Stocks
Nifty, Sensex weak; may make an effort to stabilise – Monday closing report
We had mentioned in Friday’s closing report that Sensex, Nifty were under pressure. The major indices of the Indian stock markets moved up during the day, but got slammed again the in the late afternoon session and closed with minor losses over Friday’s close. The trends of the major indices over Monday’s trading are given in the table below:
 
 
Key Indian equity market indices that opened in the green on Monday were trading flat in the afternoon session. Good buying was observed in fast moving consumer goods (FMCG) and telecom sectors, while selling pressure was seen in realty and energy sectors. There was no fresh macro-economic stimulus and the market is in a wait and watch mood until there is clarity in interest rates from the US Federal Reserve. Trading volumes were also on the lower side on the NSE.
 
Upcoming derivatives expiry, combined with March quarter results and position of foreign investors vis-a-vis India, will guide the domestic equity markets during the week ahead, feel market analysts. Besides, trends in global crude oil prices, movement of the Indian rupee and further announcements on the monsoon will influence investors' sentiments. On the domestic front, a key event to be watched is the results of some of the large companies in the capital goods sector. The expectation is negative, which is likely to put additional pressure on the markets. Major firms like ONGC, IOC, HPCL, Power Finance Corporation, Bajaj Auto, Ashok Leyland, Tata Steel, GAIL, India Cements, BHEL, Crompton Greaves, Cipla, Abbott India, GSK Pharma are expected to announce their Q4 results in the coming week.
 
Reserve Bank of India (RBI) Governor Raghuram Rajan on Saturday said despite two droughts and a weak international market scenario, the Indian economy has recorded 7.5% growth. He said India is largely protected from global volatility. "The Indian economy has recorded 7.5% growth, which suggests we have macro stability, which is desirable and need to continue to preserve it," Rajan said at the Mahtab memorial lecture.  "There is a lot of uncertainty as to what Japan will do or what China will do. But, the way to maintain our growth is really to start with a strong policy. Today, we are largely protected from the volatility," the RBI governor said. He, however, said India needs to be vigilant against the global market. "We need to grow. But, we need to grow with macro stability. We need to ensure we grow in a sustainable way. For that, we have to keep in mind the fiscal consolidation, control of inflation and clean-up of banks," Rajan said. He said the policy framework and macro stability would help gain the trust of outside investors and they would then be interested in lending to India. He batted for lighter regulation for small scale industries and easier business environment for start-ups in order to foster job creation. Overall, we can infer that RBI policy would be in favour of fiscal consolidation, inflation control and creation of jobs, rather than a policy to encourage a bull run in the stock market by making things attractive for FIIs (foreign institutional investors).
 
The top gainers and top losers of the major indices are given in the table below:
 
 
The closing values of the major Asian indices are given in the table below:
 

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Fraud in Ricoh. What was the role of exchanges, SEBI and rating agencies?
Imaging solutions and IT services company, Ricoh India's case is identical to the Satyam fraud as its revenues, receivables and inventories appear to be padded up, alleges Anil Singhvi, chairman of Ican Investment Advisors in a television interview. Despite several discrepancies in following regulatory practices, none of the exchanges, market regulator or even credit ratings agencies have shown interest in the affairs of Ricoh India. The company, a unit of Japanese Ricoh, not only failed to file its September quarter results for several months, but also changed its auditors several times.  
 
Speaking with CNBC-TV18, Singhvi said, "There are only one or two points which one has to just look at it. The total borrowing two years back in March 2014 was Rs367 crore which went up Rs716 crore last year, that is March 2015. And now, it is Rs1,300 crore. `A company which does not incur a single rupee as a Capex, the loans going up from Rs300 crore to Rs1,300 crore. In addition, the parent has provided Rs500-Rs600 crore. They have given Rs200 crore of non-convertible debentures (NCD) and Rs270 crore of commercial papers (CP). I have yet to come across many companies in India where parent and particular in multinational company (MNC) will be giving a CP of Rs270 crore for a profit making company."
 
