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CG Power Shares Hits Lower Circuit As ‘Suspect, Unauthorised, Undisclosed’ Transactions Found

Based on the observations, CG Power has now restated its financials for the year ended March 2017 and March 2018.

Smoke rises from a chimney as electricity pylons stand at a thermal power station in India. (Photographer: Dhiraj Singh/Bloomberg)
Smoke rises from a chimney as electricity pylons stand at a thermal power station in India. (Photographer: Dhiraj Singh/Bloomberg)

Shares of CG Power And Industrial Solutions Ltd. hit the lower circuit on Tuesday after a probe by a legal firm revealed that the Gautam Thapar-founded Avantha Group flagship understated its liabilities and advances made to related and unrelated parties, among other financial irregularities.

The transactions were carried out by some key managerial personnel and other employees prejudicial to the company’s interest, according to an exchange filing. The transactions appeared to have been undertaken in a seemingly “fraudulent manner” warranting investigation, it said.

CG Power didn’t disclose the name of the legal firm that undertook the investigation.

CG Power Shares Hits Lower Circuit As ‘Suspect, Unauthorised, Undisclosed’ Transactions Found

In March 2019, an operations committee—headed by one of the firm’s independent directors—was formed primarily to seek refinancing of certain facilities and protect shareholders’ interest. This panel received a letter from a financing company about an interest payment failure, which the committee was unable to track in CG Power’s books, implying that the loan on which the power equipment maker defaulted was not shown in its balance sheet.

In a separate case, CG Power’s managing director received a request from a bank to replace a cheque whose validity was about to expire. And here, too, the operations committee could not track the said liability in the company’s financials. To asses this, the panel appointed an independent legal firm to investigate.

Based on the observations in the legal report, the power equipment maker has now restated its financials for the year ended March 2017 and March 2018. While the company didn’t disclose the restated profit/loss for 2016-17, its revised 2017-18 loss was Rs 404.21-crore higher at Rs 728.93 crore. For the year ended March 2019, it reported a consolidated loss of Rs 486.79 crore, the filing said. CG Power also said legal efforts to recover written off losses are being taken.

“Moreover, certain additional suspect, unauthorised and undisclosed transactions and entries identified during further verifications (‘additional transactions’) have been brought to the attention of the Risk and Audit Committee,” CG Power said in the filing.

CG Power also restated its receivables from related parties for the financial years ended March 2017 and 2018, while it disclosed the outstanding amount for the year ended March 2019.

This adds to the woes of CG Power, which has been struggling with mounting debt. Shares of CG Power too have been invoked as the promoters who pledged the company’s stakes defaulted on payments. Recently, Yes Bank Ltd. invoked pledged shares of CG power, acquiring 12.79 percent ownership in the company from the promoter Avantha Holdings Ltd.

Key Findings Of The Investigation

  • Understatement of the group’s total liability by Rs 1,608 crore as of March 2018 and by Rs 402 crore as of April 2017.
  • Understatement of advances to related and unrelated parties by Rs 2,807 crore as of March 2018 and of Rs 1,331 crore as of April 2017.
  • Assets provided as collateral without due authority. The company was made co-borrower and guarantor for unrelated third-party loans without due authorisation. These funds were immediately routed by the company to related parties without due authorisation.
  • Understatement of the group’s net worth by ‘unauthorised’ and ‘inappropriate’ write-off.
  • The company said it has restated last two years’ financial statements, including the impact of all the undisclosed or the understated transactions and making appropriate disclosure.

Alleged Fraud?

One of CG Power’s joint auditors, SRBC & Co LLP (an audit arm of EY), has sought information and explanations from the company regarding certain transactions as part of the notice issued to the company under Section 143(12) of the Companies Act, 2013, according to the filing.

Section 143 (12) of the Companies Act pertains to cases where the auditor believes an offense involving fraud has been committed by officers or employees of the company. The auditor is required to report such matters to central government.

The company, however, said these matters were added in the scope of the legal firm’s investigation.

CG Power and SRBC have yet to respond to BloombergQuint’s emailed queries.

On Tuesday, CG Power shares fell 19.84 percent to Rs 14.75 apiece on the BSE while those of Yes Bank, which holds 13 percent stake in the company, slumped 7.11 percent to Rs 71.25. The benchmark Sensex shed 0.20 percent to end the day at 37,328.01 points.