Auditor Seeks Details Of Probe Into Infibeam’s Merger With Avenues India

Infibeam Avenues Ltd.’s auditor sought a detailed report of a probe into its merger with Avenues India Pvt Ltd. even as corporate governance concerns have destroyed more than three-quarters of online retailer’s market value.

SRBC & Co LLP, the audit arm of EY India, citing information provided by a third party, had asked the management to conduct an independent investigation into “merger and acquisitions” and other “financial statement-related matters” in the first quarter for financial year 2018-19, Infibeam had informed the exchanges as part of the earnings announcement for the quarter ended June 2018 without explicitly saying what triggered the demand.

The company, in its September-quarter earnings filing, said an independent chartered accountant firm investigated the matters and the initial report didn’t contain “any material adverse observation”.

The online retailer reiterated as much in its statement to BloombergQuint. Infibeam received the initial report from independent firm, and there are no material adverse findings, it said in its reply to a query on concerns about the merger.

That response didn’t satisfy the auditor. In the limited review of the second-quarter numbers, SRBC & Co asked the company to submit the detailed report of the independent investigation. The company is yet to submit the details.

Infibeam, in its reply to BloombergQuint, said the detailed report is being prepared but the matter is not being reinvestigated.

Deal Under The Scanner

It’s obvious that the auditor’s concerns stemmed from the merger with Avenues India because the company had only one M&A in FY18. Infibeam, in an emailed response to BloombergQuint, also confirmed that its Rs 2,000-crore all-stock deal with the payments gateway was probed.

That comes when the company is already battling investor fears. One of its joint statutory auditors had stepped down citing “time and resource constraint” in March last year. Then a WhatsApp message about related-party loans in September wiped off 73 percent of its market capitalisation in a day. Its shares have tumbled 80 percent from their peak.

More Than 90% Value Locked In Intangibles

Infibeam agreed to combine with Avenues India in July 2017. While the final approval from the National Company Law Tribunal came in May last year, the merger was recorded in FY18.

Infibeam issued fresh stock worth Rs 1,772 crore to the shareholders of Avenues India taking into accounts its assets. After the deal, total assets on its balance sheet surged threefold to Rs 2,847 crore in FY18.

• But the fair value of net assets acquired was about Rs 134 crore, according to the company’s FY18 annual report. That’s just 6.7 percent of the total value of the acquisition.
• The rest came from “unidentified intangible assets” including goodwill, trademark, software and customer relationship.

It’s, however, not clear if the auditor’s concerns stemmed from such a high proportion of intangibles. Infibeam didn’t share the details of the ongoing investigation report with BloombergQuint.

To be sure, a software company having high intangibles is not unusual as they may have intellectual property rights, products and customer relationships, but these get factored as part of net assets during an M&A transaction. Infibeam paid significant premium of Rs 1,864 crore over and above the net asset value.

The auditor also said the impact of the transactions in question on Infibeam’s FY18 and first-quarter earnings can’t be ascertained till the investigation is over.