Government to set up new agency to probe corporate accounting frauds

The government will soon set up a specialised agency to investigate large corporate accounting frauds. It is keen to establish a robust mechanism for faster inquiries into scams such as the one at Satyam Computer Services, which overstated earnings for several years under a previous management.

The proposed agency is likely to examine accounting frauds of certain classes of listed companies or those of Rs 500 crore and more.

To be formed under the Companies Act provisions, the agency will be mandated to investigate auditing and accounting frauds, either suo motu or on referral by the Centre.

 

“The threshold for accounting frauds to be probed by the upcoming agency is likely to be Rs 500 crore and above. It could also probe frauds of certain classes of listed companies,” said a senior government official. “Currently, there’s a lack of specialisation required to probe complex accounting frauds. The agency will ensure swifter probes.”
First suggested in the aftermath of the Satyam fraud, in which the auditor was also implicated, the upcoming agency will have an overarching role to regulate chartered accountants as well as set standards. It will have forensic auditors on its panel as well.

At present, the Institute of Chartered Accountants of India (ICAI) has authority to investigate and take disciplinary action in cases in which an auditor is involved. Any fraud below the threshold set by the government could still be investigated by the professional association.

ICAI has requested the corporate affairs ministry to not dilute its authority. If the government is keen on setting up an authority, ICAI has suggested that this look at high-value accounting scams above a threshold of Rs 1,000 crore.
“We have made a representation to the government that ICAI’s mandate should not be diluted and authority to initiate probe and take disciplinary action against auditors should rest with the institute,” ICAI president Manoj Fadnis told ET.

In recent years, ICAI has probed auditors of companies such as Reebok, Sesa Goa, Satyam and the Saradha Group among others. These inquiries followed references sent by the Serious Fraud Investigation Office (SFIO).
“The agency will strengthen the government’s mechanism and will ensure faster enquires into accounting frauds. For the auditing profession as well, it will be a very positive step as the agency will oversee quality of profession,” said Lalit Kumar, partner at J Sagar Associates. “But the government also has to ensure that ICAI’s mandate is not diluted.”

A recent study by Assocham and Grant Thornton India said there was a 45 per cent increase in Indian corporate fraud in the past two years. The proposed agency will have powers to penalise audit firms in case they are found guilty of misconduct. Penalty could also include the disbarment of such audit firms.

The agency will also be solely in charge of setting up and revising accounting standards and will have professionals from industry and several government bodies on its panel. “The agency will make recommendations on formulation and laying down of accounting and auditing standards for companies,” a senior government official told ET. “It will also monitor and enforce compliance and oversee quality of service of professionals in the industry.”

ET VIEW

No Duplication Please, Overhaul SFIO

Duplication makes no sense. India already has a specialised agency, the Serious Fraud Investigation Office (SFIO) to do cutting-edge investigation on financial frauds. The Institute of Chartered Accounts of India, on its part, can take disciplinary action against errant auditors. True, the SFIO’s functioning has been dismal so far, and what is needed is to transform the agency to take on new and complex probes. It should hire professionals laterally including cyber security experts, forensic auditors and tap the best talent from other investigating agencies. Ideally, it should draw together a team depending on the case. But to attract the best talent, it also needs to pay market-linked salaries.

Source: http://economictimes.indiatimes.com/articleshow/49927368.cms

Ease of doing business in India – Related Party Transactions

Related party Transactions.

As part of its ongoing efforts to improve ease of doing business in the country, the Corporate Affairs Ministry has notified changes that further relax compliance requirements.

As another major step, the Companies Amendment Act, 2015 addresses “problems faced by large stakeholders who are related parties”.

In this new amendment, it replaces “special resolution with ordinary resolution for approval of related party transactions [Section 188] by non-related shareholders”.

Besides, related party transactions between holding companies and wholly owned subsidiaries have been exempted from the requirement of approval of non-related shareholders.

As per the amendment, the requirement of passing special resolution for approving certain related party transactions has been done away with. With this, certain related party transactions can now be approved through ‘ordinary resolution’ instead of ‘special resolution’.

Further, it has also been provided that for related party transactions between a holding company and its wholly owned subsidiary, no resolutions are required to be passed if the accounts of the holding and subsidiary company are consolidated and placed before the shareholders in a general meeting for approval.

Punishment for Contravention on defaults relating to deposits

Punishment for Contravention of Section 73 and Section 76 of Companies Act, 2013 for Acceptance of Deposits by Companies [New Section 76A inserted]

 

The Companies (Amendment) Act, 2015 has inserted a new Section 76A after Section 76 which introduces penal provisions for contravention of provisions of Section 73 and Section 76 (pertaining to acceptance of deposits by a company) or rules made thereunder, or if a company fails to repay deposits within the time specified.

As per the amended law:
A company, if it fails to repay deposits within the specified time, shall be punishable with a fine which shall not be less than Rs.1 crore but which may extend to Rs. 10 crores, in addition to the payment of the amount of deposit or part thereof and the interest due.
Every officer of the company who is in default shall be punishable with imprisonment which may extend to seven years or with a fine which shall not be less than Rs. 25 lakhs but which may extend to Rs. 2 crore, or with both.
Thus, specific punishment is prescribed for non-compliance to norms governing deposits taking activities.

Valuation of Business under DCF Method

Valuation of Business under DCF Method

Valuation of enterprise is a complex assessment of the intrinsic value of a business enterprise, based on the strength of historic performance, present value and the future potential taking various factors in to account. Hence, the valuation of a business enterprise is both an art and a science. There are broadly three approaches to valuation, namely, Net Asset Approach, Income Approach and Market Approach.

First one is based on Net Assets of the enterprise, viz., the value of the Total Assets as per the Audited Balance Sheet less the Total Liabilities.

