Vishal's true picture puffed up: Auditors

CDR process may stumble as lender demands forensic audit, threatens to move CLB

Debt-ridden Vishal Retail had overstated profits and under-reported losses, according to its auditors. In a ‘limited review report’ to the board of directors earlier this month, the auditors – Haribhakti and Company – said for the nine months ended December 2008, the company stated a net profit of Rs 48.93 crore instead of Rs 20.24 crore.

Similarly, the net loss for the year ended March 31, 2009, was reported as Rs 88.94 crore instead of Rs 94.49 crore, according to the report, which has also been filed to the stock exchanges.

The troubled retailer is currently undergoing a corporate debt restructuring (CDR) exercise.

The auditors also pointed out some gaps in listed income, as well as in recognising contingent liabilities of the company. They, however, said the review was primarily limited to inquiries of personnel and analytical procedures applied to financial data, and thus provide less assurance than an audit.

Forensic audit demanded
The auditors’ comments are likely to impact the ongoing CDR process, which is already facing some hurdles. At least one of the bankers in the ‘CDR cell’ — which comprises the six main lenders to the company — had begun demanding a forensic audit of the company.

The banker has threatened to take the matter to the Company Law Board (CLB) if the forensic audit, usually undertaken to uncover financial fraud, does not come through, a senior official connected with the CDR process said. He did not want to be named.

Six of the 13 lenders with exposure to the troubled retailer are part of the CDR cell. These are State Bank of India, Bank of India, ING Vysya, UCO Bank, HDFC Bank and HSBC.

The forensic audit was demanded as there is an an apprehension that money raised by Vishal Retail in the past two years had been siphoned out.

When asked whether there was a case for an audit, Vishal Retail’s chairman Ram Chandra Agarwal said: “I have been hearing about this, but I have not received anything in writing.”

The CDR cell is expected to take a final decision on the debt restructuring on March 26. All lenders who are part of the CDR cell are bound by the decision made by it.

“Normally, the lead bank takes other banks into consensus. It is not very common to see a (non-lead) bank approach the Company Law Board, but it is possible,” said Manoj Kumar, senior partner, Hammurabi & Solomon, a corporate law firm.

In such an event, the company and those involved in the CDR would become answerable to the CLB.

The chief general manager of the CDR cell, K P Ramakrishnan,refused to comment on the likelihood. “Every decision is taken with a super majority of the lenders, which can be 60 per cent by number or 75 per cent by their exposure to the debt,” he said

Gap in inventory
The demand for a forensic audit was triggered by the speedy depletion in the value of inventory held by the company. The company reported an inventory of Rs 750 crore as on December 31, 2008. As on December 2009, this was valued at Rs 392 crore. The inventory is now valued at less than half that number.

The company conceded it had been writing down inventory since January 2009. “We have been in the process of writing off bad inventory. There is no case for further write downs,” said Agarwal.

Since Vishal’s inventory is not dominated by perishables, eyebrows have been raised at these write downs.

The limited review report of the auditors also highlighted the inventory write offs. While Rs 134 crore was written off earlier on account of “shrinkages, slow-moving, non-moving, obsolete, damaged goods, etc”, another Rs 143 crore was written off between January 1 and March 3, 2010, according to the report.

“The basis of such write-offs has not been explained. Hence, we are unable to comment on the adequacy of the amount written off and/or further provision for write-off required in this regard,” said the report, signed off by Raj Kumar Agarwal, partner in the firm.

“VRL should not require write down of such a scale. Even if it is assumed that the write down was a genuine cleansing of books, there are reasons to suspect that this write down was overdue for many years and the financials on the basis of which money was raised from lenders and investors did not truly represent the company’s affairs,” said the official.

Lenders are also viewing with suspicion a new entity — Unistar Retail — started in December 2009 by Sunil Hiravat, who has been a close associate of Ram Chandra Agarwal. “I have nothing to do with Unistar,” said Agarwal.

Vishal Retail had gone for corporate debt restructuring last November. The Texas Pacific Group, a private equity fund, is said to be keen on taking over the assets of Vishal, with an investment of Rs 250 crore.