Bengaluru-based InGovern Research Services that provides proxy-voting advisory has also raised concerns on the operations of Ricoh India, in which auditors have pointed our several financial inconsistencies. Seeking appointment of government nominated directors on the board of Ricoh India, the proxy advisory firm, put the onus on market regulator Securities and Exchange Board of India (SEBI) to intervene in the matter as a pro-active regulator, says a news report.
 
Last week, after several months delay, Ricoh India filed is results for the September 2015 quarter. The company has reported a loss of Rs147 crore for the second quarter of FY2016 even as its total revenues jumped to Rs661.6 crore from Rs374 crore, same period last year. 
 
In a regulatory filing on 18 February 2016, the company said that it is about to finalise its accounts and will file it in a short time. Further, the reason for the delay in filing was cited as the change in statutory auditors last year, which led to the new auditors taking longer than usual to furnish the signed reports to the Audit Committee. The company’s Board meetings have also been repeatedly postponed from 5th November to 10th November, and later to 14th November 2015.
 
According to report from LiveMint, PricewaterhouseCoopers (PwC) through Amarchand Mangaldas & Co conducted a forensic audit of Ricoh India. On 10 July 2015, the Company’s Board appointed BSR & Co as its new statutory auditors for five years in place of retiring auditors Sahni Natarajan and Bahl. Ricoh India’s regulatory filing on 7 December 2015 says that the company has considered and taken note of the recommendations of its statutory auditors. However, there is no mention of key recommendations from the statutory auditors.
 
In April 2016, Ricoh India had informed the exchanges that an independent agency has been appointed to assist the Audit Committee to better understand certain areas where the auditors had emphasized further review. This agency was conducting a review, which will be completed soon. It comprises of an independent law firm and accountants. Interestingly, some members of the top management including the CEO and CFO, have been asked to be on leave during the said review process. These include, Manoj Kumar, Managing Director and Chief Executive Officer, Arvind Singhal, Chief Financial Officer and Anil Saini, Senior Vice President and Chief Operating Officer of Ricoh India.
 
Earlier, the company had sent a communication to the exchanges on 18 February 2015 stating that 'The Company has not yet received the signed limited review report from the auditors and the audit committee would take up again the matter with the Statutory Auditors to submit their limited review report on an immediate basis.' Further, the filing stated, 'In order to assist the audit committee, the audit committee has sought the opinion of an Independent Agency in this regard.'
 
“Most importantly, the entire replacement of auditors raises a lot of doubt. They also could not figure out. It was not clear whether the parent company knew about the issue. If they knew it, they should have immediately informed the stock exchanges,” the report from LiveMint says quoting Shriram Subramanian, managing director of InGovern.
 
"Class action suit should be taken. At the end of the day, they (the government) did it in the Satyam case. Government-appointed directors should be there on the board. Not one director but all the directors,” he told the newspaper.
 
Ricoh India also filed a police complaint saying it has detected massive financial irregularities and fraud in the company after a forensic investigation revealed wrongdoing.
 
While the company was struggling with its audit reports, ratings agencies were too not concerned. In January, India Ratings and Research Pvt Ltd (Ind-Ra) upgraded Ricoh India’s Rs200 crore long-term non-convertible debenture (NCD) to Ind-AA from Ind-A. The ratings agency, a unit of Fitch, also upgraded long-term issuer rating of the company to Ind-AA from Ind-A, with a stable outlook.
 
According worried investors, Ricoh India first needs to fix its governance issues. What is more shocking in this case is silence from the exchanges and regulators. Despite all the incidents taking place in Ricoh India, there is no record of the stock exchanges having posed any questions to the company.
 
Ricoh India closed Monday 5% down at Rs269 on the BSE, while the 30-share benchmark ended the day marginally down at 25,230.

