Indo-Rama Hides Rs 40-Cr Losses

Its annual report for the year, however, shows a profit of Rs 1.1 crore. It has also declared a 25-per cent dividend, leading to an outgo of Rs 17.3 crore.

The auditors, S R Batliboi & Co, have qualified the annual report for 1995-96, refusing to accept the company's practices. The matter is expected to come up at Indo-Rama's 10th annual general meeting in Dhar district of Madhya Pradesh today.

A senior vice-president of the company, when contacted, refuted that the company has violated accounting standards. He maintained that the company has done no wrong.

"We have not made losses. We have followed practices prevalent in the industry. In certain cases, we felt we were right and decided to follow it despite differences with the auditors," he explained.

 

A scrutiny of the balance sheet reveals that procedures like change in depreciation calculation (Rs 11.6 crore); deferment of expenditure (Rs 10.6 crore); non-provision for decline in value of market investments (Rs 7.9 crore); change in accounting for interest income on outstandings Rs 8.6 crore) and others had benefited the company to the tune of Rs 40.8 crore.

If this had been included in the books, Indo-Rama would have ended the year with a huge loss.

The significance of this can be seen in one act, change in depreciation calculation: Indo-Rama has treated its newly-commissioned yarn and fibre plant in Nagpur as a continuous process plant, thereby attracting a depreciation rate of 5.28 per cent against 10.34 per cent for other plants. This has led to lower depreciation charge of Rs 34.0 crore, against actual depreciation of Rs 45.6 crore.

The benefit of Rs 11.6 crore is crucial as the company's net profit is only Rs 1.1 crore.

Experts say a spinning and texturising plant can in no way be considered a continuous process plant. The company has misunderstood the definition of a continuous process plant and charged a lower depreciation rate.

"A continuous plant is one which cannot be shut down due to certain operational reasons, which has to run continuously. For example, a steel or petrochemical plant qualifies for this category as any stoppage will lead to huge financial or energy losses," said Sunil Kothare, a Mum-bai-based chartered accountant.

Indo-Rama justifies its move, saying the plant runs 24 hours a day throughout the year. "We have taken technical opinion and ascertained it qualifies for lower depreciation," explain company sources. But they admit the move violates recommendations of the Institute of Chartered Accountants of India (ICAI).

Added to the benefit of Rs 11.6 crore is another Rs 7.9 crore, relating to non-provision for decline in market value of quoted investments.

The company's stand is that the decline is temporary and no investment needs to be provided. This is another violation of ICAI guidelines.

Last year, Indo-Rama's plant was shut down for 60 days for technical reasons. The expenditure of Rs 10.6 crore has been treated as deferred revenue expenditure to be amortised over five years.

Kothare points out that expenditure is usually deferred when the activity for which it is incurred is expected to yield benefits over a period of time. For example, advertising expenses on a brand.

This is not the case with Indo-Rama. The expenditure was incurred on a plant shutdown and there is no reason to amortise it over five years.

The company has also not accounted for discounts and rebates issued to customers as credit notes have not been issued. This is a violation of Section 209 of the Companies Act, which states books of accounts must be kept on an accrual basis. The company has stated it will account for the discounts when credit notes are issued. But if they are not issued for a long period, say two years, what happens? Will the company defer payment till then?

So far, Indo-Ramainterest income was credited even before receipt of the principal amount.