Sicom Skirted Rs 14-Crore Loss, Says Auditors' Note

The erstwhile Maharashtra government institution made a net profit of Rs 34.67 crore last year on a gross income of Rs 177.47 crore.

Sicom has not provided for decline in market value of investments worth Rs 36.57 crore. It has also not provided for bad and doubtful debts worth Rs 12.58 crore.

In its observation, the Comptroller and Auditor General of India have said they have no comments to make on the accounts.

In their report, the auditors S S Nayak have stated that such non-provision of investments in not in accordance with Accounting Standards 13 of the Institute of Chartered Accountants of India. The net profit for the year and value of current investments are higher, to the extent of such provision not made, they add.

Accounting Standard 13 of the Institute says companiesshould provide for decline in market value of quoted investments, unless the managements feel such decline is temporary in nature.

This loophole has been exploited by several companies whose investments have declined. They say the decline is only temporary so they are making a provision.

Recently, Delhi-based Indo-Rama Synthetics Ltd resorted to this practice and succeeded in converting a Rs 40 crore loss into a Rs one crore profit.

In an explanation, Sicom has defended its action saying the decline in market value is temporary in nature. Value of other investments have risen and the company has also created a special reserve for appropriation towards any future losses, so, no provision is made towards diminution in value of investments.

The erstwhile Maharashtra government institution has total quoted investments worth Rs 250.48 crore, including long term investments in equity shares, debentures, units, warrants and current investments.

Leading chartered accountants in Mumbai say Accounting Standard 13 applies to all companies, non-banking financial companies, and financial institutions.

Financial institutions or finance companies like Sicom cannot have any special treatment, says one accountant.

Sicom has also not provided for bad doubtful debts to the extent of Rs 12.58 crore. It has cited the creation of special reserve of Rs 61.20 crore as under section 36 (I) (vii) of Income Tax Act, 1961.

A special reserve is a tax saving mechanism for non-banking financial companies. Funds diverted to the special reserve from profits would not be liable to income tax.

The reserve is also used to provide a buffer against future losses, so Sicom says it is justified in not providing for Rs 12.58 crore for bad and doubtful debts. The reserve at the end of March 31, 1996 is worth Rs 61.20 crore.

Bad and doubtful debts to be provided for stood at Rs 14.58 crore on March 31, 1996. Out of this, Sicom made a provision for Rs two crore and the remaining has been left out.

Sicom did a similar thing in 1994-95. Non-provision for bad and doubtful debts stood at Rs 25.31 crore, out of total provisions necessary of Rs 26.31 crore.

But accountants say if the reserve is worth Rs 61.20 crore, the company should not have made a provision for the entire Rs 14.58 crore. Why did they provide for only Rs two crore and not the remaining Rs 12.58 crore? That's not the normal practice, asks an accountant.