The report answers a question for which no answer was available so far - how ICL managed to post the net profit that it did in the second half. What was amazing is that the company declared those profit figures for the period when Madras Cement's cement division made a loss. Finally, one can say with confidence that the company made profits purely because of book-entries. ICL's PAT for 1998-99 was Rs 83.89 crore.

The first book entry which is selected because it is the most revealing deal with profit on sale of investments. According to the schedule on other income, it is Rs 33.58 crore. The profit is not because any investments have been sold but because Raasi has been acquired. One normally thinks that the profit raises on sale and not on acquisition.

The notes to accounts reveal that priorto the open offer being made for Raasi, ICL had stake in the company acquired at an average cost of Rs 93.5 per share. Post-court approval of the scheme of arrangement, Raasi's cement division was part of ICL. The settlement price for Raasi shares is Rs 300 per share. The notes to accounts explain that as regards the holding by ICL in Raasi Cement, the difference between settlement price and the cost of acquisition as reduced by the value attributable to the capital of the residuary company being 5 per cent of the cost has been treated as income.

The face value of Raasi shares has been reduced to Re 0.5 per share.Explains a chartered accountant Jayant Thakur, ``If a company realises its assets which were till then represented by shares, the surplus can be treated as revenue profit. Although, the caveat is that the valuation should be beyond the shadow of doubt.''

Effectively, it means that by paying Rs 300 per share, ICL has acquired assets worth Rs 315 per share (Rs 300 + 5 per cent of Rs 300). ThoughICL might consider Raasi share to be worth Rs 300, it does not mean that it was worth that amount. In any case, it is not realised income and is purely book entry though the accounting entry may be justified. Next year or in a difficult year, the company can sell investments to a wholly-owned subsidiary for a profit. Being a transaction with wholly-owned subsidiary, it won't attract capital gains tax (Sec 47(iv) and the company will earn profit in books. This is a practice quite common among Indian corporates.

The second entry deals with assignment of sales tax liability which is a recurring event initiated in 1997-98. The company has calculated the present value (discounting factor not disclosed in the notes to accounts) - Rs 5.94 crore and assigned the liability by paying the NPV. The difference between the accumulated sales tax deferral (for 1998-99 sales) and NPV instead of being taken as capital reserve has been taken as income.

The same treatment was applied by a speciality chemicals company,Sunshield Chemical in 1994-95. Essel Packaging assigned sales tax liability in 1997-98 but booked the difference as capital reserve. The transaction serves two purposes. One, balance-sheet size gets reduced (contingent liability does not form part of balance-sheet) and the company continues to get cash which can be used for working capital. The assignment has resulted in profit for the year being higher by Rs 25.81 crore (Rs 9.38 crore).

Together with profit on sale of shares (Raasi Cement), assignment of ST liability results in profit being higher by Rs 59.39 crore. Income from property division was Rs 14.56 crore. If one takes the profit of this division, the profit from cement division will amount to almost nothing as other income is Rs 12.68 crore. The dividend outgo (subject to shareholders approval) will be Rs 25.94 crore. One point that needs to be considered is that even if Raasi profit is accepted, is it not a one-time income? In that case, why it was not disclosed as extra-ordinary income in thedeclared half yearly results?

E-Business
At a recent Intel-sponsored seminar on e-business in Mumbai a number of interesting observations were thrown up. Perhaps the most incisive insights came from IndiaWorld Communications managing director Rajesh Jain. In his presentation, he pointed out that companies with a well-established distribution chain need not necessarily change their model to take advantage of the Internet. In fact, a number of companies might find it advantageous to maintain their existing brick-and-mortar network and use the Net to make the channel more efficient.

Consider the case of Amul, for instance. Although one can now order Amul products over the Net, the company uses its existing distribution set-up to finally deliver the goods. The question that arises is why would a customer, who can easily procure the products from his near-by store, log on to the Net to place an order? Secondly, how is this facility beneficial to the company, that in any case is not going to by-passits intermediaries to deliver the goods? Suppose the customer went to the store and found that a certain item was out-of-stock.

He could then log on to the Net and place his order directly with the company. The company would then contact the distributor nearest to the customer to arrange for delivery.

In the process, the customer is able to get the desired product. The company is able to retain his loyalty and the intermediaries are still able to make their margins. Besides, the Net opens up the possibility for the company to directly have access to customer information, which opens up possibilities for better customer relationship management.

Emcee (with contributions from Urmik Chhaya & Sarad Saraf)