Disclosure of accounting irregularities is the latest scandal to hit India Inc
Avantha has a negligible stake in CG Power, as lenders invoked the pledged promoter shareholding
The board of Gautam Thapar-promoted CG Power and Industrial Solutions Ltd said the company will restate accounts after discovering “significant accounting irregularities" and governance lapses, sending its shares plunging by the maximum daily limit of 20% on Tuesday.
The board said it has found “suspect" transactions that have led to significant understatement of the company’s liabilities and advances to related and unrelated parties.
CG Power’s disclosure of accounting lapses is the latest in a series of governance and accounting scandals that have hit India Inc. over the past year, increasing scrutiny over not just the promoters of the companies but also independent directors, auditors and regulators.
The inability of Thapar’s Avantha Group to meet debt obligations has meant that group companies had to cede control of CG Power to lenders, although they are still listed as the promoter group.
As on 30 June, Avantha had a negligible stake in the company, with lenders invoking the entire pledged promoter shareholding earlier this year. Private sector lender Yes Bank holds a 12.79% stake in CG Power as of 30 June, while other major shareholders include HDFC Mutual Fund, Aditya Birla Sun Life, Franklin Templeton and Life Insurance Corporation of India.
“The total liabilities of the company and the group may have been potentially understated by approximately ₹1,053.54 crore and ₹1,608.17 crore, respectively as on 31 March 2018," CG Power said in its exchange filing.
The company said that advances to related and unrelated parties and the Avantha Group may have been potentially understated by ₹1,990.36 crore and ₹2,806.63 crore, respectively as on 31 March last year.
The board said that certain assets of the company were purportedly provided as collateral without due authority and that the company was made a co-borrower and/or guarantor for enabling ostensibly unrelated third parties to obtain loans without due authorization.
These transactions were purportedly executed by company personnel (current and past) including certain non-executive directors, certain key managerial personnel and other employees, the company said.
Also watch: CG Power shares slump after board finds 'suspect transactions'
CG Power’s revenue rose to ₹5,355 crore in the year ended 31 March from ₹5,106 crore in the previous fiscal. It reported a loss of ₹1,403 crore in the year ended 31 March compared to a profit of ₹19.24 crore in the previous year.
Avantha Group’s troubles can be traced to its ambitious expansion plans fuelled by debt in the pre-Lehman Brothers period, when it made the largest overseas acquisition by an Indian paper maker in 2006, buying Malaysia’s largest pulp and paper company Sabah Forest Industries in a $261 million deal. That, and other acquisitions, eventually stretched the group’s balance sheet too thin.
According to Bloomberg data, CG Power reported a consolidated debt of ₹2,664 crore as on 31 March, up from around ₹1,996 crore in the previous fiscal, while Ballarpur Industries Ltd, another group company, reported a debt of ₹5,496 crore as on 31 March.
Ballarpur too has seen massive erosion in share value, with its stock price falling over 86% since the start of the year to close at ₹0.73 on Tuesday.
The promoter group holds 25% in Ballarpur, however almost all of it is pledged with lenders as of 30 June, stock exchange data shows.
In 2017, lenders to Ballarpur Industries took management control of the company as part of strategic debt restructuring, a Reserve Bank of India mechanism to address bad loans.
The group’s foray into the power business too didn’t yield a successful outcome, saddling it with additional debt.
Its 600 megawatt (MW) thermal power plant in Chhattisgarh under Korba West Power Co. has been sold to Adani Group by lenders. Banks are also trying to find a buyer for its other power plant in Madhya Pradesh—Jhabua Power—which has 600MW of operational thermal capacity, with an additional 660MW under implementation.