> But it makes absolutely no sense for Polycab to simultaneously fudge its books to show ₹100 crore > more in expenses while also hiding ₹400 crore of perfectly legitimate expenses. Sure, steal that
> ₹100 crore if you must but also take those legit expenses!
No, this makes perfect sense.
Let's say there is a worker in a shop which sells say chocolates. Everyday 200 people buy a chocolate from the shop. Cost Price per piece for the shop is 40 & the shop sells it for 100.
So one day the worker puts in his own money & buy 100 chocolates from the wholesaler - since he is buying it from his own money, it's not on the shop's books. So out of the 200 chocolate the shop sells on that day, only 100 is sold by the shop & the other 100 is sold by him using the shop. When he is selling chocolates, half the sales won't be on the shop's books.
So essentially, he has made a profit of 6,000 without any of the other overheads of the shop.
Which seems to be what the promoter has done. He has spent 400 crore of his own money (instead of the company money) in getting stuff manufactured - thus understated expenses (though it's not really understating because the company didn't spend that money - the promoter did). He has however sold it for 1000 crore but the sale won't be on the books - so understated sales - again not really understated. He has thus siphoned off 600 crore of profit from the stock holders (actually may be more than 600 because he probably is using the company's resources for doing everything).
The other 100 crore thing is a totally different matter - it's the company's accountants trying to reduce taxes using false expenses - it's unrelated to the understated expenses & sales. It shouldn't be conflated.
Quality of book results & management is gone now. Outsider cannot reasonably trust any financial data.
Probably auditors will face music from NFRA
Management will face prosecution
Tax, Penalty & interest on income discovered during raid is very high. Assume almost whole of income will go out as tax & mostly tax department will go backward 10 years for investigation
I expect company to offer some settlement by offering to pay huge taxes. There is legally possible scheme of tax settlement but that involves a lot admission of wrong doing & such admissions will be used in other proceedings
Coincidentally, I know certain members of the Jaisinghani clan. Me and my colleagues were quite certain something major will break out and finally it did (half a decade after we'd predicted)
At the end
1. 400 crore expense overstated - companies often adjust for income / expenses and sometimes, just sometimes, the estimates go wrong. This leads to correction measures at the year end. To be tax compliant, they mightve paid more advanced tax and realised book profit has actually breached the mark they wanted to set the profits to. So, kharcha kam kiya towards the end. Also done to do GST fraud, for all we know, the understated expenses are getting accommodated in the coming years. It is a very elaborate tax saving strategy - this year we did a lot of tax savings, even more than what we want, let's defer some in a manner to help us out next year.
2. Trust me, any and every company which commits tax frauds, continues to commit them even after they've been caught. They'll be more careful now but still do it. The market will correct itself so it would've been a great buying opportunity depending upon the company fundamentals. Its a great company but tax evasion is in the roots.
3. Tax penalties are usually 100% to 300% of the tax fraud. E.g. income 100, tax 30% = 30. Tax penalty 30 to 90 over and above the 30 tax payable. Tax amount will attract interest at 1.5%p.m. till paid from the year in which such fraud was found. So, a 600 crore income fraud can result in approx. 600 crore tax payable (tax+penalty+interest)
4. SEBI should but it can't because technically it has not been non-compliant as per SEBI Act. They can put the company under a magnifying scope, find irregularities and ensure the investors are safeguarded. Here there's some ambiguity for SEBI powers which it can use/misuse so don't know which angle they would take.
But it makes absolutely no sense for Polycab to simultaneously fudge its books to show ₹100 crore more in expenses while also hiding ₹400 crore of perfectly legitimate expenses - This in all likelihood to maintain the illusion of a consistent operating margin. Sales of 1000 cr off the books so to adjust against it expenses of 400 cr also off the books.
> But it makes absolutely no sense for Polycab to simultaneously fudge its books to show ₹100 crore > more in expenses while also hiding ₹400 crore of perfectly legitimate expenses. Sure, steal that
> ₹100 crore if you must but also take those legit expenses!
