Bank of India's net profit has plummeted by 44 per cent in 1998-99, from Rs 364.51 crore to Rs 201.14 crore. What is worse is that the profits seem to have been engineered by some of the accounting practices of the bank. For instance, the bank has taken credit for Rs 177.50 crore worth of interest on Income Tax refunds, although the payment for this amount has been withheld under Section 241 of the Income Tax Act. Section 241 grants power to the assessing officer to withhold refund under certain circumstances. This indicates that the bank has taken credit for an amount which has not yet been received by it, and a reference has been made to this by the auditors. The effect, net of taxes, is that the profit has increased by Rs 131.50 crore.

The other problem which the bank has relates to BoI Mutual Fund's BoI Double Square Plus 1990 assured returns scheme. While the loss on repurchases till March 31, 1999 have been debited to the Profit and Loss Account, the estimated loss of Rs 210.14crore has been included in contingent liabilities. Redemption is due in September 2000. This contingent liability will hang like Damocles' sword over the bank's head. Add to that the fact that the wage liability has not been quantified, the rise in non-performing assets. Even if we reduce the 1997-98 profit to exclude the writeback of depreciation, the profit that year was higher than that shown in 1998-99. All these factors have taken their toll on the stock, which opened downward with a gap on Friday, before losing further ground.

Sugar importers

Indigenous sugar manufacturers have for long been demanding a level playing field with importers. Their grouse has been that not only has the government failed to protect the domestic industry from cheap imports but has also been discriminatory. While the Sugar (Control) Order, 1966 was strictly imposed on them, the importers largely stayed outside its purview. The producers not only have to meet the 40 per cent levy quota of the government at pricesfar lower than their average cost of production but also do not have the freedom to sell or store their stocks. As international prices have dipped, importers are often able to acquire their stocks at prices lower than the cost of indegeous production. Besides, they are able to sell their stocks freely. Hence, while domestic players continue to make losses, importers are raking in the money.

Currently, the fob price of sugar stands at around $215 per tonne. Add to it the average transportation cost of around $ 30 per tonne, 25 per cent basic import duty, 2.5 per cent additional duty and a Rs 850 per tonne countervailing duty. The average landed cost of imports works out to around Rs 13,800 per tonne as compared to the Rs 13,500 per tonne cost of domestic production. However, as importers do not have an obligation to supply 40 per cent of their produce at levy prices (which are approximately 30 per cent lower than free prices), their average realisations are far in excess of those earned by the producers.For most sugar mills in the country, average realisations are lower than their cost of production as a result of which a number of them are turning sick. However, the fortunes of the domestic industry may once again brighten if the government imposes the Sugar (Control) Order on the importers as well. Though the Order has already been amended to the effect, it is yet to be put into effect.

Tata Tea

News reports indicate that Tata Tea is in the fray for acquiring the UK-based Tetley for Rs 1,500 crore. That the management of the company wants the deal to be a "no drips, no mess" affair is evident from its financing plan. As Tetley appears to have a strong balance sheet, it will raise additional debt. This will later be taken into Tata Tea's books. Therefore, the cash outflow involved in the acquisition will be minimal.

Tata Tea's international operations are carried through the joint venture, Tata Tetley and Tata Tea Inc. Though the company has strong brands of its own and gets a sizeable incomethrough the sale of packaged tea, the major portion of its revenues comes from the sale of bulk teas. It is a major supplier to tea markets both in India and abroad. Tetley on the other hand is largely a marketer of tea and gets its raw materials mainly from Indian and Kenyan markets. Its strength lies in marketing innovations which result `in superior margins. The acquisition will therefore give Tata Tea a share of over 7 per cent of the global tea market. It will get ownership of Tetley's popular brands which should result in higher margins. This is because it will be able to sell far more of its production in the value added form. That this will come without a strain on the company's finances only makes the acquisition all the more attractive.

Sebi's guidelines on the Employee Stock Option Scheme (ESOS) and Employee Stock Purchase Scheme (ESPS) contain an interesting requirement. Either in Directors' Report or in Annexure to Directors' Report, the diluted EPS adjusted for exercise of option calculated inaccordance with IAS 33 will have to be disclosed. This is the first time that members of the ICAI will have to certify compliance of IAS and by the looks of it, not for the last time. The standard excuse offered for not having an Accounting Standard on consolidation of accounts/deferred tax/segment-wise reporting was that it is not required by law and therefore, there is little point in having these standards. Disclosure of fully diluted equity is a requirement of Schedule VI of the Companies Act. Some companies prefer to disclose the information in the notes to accounts and some in notes given below the schedule on loan funds. Why has the ICAI not issued a standard? At least one sensex/nifty company does not disclose this information and it is not qualified. The way Sebi is going, it may make make IASs 14 (segment-wise reporting), 27 (consolidation) and 12 (deferred tax) mandatory. The accounting entries to be passed and adjustments to be made in shareholders funds have also been specified by Sebi.

Fewinteresting tax issues also arise. Under the cashless system of exercise of ESOS, a company is allowed to fund the payment of exercise price (the price payable by the employee for exercising the option granted to him/her). Will this be allowed as a revenue expense as is done in the US and be tax deductible? How will the holding period be calculated? Will it be from the date of grant (issue of options to employees) or exercise? Will the ESOS granted by the holding company to the employees of wholly owned subsidiary be treated as perquisite? Though, it cannot be used as precedent, AAR (102 Taxmann) has already given a judgement to that effect. Will the scope be extended to cover all subsidiaries and not just wholly owned subsidiaries? (Option can be granted to the employees of holding or subsidiary company). The holding period is important because the rate of exchange fluctuates. The depreciation of the Indian currency can make a large difference to the tax liability. Another issue is that if sold immediatelywill it be "capital gains" or "income from other sources"?

Emcee (with contributions from Sarad Saraf & Urmik Chhaya)