting to ₹188.48 crore and ₹691.30 crore, respectively. Further, Manpasand also used input tax credit from fake invoices for payment of GST liabilities, resulting in a loss of GST revenue to the exchequer.
Mehra Goel & Co., statutory auditors, resigned on July 4, 2019, due to this investigation. After search and seizure proceedings by CGST, eight directors, including three independent directors, also resigned from their positions between May 25, 2019 and September 30, 2019.
Finquest Financial Solutions, a non-banking financial company that had sanctioned secured term loan of ₹100 crore to MBL, appointed Ernst & Young to carry out the due diligence as one of the conditions for disbursement of the loan. It was later brought to the notice of the Board that sales invoices, purchase invoices, production records and bank statements had not been made available by Manpasand to E&Y. The audit firm observed that the company entered into repetitive transactions with unexplained parties, the volume of which was extraordinarily high.
Subsequently, Batliboi & Purohit, appointed as statutory auditors in place of Mehra Goel & Co, also quit after the company did not allow its audit team members to enter the Vadodara factory for conducting a statutory audit. “The forensic audit stood corroborated by other factors, it was apparent that the financial statements of MBL for FYs 2018-19 and 2019-20 were manipulated and the figures contained therein were significantly misstated. This led to publication of manipulated, untrue and misleading financial results of the company during FYs 2018-19 and 2019-20, which presented a false picture of the financial health of the company to investor.”
A forensic audit by SEBI-appointed Chokshi & Chokshi LLP revealed overstatement of purchases, overstatement of sales, adjustment using tax invoices, ledger balances adjusted through ‘Other JV entries’, understatement of debtors, transactions with parties having same PAN, understatement of creditors, reimbursement of branding expenses and overstatement of expenses.
Circular transactions
Similarly, in an interim order, SEBI found that Add-Shop E-Retail and White Organics Agro engaged in irregularities pertaining to related party transactions, fake announcements regarding supply orders, etc. Besides, SEBI discovered that significant related-party transactions lacked proper audit committee approval.
The more shocking findings were circular transactions among ASERL, White Organics Agro and Dada Organics. They were booking sales and purchases without having any real stock from each other . It was found that WOAL, DO/DOL and ASERL rotated funds to settle the fake circular transactions booked by them. Add-Shop E-Retail was listed on the BSE-SME platform in September 2018 and moved to the main board in October 2020. The promoter’s stake in the company dropped from 62.99 per cent in April 2020 to 27.2 per cent in December 2023.
In its response, ASERL said, “The management does not foresee any material impact on the financial/operation activities of the company, as the interim order cum show-cause notice based on misinterpreted facts and assumptions and shall be contested.” The company will be reviewing the order and taking all necessary steps to take this to the logical conclusion and safeguard the interests of company and stakeholders at large, it further said.
Call for vigilance
Recently in an “X” post, RPG Group Chairman Harsh Goenka said, “With a booming stock market, all the malpractices of Harshad Mehta/Ketan Parekh era are back primarily in Kolkata. Promoters are inflating profits (through profit entry) and in nexus with Gujarati-Marwari brokers driving their stock prices to unrealistic levels. It’s time for SEBI and @FinMinIndia to step in and investigate before small investors suffer severe losses.”
The shocking revelation by SEBI indicates that Goenka’s fear is not unfounded. Despite a lot of checks and balances and constant vigil from regulator, exchanges, government agencies and departments, companies still find loopholes and indulge in these activities.
One hopes the regulator takes strong action against the manipulators and gives them severe punishment. Besides, the auditors should also escalate the issues at the initial stages itself before the fraud grows manifold. Better communication among various agencies will help mitigate these wrongdoings at the outset.
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