Companies are trying to clean up their balance-sheets and make provisions for forex losses as they think the disclosures will not have a major bearing on their valuations, which are already down.

This is reflected in the large number of companies reporting forex losses in the quarter ended December 2008, against the quarter ended September 2008.

This is despite the rupee depreciating only 3.93 per cent in the December quarter, against 9.10 per cent in the quarter ended September, 2008.

The number of companies, which have come forward to disclose MTM provision, is substantially large if one compares with Q1 when 107 companies made MTM provisions to the tune of Rs 6,966 crore and the rupee had depreciated 7.28 per cent.

“Companies realise that with the stock market down, valuations will continue to be low, and it’s good time to make provisions and clean up their balance-sheets,’’ said a Mumbai-based forex expert.

The fraud at Satyam has brought the auditors’ role under scanner, which led the stock market regulator Sebi to propose a peer review of audit reports of Sensex and Nifty companies. This is also pushing companies to come clean on losses.
 

“Post-Satyam, auditors are looking at numbers with a magnifying glass, asking more questions,” added a forex expert. Auditors say this has brought a change in the mindset of companies, which will be reflected in the year-end results.

“There’s reluctance on the part of companies to be aggressive in treatment of certain entries in their books of accounts. Today, they are more conservative,’’ said Apurva Mehta, associate director, KPMG Advisory Services.

Earlier, companies would take a different view on treating off-balance sheet items like bank guarantees, derivatives or credit default swaps. But today, they are coming under the accounting focus, said Mehta.

Experts estimate that more than two-thirds (70 per cent) of the MTM provisions on forex losses can be attributed to foreign currency loans, 20-25 per cent to losses suffered on forex receivables, and 5-10 per cent to forex derivatives.

Indian companies took advantage of lower interest rates to raise foreign currency loans and foreign currency convertible bonds (FCCBs). They were encouraged by three positive factors: the rupee was appreciating, the stock market was on a high aided by strong FII inflows, and most companies posted good results.

Many in India thought the rupee would appreciate to Rs 38, and most companies did not cover their long-term forex liabilities. They were caught on the wrong foot when FIIs withdrew more than $14 billion from stock markets within a short span of time. The stock market crashed and the rupee depreciated to Rs 49-level.

“This was the first blow. It was followed by high oil prices, high cost of capital and limited export growth, which led to Indian companies reporting poor results. It was a double whammy impacting India Inc,’’ said Hinduja group CFO Prabal Banerji.

As a consequence, not only the loan liability had to be re-stated at a much higher figure due to the depreciation of the rupee, but even the quasi-equity instruments like FCCBs were also not any longer perceived to be convertible as the existing market prices were abysmally lower compared to the conversion prices agreed.

The second category of losses was due to export receivables. Exporters thought the rupee would appreciate and had covered their forex receivables at Rs 40-41, which turned out to be counter-productive when the rupee started depreciating.

These forward covers resulted in the second major category of losses for Indian companies, accounting for 20-25 of the forex losses while losses on derivatives would account another 5-10 per cent of the forex losses, estimates Banerji.

Companies, which have reported forex losses include Ranbaxy, M&M, Essar Oil, Tata Motors, JSW, GHCL, TCS, Maruti, Dr Reddy’s, Cipla, Suzlon, GMR, NIIT and Mindtree. Companies like Bajaj Auto and Bharat Forge have adopted AS-30, which allows them to take forward their forex losses into a hedging reserve.

(With research inputs from BS Research Bureau)

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