Raymond Apparel: Woolly Accounting and Willing Auditors!
The audited annual report of ‘The Complete Man’, for the year ended 31 March 2022, is a treat to read and relish… if one is not a shareholder of the wool-spinner—Raymond Ltd.
The stand-alone accounts have been debited an exceptional loss of Rs907 crore pertaining to different components, arising from the loss in the value of assets of the subsidiary company Raymond Apparel Ltd (RAL). A quirky accounting approach has helped to reflect a considerably lower amount of Rs244 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 stand-alone and consolidated accounts for the period ended 31 March 2022.
The background to the above issue lies in certain corporate actions as detailed herein.
On 27 September 2021, the board of directors (BoD) of Raymond Ltd (parent company) approved a scheme to consolidate the whole business of RAL under a scheme of arrangement (SoA). This SoA was structured as a demerger, such that RAL will continue to survive, although as would be explained in greater detail, as a skeleton or less!
Intriguingly, on 7 November 2019, the BoD of Raymond had approved a composite scheme, one of the components of which was the full merger of RAL! The scheme was pending with the National Company Law Tribunal (NCLT) and the BoD decided to call off the earlier scheme, when it came up with a new one on 27 September 2021.
The scheme was finally implemented with 1 April 2021 as the appointed date. The financials for the year ended 31 March 2022 of the parent reflected the consolidated numbers of RAL for the full year. As a corollary, RAL’s books showed an empty wardrobe!
RAL’s gross asset, which stood at Rs1,304 crore as on 1 April 2021, was effectively taken at around Rs328 crore, reflecting an approximate erosion in value of Rs938 crore mentioned above (subject to some adjustments to balance the difference). 
The scheme had a peculiar carve out of nearly Rs600 crore due to the parent, which was termed as quasi-equity and not adjusted under the SoA as it ought to have been. The scheme was contrived as a demerger by leaving behind a few token assets that had little real value and included some fictional intangibles.
The accounts of RAL were effectively cleared of all line items and only two key numbers remain there as at the close of 31 March 2022. As explained above, the parent had funded RAL to the tune of Rs600 crore; with the erosion in the value of RAL assets (which I have mentioned at the very beginning of this article), this amount represented a complete loss that RAL was in no position to pay back its parent.
Instead of writing off this sum in the process of consolidating the business of RAL, the amount was reflected as quasi-equity in RAL books and the corresponding adjustment figure was shown as a negative equity (negative reserves).
RAL’s financials are an insult to the intelligence of any reader of financial reports and the fact that it has been signed off by a firm of accountants, without exhibiting any discomfort, is singular enough to lose faith in audited statements!
The scheme and the actions associated with it raise many questions about the conduct of the BoD and auditors of the two companies.
A 75% erosion in the value of RAL’s assets hardly have happened in just a year. It is also not easy to lose so much money in business transactions!
The directors’ report, and the audit report of RAL and its parent for the previous year ended 31 March 2021, did not even whisper about a potential loss! The current year directors’ report of the parent also makes no mention of the amount ultimately written off. Notes to the accounts merely tabulate the heads under which the write-off is made and throw no light on the decisions taken, despite a few thousand words. 
There is no explanation as to why the BoD aborted the earlier amalgamation of RAL and changed it to a demerger, which looks most questionable from a compliance angle.
RAL, which is a mere carcass or not even that, has increased its authorised capital from Rs23.5 crore to Rs601.30 crore after the demerger! The amount that should have been paid towards this exercise does not even figure in the accounts of RAL! 
RAL accounts show a debit for interest of Rs26.47 crore during the year, when the only balance in books is the quasi-equity of the parent of about Rs600 crore.
RAL has no revenue and no business to carry on during the entire year after the demerger is affected. Yet, the auditor had little difficulty in appeasing his conscience that with the efforts of the management to convert the zombie loans as 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!
Incidentally, the auditor of RAL, with no financials to audit, was paid Rs37.71 lakh as fees as against Rs35.6 lakh paid in the previous year when the turnover was above Rs500 crore! It is not that he audited the business that was consolidated with the parent. The parent auditor was separately paid Rs20 lakh for that effort!
The director’s report of RAL, which had no operations in the year ended 31 March 2022, has the remarks cited below, which I have extracted in part to save space:
The Company had entrusted the internal and operational audit to M/s Mahajan & Aibara Chartered Accountants LLP upto Quarter ending 30 June 2021 and then appointed Messrs. Ernst & Young LLP, a reputed firm of chartered accountants for the period 1 July 2021 to 31 March 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.
One truly wonders about the nature of internal control audit that a globally reputed firm undertook of a company that had no operations, no staff, no office space, and has only produced accounts that are a figment of the wildest imagination!
Moving on from RAL and shifting to its parent, the quarterly results for the first three quarters of 2021-22 are deafeningly silent on the upcoming write-off! The stand-alone results of the fourth quarter are represented by a solitary incomplete page on the website of the 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 and the press, makes one wonder if their silence has come at the price of a few suit-lengths of the choicest baby cashmere wool! 
In the well-known fairy tale by Hans Christian Andersen of the title ‘The Emperor’s 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 many regulators in the field would be like the child and ask the questions that should most deservedly be asked in this case!
(Ranganathan V is a CA and CS. He has over 43 years of experience in the corporate sector and in consultancy. For 17 years he worked as Director and Partner in Ernst & Young LLP and three years as senior advisor post-retirement handling the task of building the Chennai and Hyderabad practice of E&Y in tax and regulatory space. Currently, he serves as an independent director on the board of four companies.)
2 months ago
Excellent article. Thanks for the meticulous effort you have put in to dig into the auditor reports. Thanks to the Moneylife team also for this article.