No, this makes perfect sense.
Let's say there is a worker in a shop which sells say chocolates. Everyday 200 people buy a chocolate from the shop. Cost Price per piece for the shop is 40 & the shop sells it for 100.
So one day the worker puts in his own money & buy 100 chocolates from the wholesaler - since he is buying it from his own money, it's not on the shop's books. So out of the 200 chocolate the shop sells on that day, only 100 is sold by the shop & the other 100 is sold by him using the shop. When he is selling chocolates, half the sales won't be on the shop's books.
So essentially, he has made a profit of 6,000 without any of the other overheads of the shop.
Which seems to be what the promoter has done. He has spent 400 crore of his own money (instead of the company money) in getting stuff manufactured - thus understated expenses (though it's not really understating because the company didn't spend that money - the promoter did). He has however sold it for 1000 crore but the sale won't be on the books - so understated sales - again not really understated. He has thus siphoned off 600 crore of profit from the stock holders (actually may be more than 600 because he probably is using the company's resources for doing everything).
The other 100 crore thing is a totally different matter - it's the company's accountants trying to reduce taxes using false expenses - it's unrelated to the understated expenses & sales. It shouldn't be conflated.
Quality of book results & management is gone now. Outsider cannot reasonably trust any financial data.
Probably auditors will face music from NFRA
Management will face prosecution
Tax, Penalty & interest on income discovered during raid is very high. Assume almost whole of income will go out as tax & mostly tax department will go backward 10 years for investigation
I expect company to offer some settlement by offering to pay huge taxes. There is legally possible scheme of tax settlement but that involves a lot admission of wrong doing & such admissions will be used in other proceedings
Expect ED to make raid.
Coincidentally, I know certain members of the Jaisinghani clan. Me and my colleagues were quite certain something major will break out and finally it did (half a decade after we'd predicted)
At the end
1. 400 crore expense overstated - companies often adjust for income / expenses and sometimes, just sometimes, the estimates go wrong. This leads to correction measures at the year end. To be tax compliant, they mightve paid more advanced tax and realised book profit has actually breached the mark they wanted to set the profits to. So, kharcha kam kiya towards the end. Also done to do GST fraud, for all we know, the understated expenses are getting accommodated in the coming years. It is a very elaborate tax saving strategy - this year we did a lot of tax savings, even more than what we want, let's defer some in a manner to help us out next year.
2. Trust me, any and every company which commits tax frauds, continues to commit them even after they've been caught. They'll be more careful now but still do it. The market will correct itself so it would've been a great buying opportunity depending upon the company fundamentals. Its a great company but tax evasion is in the roots.
3. Tax penalties are usually 100% to 300% of the tax fraud. E.g. income 100, tax 30% = 30. Tax penalty 30 to 90 over and above the 30 tax payable. Tax amount will attract interest at 1.5%p.m. till paid from the year in which such fraud was found. So, a 600 crore income fraud can result in approx. 600 crore tax payable (tax+penalty+interest)
4. SEBI should but it can't because technically it has not been non-compliant as per SEBI Act. They can put the company under a magnifying scope, find irregularities and ensure the investors are safeguarded. Here there's some ambiguity for SEBI powers which it can use/misuse so don't know which angle they would take.
Great insights -- thanks Ishpreet!
SEBI can do a lot but I doubt it will.. it has got a lot of big fish on its plate at the moment after all.
But it makes absolutely no sense for Polycab to simultaneously fudge its books to show ₹100 crore more in expenses while also hiding ₹400 crore of perfectly legitimate expenses - This in all likelihood to maintain the illusion of a consistent operating margin. Sales of 1000 cr off the books so to adjust against it expenses of 400 cr also off the books.
Income tax penalty on misreporting is 200% of the misreported income. So you’re actually undercounting the penalties.
Most of the time it is income tax bull shit raids and waste of time for business folks.