Market regulator Securities and Exchange Board of India (SEBI), in its letter dated 22 November 2021, had written to Man Industries (India) Ltd, informing that a forensic auditor was appointed to investigate the accounts of the company for a period of seven years from the accounting year ended 31 March 2015 till 31 March 2021. The scope of the audit indicates a possibility of fraud and diversion of funds involving various dimensions specified in the attached letter. Man Industries is into manufacturing and sale of carbon-lined steel tubes.
However, this letter came to investors’ knowledge only on 10 May 2022, when the company disclosed its existence to the stock exchanges. Needless to add, the investor community is quite shocked that the company has brought such an alarming matter to the notice of the market participants almost six months after the company received it.
It is more shocking that the regulator, which has issued a directive for forensic audit on the grounds that investor money had allegedly been wrongfully diverted by the promoters, chose not to disclose the matter on its own nor specifically direct the company to forthwith disclose the matter to the stock exchanges.
A scrutiny of the audited accounts of the year ended 31 March 2021—the latest available in the public domain—reports a smart increase in the profits of the company but a deeper dive shows that it has issues with its cash position. While the net profit after tax at Rs136 crore showed a formidable rise in excess of 100% over the previous year's, the cash drain is an astounding Rs280 crore, represented by an unexplained increase in inventories and debtors.
The most intriguing part in the accounts and the auditor's report is the fact that the accounts of the subsidiary Merino Shelter P Ltd, which is 100% held by Man Industries, was not consolidated with the holding company’s accounts!
The auditor, both in the stand-alone accounts and most inexplicably in the consolidated accounts, did not qualify the fact that the subsidiary accounts were neither audited nor looked into by the auditor. The audit report merely remarks, as key audit matter, that the valuation of the investment made in the subsidiary was being valued, based on the management's judgement!
It is like an audit report stating that the report was being issued based on management’s assertion that the accounts have been correctly compiled and leaving the risk of inaccuracy to the account of the reader!
A sharp rise in expenses, like freight & forwarding and sales commission, are worrisome signs. It is noticed in other cases that these are signs of inflated expenses. The provision for bad debts shows an alarming increase too.
The notes also mention of a litigation between two groups of promoters arising out of a business split carried out in 2015 based on a court order of a scheme of arrangement.
SEBI has also failed to bring out, in its letter, the reasons that prevailed for it to order a forensic audit. As a regulator, it has more responsibility than a financial analyst or journalist who comments with limited facts and only a feel for the numbers gained over years of reading the accounts of companies.
Shouldn’t investors, who invested and lost money between 22 November 2021 and 10 May 2022, be compensated by SEBI for its failure to provide the most elementary care of duty to investors, whose interest it has been set up to protect?