Home / Industry / Banking /  More trouble for Future Retail? Lenders weigh forensic audit

Future Retail Ltd’s lenders are planning to discuss allegations of financial irregularities against the retailer and may initiate a forensic audit of the company’s books, two people aware of the development said.

In a 24 November letter to the finance ministry and the Reserve Bank of India, Future Group’s partner Inc. alleged funds diversion in Future Retail, including unfair related-party transactions worth about $1 billion; a sudden spike in Future Retail’s debts; and an inordinate delay in payment to creditors due to discrimination by promoters.

“The lenders will meet this week and discuss whether a third-party agency or a forensic auditor could be appointed to scrutinize the allegations against Future Retail," one of the two people said, seeking anonymity.

In its letter, Amazon cited correspondence by Future Retail’s audit committee to the board, flagging concerns. Mint has reviewed a copy of the audit committee’s letter. On 29 August 2020—the day Future Group announced its plan to sell assets to Reliance Industries Ltd for 24,713 crore—Future Retail’s audit committee wrote to the board regarding the need for a third-party audit into the accounts of Future Retail. The committee expressed concern that it could not ascertain the utilization of funds raised by the company, transfer of substantial amounts of money from Future Retail to Future Enterprises Ltd (FEL), and payments made towards security deposits for stores rather than creditors.

The letter said: “The committee members observed that there was a sudden increase in debt from Feb 2020 to 23 March 2020."

“The committee members expressed grave concern regarding the deteriorating financial position, in spite of various equity and debt fund mobilizations concluded in December 2019 and March 2020 quarter, and a detailed explanation of all significant transactions undertaken by the company was sought by the committee members," the letter said.

An audit committee meeting in August 2020, the letter said, discussed key financial issues relating to existing working capital limit utilized; funds available for drawdown; cooperation and support from lenders; share pledge funding at promoter-entity level; grapevine communication in the market; delay in payment to vendors and falling share price.

According to the letter, only two of the issues raised—relating to falling share price and share pledges—elicited a satisfactory response from Kishore Biyani, founder and group chief executive officer.

During FY20, Future Retail paid significantly higher security deposits—it increased by approximately 125% from FY19 and continued at around the same level in FY21 even as the pandemic forced retailers to shut stores. The number of stores run by Future Retail also reduced by 10% from 1,511 to 1,350 and then further to 1,308 over successive financial years, the letter said.

The audit committee of Future Retail said it is perplexing that in FY20, the company’s advances to suppliers increased by 184%, even though purchases during the financial year fell from previous years.

The letter said that transactions of almost 7,000 crore were undertaken between Future Retail (FRL) and group company FEL in a fiscal year.

Citing the audit committee’s letter, Amazon had said, “These significant related-party transactions between FRL and FEL seem to be followed by yet another transaction between these two entities in FY20-21 where FRL has purchased goods and services from FEL for an amount of 682 crore at a time when FRL claims to be under significant financial stress due to the covid pandemic."

The committee asked FRL’s board to explain the movement of fund flow and the reason for the spike in debt.

“After detailed discussion and as requested by the committee, the management (of FRL) would provide details as sought and also provide all assistance for checking to be done by an outside (third-party) expert/agency(ies), other than existing statutory auditors, in connection with above. It was suggested that the scope of work for outside third-party expert/agency(ies) would be decided in consultation with the audit committee," the letter said.

Emails sent to the key lenders of FRL, including Bank of India, Union Bank of India, Bank of Baroda and Axis Bank did not elicit any response.

A Future Group spokesman said, “ Our lenders have not called for any joint meeting, with or without inviting us to discuss the matters related to Amazon’s allegations."

Regarding the audit committee’s letter raising concerns about FRL’s financials, the spokesman said, “It was the committee’s job to raise questions to the management. Various questions were raised by the committee from time to time and these were clarified through detailed explanations by management with supporting documents and presentations to their satisfaction, as well as through special audits wherever required."

For the year ended 31 March, Future Group reported a loss of 5,943 crore on sales of 11,723 crore, a drop of 66% over FY20. The group’s total debt was up by 7% to 20,742 crore. Lenders led by Axis Bank have a total exposure of 16,000 crore to the conglomerate.

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