The Securities and Exchange Board of India (SEBI) has launched an investigation into the financial statements of Eros International Media Ltd (Eros) for FY18-19 to FY20-21, with a wide ambit, covering money transactions and agreements entered into by the company with at least 45 entities.
The market regulator has asked the Kishore Lulla company to submit details of the methodology used to determine the impairment of some of the films which were recognised as intangible assets in the company's annual report.
The investigation appears to be in response to whistle-blower information, although our source has not said so. The action by the regulator is not in the public domain and was sent to us by a confidential source. Moneylife sent an email to Eros, copied to Pradeep Dwivedi, chief executive officer (CEO) and Rajesh Chalke, chief finance officer (CFO), of the company, regarding the SEBI investigation.
In response, the company spokesperson stated, “The impact of COVID-19 on media and entertainment industry is an established fact, and that has a bearing on advances made in the past in our business for content acquisition, for which only provisions have been taken as per the Indian accounting standards (Ind AS), and write-offs are limited to doubtful receivables as per norms. Hence, the accounting of assets and impairments in respective period of our financials necessarily follows prescribed Ind AS standards depicting the fair enterprise value.”
“As is customary, we maintain a regular channel of communication with the regulators to clarify and address queries, if any. We always co-operate with market regulators to maintain the transparency and governance required of a listed entity. We would not like to comment on any other speculative assertions,” the spokersperson added.
According to SEBI, there is reasonable ground to believe that the financial statements of Eros were prepared in a manner detrimental to investors or the securities market. It has sought details of impairment amount to as much as Rs1,278.50 crore reported by the company on a stand-alone basis and Rs1,553.52 crore reported on a consolidated basis.
In its annual report (AR) for FY19-20, Eros stated, "...management has identified impairment indicators (impact of COVID-19 pandemic of company's operations, significant reduction in market capitalisation as compared with the previous year and other factors) exist as at 31 March 2020.
"As a result, an impairment assessment was required to be performed by the company by comparing the carrying value of the cash-generating unit (CGu) to their recoverable amount, i.e., value in use to determine whether impairment was required to be recognised. For the purpose of impairment testing, management has determined the value in use of CGu based on the valuation report by external expert. The assessment of the value in use (the present value of the future cash flows that are expected to be derived from the asset.) requires significant judgment, in particular relating to estimated cash flow projections and discount rates."
"During the year ended 31 March 2020, the company has recorded an impairment provision of Rs1,528.55 crore to reduce the aggregate carrying value of CGu comprising of content advances and film rights, comprising of content advance and film rights, to their estimated recoverable values, as per the valuation report," it added.
SEBI has asked Eros to provide details of impairment tests done for FY16-17, FY17-18, FY18-19, FY19-20 and FY20-21.
Further, the market regulator has sought details about the impairment of Rs208.14 crore for rights of films like R...Rajkumar, Omkara, Lingaa, Housfull3, Goliyon ki Rasleela- Ram-Leela, Bajirao Mastani, Dishoom and Bajrangi Bhaijaan. SEBI also wants to know how the COVID-19 pandemic has affected film rights and the methodology used for valuation at the time of recognising these movies as intangible assets.
SEBI noted that Eros had provided a report on impairment analysis as of 31 March 2020 done by Duff & Phelps to National Stock Exchange (NSE). The market regulator asked the company to provide copies of its internal discussion, memos, meeting notes and minutes of the board meeting for approving the appointment of Duff & Phelps as a valuer. SEBI also asked Eros to provide copies of the minutes of all meetings of the audit committee during FY18-19 and FY19-20.
In its AR for FY19-20, Eros says it enters into agreements with production houses to develop future film content. "Advances are given as per terms of agreements. Such content advances are monitored by management of the company for recoverability and appropriate write-offs are taken when film production does not seem viable and refund of advance is not probable basis management evaluation."
"The content advances are transferred to film and rights at the point at which the content is first exploited. Provision is made as per provision policy in respect of content advances against which content has not been delivered by vendor within agreed timelines or where projects are at a standstill or put on hold for a substantial period of time," it added.
Further, Eros says, during FY19-20, the management wrote off Rs519.98 crore, disclosed under the exceptional item. It stated, "The group had entered into an agreement with some of the customers which entitled them to exploit the film rights for the period as specified therein. the amount receivable from such customers under the said agreement has been past due over a prolonged period. Due to disruption in the film business caused by the outbreak of CoVID-19, the management does not have any reasonable expectation of recovering the amount due and therefore has terminated the agreement with such customers. Consequently, the receivable of Rs51,998 lakh (Rs519.98 crore) have been written-off by the management and has disclosed the same under the exceptional item."
SEBI found that there were 18 debtors of Eros whose receivables were written off by the company. It asked the company to provide details of efforts taken to recover the due amount and legal action, if any, against these 18 entities.
"It is noted that advances of Rs2.11 crore and Rs5.51 crore have also been impaired. These advances were with Sanjay Leela Bhansali and Sohail Khan Productions. In this regard, you are advised to provide copies of agreements and details of efforts taken to recover the amount..," SEBI says.
Earlier this month, SEBI sent summons to all entities involved in this matter. The market regulator has asked these entities to submit before the investigation authority documents or information related with their agreement to Eros.
According to one such summons (seen by Moneylife), SEBI has asked the entity to provide details of outstanding to Eros for content advance in its books as of March-end from 2018 to 2020. The entity is also asked to submit extracts of ledgers, agreements for which the advance was received from Eros and copies of income-tax returns (ITR) filed by it.