Second one is based on the income of the enterprise, viz., EBITDA (Earnings Before Interest, Depreciation and Amortization).

Third one is the market approach, factoring both of the above and the Discounted Cash Flow (DCF) of future earning potential of the business enterprise.

DCF method is recommended as the most appropriate method for valuation of most business enterprises, including start-ups and RBI acknowledges internationally accepted pricing methodology for valuation of shares. SEBI and other bodies also recognize the DCF method as acceptable method of valuation. An illustrative report of valuation on the basis of the DCF Method is given below for the information of the readers.

Valuation of Business of ATL Networks Limited

Background Information:

ATL Networks Limited is a leading telecom infrastructure and service provider with world class path breaking Optic Fiber Technology FTTH (Fiber-to-the-home). ATL Fiber Network offers the High speed Internet access and plethora of services. ATL Networks offers the most advanced technology of delivering the Internet at unbeatable prices.

Valuation Analysis Date:

As represented by the Management, we have taken note of the developments that have happened between Financial Years 2013-14 and 2014-15 and till May 15, 2015, which may have significant impact on the valuation of the entity. Hence, for the focus of valuation of our analysis, we have considered the valuation date to be 23 May 2015. The Management of ATL Networks Limited have provided us the Historical Financials till March 2015 and the provisional till May 15, 2015 and the Projected Consolidated Financials from 2015-16 for the next 10 years.

Valuation Analysis Methodology:

For the purpose of Valuation of business entity, we have used the guidelines as per the Accounting Standards and the latest amended pricing guidelines under the Foreign Exchange Management Act, Regulations issued by Reserve Bank of India as on May 4th 2010.

The Valuation Method suggested by these latest amended guidelines for valuation of business of an unlisted Company is Discounted Cash Flow method.

Discounted Cash Flow Method (DCF):

“The DCF method uses the Future Free Cash Flows of the Company (FFCFC) or equity holders discounted by Cost of Capital/Cost of Equity respectively to arrive at the present value. In General, the DCF method is strong and widely accepted valuation tool, as it concentrates on cash generation potential of a business.

Valuation Analysis:

As per the FEMA Regulations, we have considered the DCF method for valuation of ATL Networks Limited.

The Future Free Cash Flows to the Company, FFCFC have been calculated based on the financial projections for the period from 2015 to 2025 as provided by the Management. Based on the discussions, we understand that a heavy capital expenditure would be required in the initial years and the revenue will be dependent on the initial capacity building. The Company will break even only after 18 months.

The future growth percentage is promising based on market penetration solely in the Telecom Industry, in particular the growth in the broadband connections. Hence, the growth in the domestic market & competition in the domestic market alone is factored in the above valuation analysis.

Discounting Factor:

The Discounting Factor considered for arriving at the present value of free cash flows to the company is weighted average cost of capital. The cost of debt is post tax interest cost for debt and cost of equity is calculated based on Capital Asset Pricing Model (CAPM). We have considered domestic comparable companies to calculate the Beta utilized in the CAPM model to estimate the Cost of Equity.

Valuation of ATL Networks Limited using DCF method:

Under DCF Method, the sum of Present Value of Free Cash Flows of the entity in the explicit period is arrived at in Annexure – A. ATL Networks Limited, being an unlisted company and a company of moderate size, a liquidity discount and size of discount of 10% has been applied to derive the fair value of future earnings / cash flows.

Based on the method discussed above and subject to the assumptions and limitations stated separately in the annexure to the report and in our engagement letter, we have calculated the valuation of the business entity under the DCF Method of Valuation.

Sources of information

The valuation analysis is based on a review of the documentation provided by the Management. The sources of information include:

  1. Foreign Exchange Management Regulations 2000
  2. Audited consolidated financials for the period up to 31.03. 2015
  3. Provisional financial statement of the company as on 15.05.2015
  4. Projected financials received from the client for the 10 years from 2015-16
  5. Other industry related information from the World Wide Web and various publicly available sources, etc.
  6. Discussions with the Management of ATL Networks Limited
  7. Information from financial publications on Telecom industries, some of which are listed below.

 

http://articles.economictimes.indiatimes.com/2014-11-10/news/55955622_1_digital-india-broadband-growth-google-india

http://www.nextbigwhat.com/broadband-penetration-in-india-in-2012-297/

http://www.ibef.org/industry/telecommunications.aspx

http://www.trai.gov.in/WriteReadData/ConsultationPaper/Document/4.pdf

Caveats

Provision of valuation recommendations and considerations of issues described herein are the areas of our regular corporate advisory practice. The services do not represent accounting, audit and financial due diligence review, consulting, transfer pricing or domestic tax related services that may otherwise be provided by us as Chartered Accountants. We have relied on explanation and information provided by the management and accepted their information provided to us as accurate. Although we have reviewed such data for consistency and reasonableness, we have not independently investigated or otherwise verified the data provided. Therefore, we assume no liability for the accuracy of the data. The valuation analysis recommendation contain herein is not intended to represent the value at anytime other than the date of this report. We have no present or planned future interest in either the company or its subsidiaries if any, and the fee for this report is not contingent upon the value reported herein. Our valuation analysis should not be construed as investment advice, specifically we do not express any opinion on the suitability or other wise of entering into this consolidation of business transaction.

Distribution of report:

The valuation analysis is confidential and has been prepared exclusively for the management of ATL Networks Limited for Company Law requirements in India. It should not be used, reproduced or circulated in whole or in part, without the consent of the undersigned to any other person and any other purpose other than mentioned earlier in this report.

 

Sd/-

For Sundar.K. F.C.A., A.C.S.,

Chartered Accountants