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COMMENTS

Sat Anand

5 months ago

Outside India, Ricoh is well-known a global technology company specializing in office imaging equipment, production printing solutions, document management systems and IT services. Ricoh Group operates in about 200 countries and regions The majority of the company's revenue comes from products, solutions and services that improve the interaction between people and information. Ricoh also produces award-winning digital cameras and specialized industrial products. Ricoh is known for the quality of its technology, the exceptional standard of its customer service and sustainability initiatives.
I am impressed with the trendsetting THETA 360° cameras, it’s more feature-packed, and it’s called RICOH THETA SC.

RICOH's multi-function printers 9003SP/ 7503SP/ 6503SP are very advanced and efficient.

Ramesh Poapt

12 months ago

fraud,ok! but premature to say it was malafide or not willful, unnoticed by board.

Need for tweaking laws and rules for preventing NPAs in MSMEs
The micro, small and medium enterprises (MSMEs) are the largest vendors for the Union and State governments in defence, aeronautics, electronics, safe drinking water equipment and services, medical and pharmaceuticals, solar equipment and servicing. The MSME Development Act (MSMED) also provided for MSME Facilitation Council, a quasi-judiciary institution serving as an arbitration and conciliation mechanism for disputes relating to the delayed payments for the goods supplied or services rendered by the supplier at little cost. Jurisdiction is restricted to units functioning within the State, although their dues can be with any undertaking or government outside the State. 
 
Only 10 out of 29 States have such councils functioning with the most efficient among them in Tamil Nadu, Karnataka, Telangana, and Kerala. Gujarat and Uttar Pradesh (UP), although have a large number of sick MSMEs, but have not reported the number of cases resolved through the Council. Neither the Ministry website nor the Development Commissioner for MSME (DC-MSME) has put out information on the functioning of the Council in various States.  
 
Section 18 of the MSMED Act does not cover the intending buyer’s places from where the order is placed for certain goods and the enterprise manufactures, according to specifications. For its own reasons the vendee can cancel the order. The SME suffers the loss until it finds a buyer requiring goods of the same specifications. It is unlikely the alternate buyer may be available as well. 
 
The units requiring facilitation for recovery of their bills against goods and services supplied represent their cases both by themselves and/ or through their advocates. The Council chaired by the Commissioner of Industries has on board representatives from the accredited Industry associations and State Level Bankers' Committee (SLBC). 
 
This alternate dispute resolution mechanism however, works well when the dues are with public sector units (PSUs) or buyers other than government agencies and the government itself. Government departments rarely honour the arbitration proceedings and that leaves many MSMEs as non-performing assets (NPAs).
 
The Courts also do not entertain appeals against the decision of the Council unless 75% of the disputed amount is paid into the Court. If the MSME unit were to approach Debt Recovery Tribunal (DRT), it has to up-front remit 25% of the claim amount without being sure of a decision in its favour, as the DRT is meant mainly to ensure that the banks do not suffer from bad debts. 
 
On the other hand, units that approach the Council have to deposit admission fees of just Rs500 and small administrative fees for arbitration as decided by the respective state government.
 
The advantage of approaching this Council is the specific timeline for settlement of the cases. Here every claim gets acknowledged on the same day with the respondent getting a notice to respond within 15 days. Most cases get settled within three months. The units get breathing time from banks to pay dues following the Award of the Council.
 
However, several public–private partnerships (PPPs) involving specific commitments from the government, when not honoured by the government, the SME units end up in huge losses. For example, SMAAT India Pvt Ltd, SME unit in Hyderabad receiving 158 national and international innovation awards installed water purification plants in Karnataka through PPP with government having to supply raw water and electricity after installation. About 240 plants installed three years back were not supplied raw water and power that denied them the user charges. Government of Karnataka did not even pay for the equipment and installation charges within a week of installation as required under PPP. The amount of loss is a whopping Rs220 crore. 
 
The losses arising on both the counts however, land up in terminal NPA status of the related units in Banks’ books. The Bank feels that the unit has sovereign risk domestically. The provisions of the MSMED Act need refinement. Several units have become victims of prejudice of either of the Branch Manager or the Controlling Authority. The units do not have the option to swap their collateralised account with another bank willing to take the account on merits, either at incipient stage or at NPA stage without impacting on their provisions relating to that account. 
 
