According to investors and depositors, despite proclaimed strong financial results, H&M has been defaulting on repayments for fixed deposit and interest dues since June 2014
Shareholders and investors of Helios and Matheson Information Technology (H&M), an unfancied software company, have asked market regulator Securities and Exchange Board of India (SEBI) to take action against the company. They alleged that despite declaring strong financial results, the Chennai-based company has been defaulting in repayment of fixed deposits and interest to depositors since June 2014.
"It beats plain logic to understand how a company, which discloses a net profit before tax of Rs74.12 crore after making full provision for interest on all its borrowings, as also providing fully for notional expense such as depreciation, be so insolvent as to default on its fixed deposit/ interest payment commitments, when its working capital /operating cycle position as stated in the financial disclosures ,if anything, show remarkable improvement over that of the previous year ended 30 September 2013. This in itself is irrefutable evidence of the company fudging, manipulating its financial results disclosed to BSE and NSE, which calls for a full and thorough investigation of the situation," the investors and depositors said in their complaint filed before SEBI.
According to the complaint, H&M, over the past few years has been reporting good financial results and even declared 50% dividend during FY2012-13 that ended on 30 September 2013 (the company follows October to September period for financial year).
"This so called ‘excellent set of numbers’ continued into this current financial year as well where the standalone financial results of the company for the 12 month period from 1 October 2013 to 30 September 2014 (as disclosed by the company to BSE/ NSE, vide clause 41 of the listing agreement), reveal that the company’s turnover has risen to Rs606.61 crore during this period vis-a-vis Rs443.94 crore in the corresponding period in the previous year [37 % increase]. Its net profit before tax [PBT] after providing for interest and depreciation stood at Rs74.12 crore, in the current period as against Rs54.89 crore, in the previous year, registering a whopping 37% increase. Further, the standalone Balance Sheet as on 30 September 2014 reveal that the working capital / operating cycle position of the company during the year ended 30 September 2014 actually improved considerably vis-a-vis the same period in the previous year. Despite this proclaimed strong financials disclosed to the Stock Exchanges, the company has been, since June 2014, defaulting in the repayment of fixed deposit / interest due thereon to its depositors," the complaint reads.
The complaint alleges that H&M is in such a grave cash flow crisis that most of its post-dated cheques (principal and interest) for fixed deposits have bounced due to of 'insufficient funds'. "This complaint relates to the serious, grave fraud being methodically and systematically perpetrated by the company and its promoters in publishing falsified financial results to the stock exchanges with the clear intent to defraud its creditors, depositors, investors and banks."
"As per the latest shareholding pattern filed by the company with the stock exchanges (pursuant to clause 35 of the Listing Agreement) around 42% of promoter holding in the company is currently pledged with banks. This fraud is evidently being perpetrated to prop up the valuation of the company so as to fraudulently obtain loans from the banks through pledge of shares and to present a façade of credibility to the public at large. This issue has all the makings of a major scam that is bound to affect thousands of investors, depositors and creditors including banks," the complaint reads.
The investors and depositors of H&M have also demanded investigation into ratings given and its subsequent withdrawal by CRISIL on the company. They alleged that by its shoddy rating on H&M, the SEBI registered rating agency CRISIL has seriously eroded investor confidence in its rating process.
In September 2014, CRISIL assigned 3/5 fundamental grade (good fundamentals) on H&M, due to steady performance of the company. However, suddenly, next month, the ratings agency, downgraded H&M to 2/5 from 3/5 citing 'moderate' fundamentals of the company. "The revision in Helios’ fundamental grade is a result of its deteriorating liquidity. Two major factors are responsible for the liquidity crisis, the company’s working capital days have increased in the last couple of quarters and it could not secure sufficient funds to honour its payment obligations on time. The company needs fresh funds to tide over the tight liquidity position. The company has been delaying the payment of principal in several public deposits matured/getting matured during FY14," CRISIL had said in its October 2014 report.
Earlier in February 2013, Moneylife had reported on how overlooking several reports about criminal case pending against H&M's chairman and managing director, the ratings agency had assigned 5/5, its highest grading on the company
. According to CRISIL report, banking, finance and insurance companies (BFSI) and healthcare segment would drive future growth of IT services in India during 2013 and, H&M would get benefits from it as the company works with seven of the 20 largest global banks.
Moneylife had previously reported about the bruising battle between H&M and Rajeev Sawhney, chairman of Vmoksha Technologies Pvt Ltd and a US-based non-resident Indian (NRI). The battle started in 2005 when H&M announced a $19 million buyout of Vmoksha, co-founded by Rajeev Sawhney and Pawan Kumar (former CEO of the controversial DSQ Software), with the former putting in the money and the latter running the operations. Mr Sawhney soon realised that he had been kept in the dark about many aspects of the deal.
On 11 May 2005, both the companies signed a share purchase agreement under which V Ramachandran, chairman of H&M, was to pay $19 million for the three units, out of which $4 million was to be paid to Pawan Kumar, the then chief executive of Vmoksha and also former CEO of the controversial DSQ Software, as earn out. Although, Pawan Kumar and his family members were also stakeholders in Vmoksha, Mr Sawhney later bought out their stake as well.
Mr Ramachandran was supposed to pay $13.4 million to Mr Sawhney, after paying some amount to Tapan Garg and Madhuri Garg, son and wife of Pawan Kumar for their holding. Mr Sawhney soon realised that he had been kept in the dark about many aspects of the deal. For instance, he found that instead of receiving $19 million, a bank account had been ‘fraudulently’ opened in the State Bank of Mauritius in Vmoksha’s name and used to borrow $13.5 million, using a fake board sanction and false entries. That money was remitted to H&M ostensibly for subscription of redeemable preference shares on 28 June 2005.
Earlier in December 2011, the Supreme Court dismissed special leave petitions (SLPs) filed by H&M and Pawan Kumar, the then chief executive officer of Vmoksha Technologies. Both have challenged the Bombay High Court (HC) order, which allowed the revision application of Vmoksha’s co-founder Rajiv Sawhney against H&M.
You may also want to read...