In a shocking turn of events, C2C Advanced Systems (C2C), which made headlines with its spectacular stock market debut, is now under intense scrutiny following recent findings by
National Stock Exchange ([NSE)-appointed independent reviewer BDO]. The defence electronics solutions-provider, whose shares soared 322% from its IPO (initial public offer) allotment price of Rs226 to reach Rs954 by 10 January 2025, is facing serious allegations of financial misrepresentation and questionable business practices. Following the development, C2C shares fell to Rs697.20 per share, hitting the 5% lower circuit limit.
The investigation, triggered by an investor complaint, revealed discrepancies in the company's draft red herring prospectus (DRHP). Most alarming is the discovery that 74% of the company's Rs94.48 crore in sales came from just four related-party customers, with a staggering 78% of total sales remaining uncollected.
The investigation also raised serious doubts about the legitimacy of C2C's customer base, its auditors and the role of lead managers. Customer verification efforts revealed more red flags. Adding to these concerns, two major customers— Synergy Log-in Systems and Synergy Information Technologies - were not disclosed as related parties in the DRHP. C2C's US-based customer, C2Ci Inc, listed three different addresses, none of which could be verified. Another customer, Synergy Information Technologies, was found operating with a non-existent postal code and sharing a website with Synergy Log-in Systems.
The company's order-book presents equal inconsistencies. The investigation found two different order-book values in the DRHP: Rs65.27 crore and Rs50.56 crore. Additionally, Rs75.69 crore of orders from OSI Maritime were included without any valid contract, while Rs16.85 crore worth of orders came from related-party companies, raising questions about the authenticity of the company's business pipeline.
Its vendor relationships display concentration and verification issues. With 85% of purchases channeled through just four vendors, C2C's supply chain exhibits unusual concentration risk. The credibility of these vendors is questionable—three out of four operated as proprietorships with no public presence. One vendor reported zero revenue for five consecutive years, while another proved untraceable during verification attempts.
The investigation uncovered mismatches between C2C's reported financials and actual books. Notable disparities include a loan payable to C2C Innovations Pvt Ltd, where the company reported only Rs13.29 lakh in its DRHP against an actual figure of Rs13 crore.
Similar discrepancies emerged in payments to KTI Intelligent Systems, where only Rs1.19 crore was disclosed against the actual Rs3.69 crore, understated by Rs2.5 crore in the DRHP. In a notable instance, the company's DRHP claimed a repayment of Rs2.85 crore to PVR Multimedia, while internal books showed the opposite—receiving Rs2.85 crore from the same entity. Similarly, the DRHP reported advances of Rs11.76 lakh from Realtime Techsolutions, yet company records showed zero transactions, highlighting significant reporting inconsistencies.
Its funding allocation has also drawn scrutiny. Of the Rs58.85 crore raised through private placements, Rs6.25 crore was disbursed as consultancy fees—representing a striking 20% of the funds raised. The investigation found shares were issued to individuals connected to these fee recipients.
The company's export practices have also drawn regulatory attention. The absence of Softex forms for software exports represents a clear violation of Foreign Exchange Management Act (FEMA) regulations, raising questions about the company's compliance with international trade requirements.
The relationship with Realtime Techsolutions Pvt Ltd (RTTS) emerges as particularly problematic. Despite RTTS's status as a financial defaulter, C2C made payments of Rs3.07 crore on its behalf, including Rs1.61 crore in salary payments. More concerning is C2C's decision to extend Rs5.61 crore in additional funding to RTTS despite its history of bank loan defaults, suggesting a pattern of high-risk financial decisions.
C2C's loan portfolio reveals systematic irregularities in financial management. The company extended Rs6.24 crore in loans to related parties without formal agreements. The selective application of interest charges, with most loans being interest-free, suggests preferential treatment and potential violations of arm's length principles in related party transactions.
Recent financial statements indicate possible manipulation of business metrics. Post-March 2024, purchases as a percentage of sales surged from 10% to 47%, an unusual shift that lacks clear business justification. The recording of Rs9.66 crore in inventory without corresponding deliveries, coupled with sudden spikes in purchases and sales near year-end, suggests potential window dressing of financial statements.
A deeper examination of C2C Advanced Systems' corporate governance reveals a pattern of practices that extend to its top management. C2C Advanced Systems' corporate governance raises concerns, particularly regarding leadership focus and potential conflicts of interest, as its CFO (chief financial adviser) holds directorships in over seven companies.
The company has a history of regulatory lapses, including repeated defaults on statutory payments—mandatory financial obligations to the government—such as goods and services tax (GST) and tax deducted at source (TDS). It also issued a Rs6.7 crore loan to a related party without proper documentation, highlighting weak financial oversight. Revenue recognition (recording income in financial statements) appears inconsistent.
While the company claims revenue is recognised after a second round of independent testing, final payments depend on a third round by clients, creating uncertainty about reported earnings. C2C's market strategy also appears contradictory - with management claiming to prioritise domestic expansion but attributes low domestic presence to system complexity.
The company counts prominent investors in its shareholder base, including Ashish Kacholia with a 2.59% stake and Mukul Agarwal holding 1.86%. However, the mounting evidence of financial irregularities and operational inconsistencies raises serious questions about the company's governance and transparency standards.
NSE had initially postponed C2C's listing pending the appointment of an independent auditor and mandated the establishment of a monitoring agency to oversee IPO fund utilisation. Despite these measures and the withdrawal of 3.72 lakh applications worth Rs27 crore following regulatory action, the company proceeded with its listing, which was oversubscribed 125 times. Promoters hold 40.73% shares and the public 45.4%.
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