RBI rules are no reprieve
The latest circular instructions of the Reserve Bank of India (RBI) only compound the problems and defy solutions to the actual problems faced by the units eligible for capital restructuring or revival but denied that opportunity. Instances of prejudicial view of some of the well-run MSME units by the managers concerned also contributed to the NPAs in the sector. 
 
Some alternatives that deserve a look, as the roll out of instructions in RBI circular 338 dated 17 March 2016 take effect from 1st June.
 
Swapping the Account: 
 
a) If any unit is aggrieved with a particular bank over the management of the loan accounts or over the inadequate limits sanctioned confining to the discretionary powers of the sanctioning authority, such unit having adequate collateral security should be enabled to migrate to another willing Bank either on as-is-where-is basis or for enhanced limits.
 
b) In respect of units where decision to restructure has been taken with a set of conditions, such conditions should be within certain rational boundaries – in terms of additional margin money or equity or additional collateral security or all the three simultaneously. If such conditions are too onerous they should be subject to redress by the Banking Ombudsman. It may be necessary to enlarge the scope of working of the Banking Ombudsman for this purpose.
 
No additional costs for migration shall be imposed on the units in such cases.
 
Zonal Committees: There is thus far no trace of the banks acting on the constitution of these committees although even the MSME Ministry circular dated 2 June 2015.  Bank-wise Zonal Committees also seem to pose difficulties in as much as each such committee has to have a specialist, a nominee of the government, representative of the financing bank from zonal or head office to be the convenor with the ZM as chairperson. A calibrated solution needs to be put in place.
 
a) Restructuring or revival as suggested by the TEV study should also be made mandatory if the CAP fails. If the TEV study were to opine that it is not economically feasible to revive the unit there would be no option but to reject the proposal and such rejection should invariably be recommended to the appropriate authority by the Zonal Committee.
 
b) The Committee should not otherwise have the option to reject the proposition of any running unit. Once rejected by the Zonal Committee, the unit’s option to revive ceases permanently.
 
c) If the proposal does not merit consideration due to malfeasance or fraud, legal proceedings could be instituted as mentioned in the circular and such disqualification should be recorded and communicated in writing to the unit with copy to the government so that the government can also take appropriate call on the statutory dues. 
 
d) Extant instructions specify closing the door for rehabilitation permanently if a fraud or malfeasance is noticed. This instruction is absolutely in order for all proprietary units. The instruction needs a review where one of the partners or directors indulges in fraud and even the unit is itself a victim of such action. Just because frauds are occurring in a bank, the bank is not dubbed as a fraudulent bank. As long as the unit changes the partner or director who indulges in such fraudulent act and institutes legal action, if the existing collateral securities sans those of the fraudulent partner or director, the reconstituted unit should be allowed to continue its manufacturing activity. 
 
 
Incentivising Banks: Banks should be incentivised for taking up restructuring. In as much as such action is taken up on well validated proposals that have reasonable scope for moving away from NPAs the period of transition should be viewed for lesser provisioning by the Banks concerned. 
 
Uniform treatment for all accounts between Rs10 lakh and Rs25 crore may not be in order for the following reasons:
a) Up to Rs1 crore Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) cover is available.
b) The bandwidth between Rs10 lakh and Rs25 crore is too large as the sanctioning authorities for the intermediary layers of limits will be different and so would be for taking a decision on restructuring/revival. By bifurcating the limits between Rs1 crore -Rs5 crore; Rs5 crore-Rs10 crore and Rs10 crore-Rs25 crore, the zonal committees will be able to involve the appropriate sanctioning authorities as members depending on the cases under consideration. 
 
It is appropriate for the RBI to tweak the prudential norms to the advantage of the banks that take a positive action in ensuring that the units do not turn sick in the first place and in cases where they find it worthwhile to rehabilitate in the second place so that asset loss and job loss can be avoided.
 
(Dr Yerram Raju Behara is an economist and risk management specialist. At present, he is Adviser, MSME Facilitation Council at the Govt of Telangana. Views expressed in the article are his personal views.)

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