Cooked books to haunt cos in restated accounts

Written by Ronojoy Banerjee | Ronojoy Banerjee | New Delhi | Updated: Oct 8 2011, 10:40am hrs
In an attempt to curb the practice of promoters manipulating the books of accounts of companies by inflating the value of assets, the ministry of corporate affairs (MCA) is considering making a provision in law that would enable such companies to restate their accounts of past years. The aim is to ensure that the doctored accounts are corrected with retrospective effect so that the firms true net worth is revealed.

The change mulled by the MCA could be introduced in the Companies Bill slated to be tabled in Parliament in the winter session.

The move is part of the governments efforts to crack down on erring promoters who resort to raising large sums of money by misguiding shareholders and creditors.

The issue of doctoring accounts for inflating net worth came into sharp focus during the R8,000-crore Satyam Computer Services scam when its tainted promoters and senior officials colluded to manipulate the books by artificially increasing the net worth of the company manifold. This had forced the Company Law Board (CLB) to order restatement of its accounts even though there was no clear provision for such a measure in the existing Companies Act.

Following this, the new owners of the company now Mahindra Satyam had to restate the companys accounts for the fiscal ended March 31, 2009.

The MCAs move is significant especially in the light of market regulator Securities Exchange Board of India (Sebi) also considering empowering stock exchanges to order restatement of accounts of listed companies if they find any proof of financial misdemeanour by its promoters.

Earlier this year, a panel appointed by Sebi reportedly cleared the proposal of allowing stock exchanges to demand restatement of books of listed companies.

We are studying the viability of introducing a provision to allow restatement of accounts, an MCA official told FE. According to this person, the government will set the criteria for such restatements whereby it would be allowed only when it is cleared by the proposed National Company Law Tribunal (NCLT), which seeks to replace the CLB and the Board for Industrial and Financial Reconstruction.

A special NCLT bench will have to approve the restatement. This, we hope, would keep a check on the practice, the ministry official added. He said that the restatement could be carried out on behalf of major stakeholders including shareholders, banks, foreign institutional investors and new promoters if the companys ownership changed hands.

To get access to easy credit, companies can inflate the value of their assets or play down their liabilities. This could have serious consequences for the shareholders, the MCA official said.

Experts welcomed the move but cautioned against its overuse. President of the apex accounting regulator Institute of Chartered Accountants of India R Ramaswamy said such a measure should be restricted to the rarest of rare cases. Managing partner at Delhi-based Corporate Professionals Pavan K Vijay said the tool would become the new RTI for shareholders.

Noted Delhi-based chartered accountant Amarjit Chopra said that along with allowing restatement, the government must introduce stringent punishment for those promoters who declared dividends based on doctored accounts.

He also said that before the government finalises the proposal, it would also need to coordinate with departments such as that of income tax. If a company has paid more taxes on their inflated assets once restatement happens, would the I-T department return it, he asked.