RCom poster child of everything wrong with corporate India: Report

“Reliance Communications Limited. (“Reliance”, the “Company” or “RCom”) is the poster child of everything that is wrong with corporate India, and irrespective of management’s assertions about “values” and “integrity” in various annual reports, we find no credible evidence of either in its financial statements or those of its former parent, Reliance Industries Limited (“RIL”). Doubts about management’s integrity and the short shrift to shareholders arise right at inception, when the demerger from RIL was undertaken on August 31, 2005, and the Company was listed on Indian bourses on March 06, 2006.”

This is an excerpt from a new report by a Canadian Investment Research company Veritas Investment Research. The 51-page report, titled Brothers In Arms: Misappropriating A Fortune—The Full Version, was published on July 18, 2011.

One of the key issue that the report addresses is the way in which ownership of promoters increased between August 31, 2005 and March 6, 2006. The report states: “Doubts about management’s integrity and the short shrift to shareholders arise right at inception, when the demerger from RIL was undertaken on August 31, 2005, and the Company was listed on Indian bourses on March 06, 2006. In the intervening period, ownership of promoters ballooned from 38.27% to 63% in RCom, under the guise of improving shareholder value and transparency.”

The report also states:

“The much discussed Ambani split is a charade to deflect attention from a well thought out plan to split family wealth via formation of similarly named companies, emboldened through strategically timed share allotments within those companies, confusing nomenclature and repeated name changes to enrich insiders at the expense of public shareholders.”

Further it states:

“If the 821.48 million shares issued to management at the formation of RCom are used as a benchmark, we estimate that RIL shareholders suffered an egregious loss of R 25,204C (US$ 5,544.8M) based on the March 06, 2006 RCom closing price of approximately R 307 (US$ 6.75) per share.”

According to the report, RCom, on a cumulative basis from FY07-FY10 had inflated its normalized profit before tax (PBT) in the core telecommunication business by Rs 10,944 crore.

The report states that the EBITDA, EPS, and book equity reported by the company since 2006 are open to interpretation.

“We give the Company a zero rating on each of corporate governance, balance sheet strength, and accounting and disclosure. We also believe that directors at the helm of RCom and RIL have failed in their fiduciary duties, and that significant and meaningful reform is needed in Indian governance standards for the protection of minority interests and the institutional and retail shareholder base, both domestically and internationally,” the report adds.

The report further states:

“It all began innocuously enough with the passage of the following resolution, “The Company has significant plans for making investments, directly or through associate companies, in various businesses, including oil and gas, petrochemicals, refining and marketing, telecom, infocom, power, etc.”, on Friday, the 15th day of June, 2001, at 11:00 AM at Birla Matushri Sabhagar, at 19 Marine Lines, Mumbai, at RIL’s 27th Annual General Meeting of Shareholders.

Ultimately, that culminated in the de-merger of Reliance Infocomm (“RIC”), Reliance Communications Infrastructure Limited (“RCIL”) and Reliance Telecom Limited (“RTL”) under the aegis of Reliance Communications Venture Limited, which finally emerged on the BSE in its current form. Each has a unique story to tell, and speaks to the mala-fide intent of the majority owners to fleece shareholders and enrich themselves.”

The report also exposes faulty accounting standards followed by RCom. It states:

“There are various kinds of accounting practices that Veritas has witnessed over the years: conservative, creative and aggressive. To that category we now add clandestine. That the financial statements of RCom are full of potholes is simply established by the fact that to avoid paying capital gains taxes in India, the Company booked income on the sale of shares in a subsidiary, through an offshore trust. How’s that possible you ask? Read page number 10-11 of the report for a detailed explanation of this…

Click here to read the entire report…

(Info: Veritas is Canada’s largest and most followed independent equity research firm)

(Update: The Power Post had uplinked the entire report on Scribd but the file was removed at the request of Veritas for unknown reasons)

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