Looks like the fabric(ation) maker is good at spinning a yarn and pulling the wool over peoples' eyes.

Many fundamental investors (me included) rely on the consolidated sales and P/L numbers shown on popular financial websites when valuing companies. We rely on the auditors to give a honest picture. However, auditor reports have not been entirely reliable and honest. I hope the Auditors are held accountable for higher standards than this.

Sir, you have provided a valuable note of caution for retail investors to check. Please write more such articles. If possible, please also write a series of articles or create a Moneylife video to teach investors about how to read and understand auditor reports. Thank you.
2 months ago
There's a PMLA law, but no PMSA act, S stands for siphoning. Remenber the distinguished Senior Raymond Chairman was sent to the streets a few years ago by his son and this Rs 900 crore pit may be related to the substratum of those events.
2 months ago
The underlying issue is complex enough and the author has further complicated it with distracting flowery language. My heads are hurting now.
2 months ago
Kudos for finding out this needle from the haystack. The moot point is: will something be done about it, either to the Company or to the auditors? Whether NFRA or ICAI will take cognizance of the sharp practices adopted by company management and conveniently approved by the auditors? This post must be forwarded to these authorities to see their reaction.
2 months ago
Many thanks Sir for the erudite article on misgoverning in Raymond Ltd, the management is as such notorious for lack of governance standards since long time & continuing the same in the new generation also. Long time ago in order to avoid wrath of the shareholders in AGM's the Co. shifted its R.O. from heart of Bombay to a village in Maharashtra & subsequently a series of decisions have gone thru' hurting minority shareholders. The management is lackadaisical & without a winning strategy. Long after an upstart has turned the tables in marketplace when the management is talking of Ethnic ! Too late for Incomplete man !
2 months ago
Review excellent work. Globally reputed firm is taking laws lightly inviting trouble in near future from law enforcement and controlling agencies.
Independence of risk management is missing
2 months ago
currently the stock is being pumped, recommended by every Tom, Dick & Harry Potter. People are saying that there is change of heart.
2 months ago
In which country you live Sir? This is an incredible India. If a Baba can run country's reputed exchange NSE from Himalayas then few exceptional loss here n there is nothing!
2 months ago
While I am not sure about it, in most probability the 600 crore given to RAL by parent may be for residential building constructed for the promoter. This has now been written off making it a free gift to promoter
2 months ago
tHanks for yr detailed views but the auditor who have done it should be taken to task by BSE/NSE/SEBi and relevant associations.
2 months ago
Mr. Ranganathan, thank you for the detailed and insightful writeup on the financial shenanigan at display. Post your sharing, I looked up at their P&L and indeed as you have highlighted, there is no mention on Exceptional loss (both in Director's report and Management analysis). What is even more surprising, there is no revenue for FY22 as against 437.64cr which they recorded for FY2021!!
2 months ago
You should then review the reliance industries financials , you will have lot more fun.
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