BackEros hits back at allegations, names law firm to conduct independent review
The company's audit committee has engaged the US law firm Skadden, Arps, Slate, Meagher & Flom Llp to conduct an independent review
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Mumbai: Eros International Plc. on Monday said the film production and distribution firm is confident about its business fundamentals but its credibility is being damaged by rumours that are creating panic amongst investors.
The company said its audit committee has engaged the US law firm Skadden, Arps, Slate, Meagher & Flom Llp to conduct an independent review.
Eros International, the first Indian media company to list on the New York Stock Exchange, is the parent company of Eros International Media Ltd, which is listed on local bourses.
Eros International has been fighting allegations of financial misreporting linked to its business from the United Arab Emirates (UAE).
Wells Fargo analyst Eric Katz cut his rating on the shares to market perform, saying he wasn’t comfortable with explanations about the company’s growing business and receivables from the UAE, according to a 24 October Bloomberg report.
US attorneys have started investigating parent Eros International following allegations that the company may have issued misleading business information to the investing public, the Times of India reported on Monday.
Shares of both the US-listed entity and the India-listed firm have fallen sharply on these concerns. India-listed Eros International Media lost 9.99% to close at ₹ 250.50 on Monday on the BSE, while the benchmark Sensex lost 0.37% to 26,559.15 points. The shares have lost 61.13% from their 52-week high.
“In the past two weeks, there has been a vicious campaign to damage the credibility of Eros International by spreading false rumors and misinformation regarding its business with an objective to create panic amongst the investor community. No new facts about the company have come to light since the filing of the FY2015 financials or its Q1 FY2016 financials at which time the market sentiment was extremely positive," Eros International Plc. said in its statement.
The company explained that its revenue from FY14 to FY15 increased by 21% to $284.2 million. On its own, this increase in revenue accounts for approximately $50 million of the overall increase in receivables. Additionally, in FY15 the company disclosed that it had renegotiated and given extended payment terms to customers amounting to $31.2 million of receivables. The increase in revenues, combined with receivables having extended payment terms, explains the jump in overall receivables from FY2014 to FY2015, the company said, clarifying its stand.
“The company’s receivables balance is expected to be approximately 50-55% of revenues by end of FY2016, which is in line with other global content companies," it said.
A Twitter user called Market Farce, whose profile reads, “Focused on uncovering farcical, fraudulent and dishonest financial market activity", had claimed UAE sales are not legitimate and had questioned the company’s Eros Now registered users. The stock has been sinking since mid-October, when Market Farce, who declined to reveal his identity when reached by Bloomberg, began tweeting about Eros.
Eros Now is the online channel of Eros International Plc.
On Friday, the investment blog Alpha Exposure wrote that due to aggressive accounting practices, Eros’ reported earnings are significantly overstating the economic reality of its business model and its subsidiary financials reveal a lack of free cash flow and raise many questions about the company’s accounting.
“The company has enriched its controlling family at the expense of shareholders through a series of related-party transactions. Eros Now is poorly positioned to win the battle for streaming media in India and appears to have made meaningful misstatements to investors. Based on the company’s persistent negative free cash flow and growing debt and share count, we believe the stock is worthless," Alpha Exposure wrote.
The company clarified that content is at the core of its business adding that it “believes that it’s content amortization policy is just as conservative as its US peers, despite the fact that the Indian film entertainment has a much longer “tail" of revenues".
“When Eros International Plc. consolidates its subsidiary financials, it cancels out all inter-company transactions between the group companies and only reports the third party revenues, costs and profitability," it said clarifying the issue of related party transactions.
Grant Thornton India Llp is the auditor of Eros International Plc. and performs the audit of the company’s consolidated financial statements, which includes its subsidiaries, in accordance with the standards of Public Company Accounting Oversight Board (US).
“Eros will survive this attack and emerge a winner in the long run for many key reasons including: The company’s fundamentals are strong with successful track record spanning decades. The company may be two years old on NYSE but its business is not a start-up," it said.
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