The developments at Ricoh India hold out two lessons for Corporate India. One the parent has, in all but name has owned up to sleeping at the wheel and is making minority investors whole again: Ricoh Japan has spelt out an elegant solution to its India problems. Two the minority shareholders have requisitioned an extra-ordinary general meeting, asking the audit committee to be sacked sending a strong signal that Corporate India’s governance failures will increasingly be met with a muscular response.
Ricoh India missed filing both the 30 Sept. 15 and 31 Dec. 15 quarterly results. The company initially tried to brush aside the delay stating that the new auditors, BSR & Co. LLP (BSR) appointed in the September 2015 AGM, “were taking longer than usual” to complete the audit (18 February 2016).
As the gravity of the problems became apparent, the company started to disclose more. Its 20 April 2016 letter clarified that BSR had requested further review of certain transactions for the quarter ended 30 September 2015. The audit committee appointed SS Kothari Mehta & Co. to conduct a review of the financials for the period April 2015 to September 2015. However, BSR & Co. LLP did not agree with the findings of SS Kothari Mehta & Co. The audit committee then appointed the law firm Shardul Amarchand Mangaldas & Co. which, in turn, appointed Price Waterhouse Coopers Private Limited to conduct a forensic review of the company.
By the time the 20 April 2016 release hit the exchanges, events and other related announcements by the company suggested that the issues at hand were more serious than first let on.
The company had by then already been moved to Z category on the BSE, so trading was affected.
On 1 April 2016, the company announced that the board was undertaking an internal review and pending its completion, had requested Manoj Kumar its managing director and CEO to go on paid leave. The CFO, Arvind Singhal and the senior vice president and COO, Anil Saini, were also asked to go on paid leave.
Manoj Kumar immediately resigned from the board, with effect from 2 April 2016 and a new managing director and CEO was appointed.
When the September 2015 results were finally announced on 18 May 2016 (in a board meeting that spilled over from 17 May 2016), it concluded what the markets had already guessed by then: the audited accounts did not reflect a true and fair picture. The review questioned the opening cash balance, highlighted the out of books adjustment to net sales, expenses, assets and liabilities, over inflating revenues on the basis of orders on hand, substantial back-to-back purchases and sales, customers with non-traceable addresses, unsupported backdated transactions. In other words, complete disregard for all known accounting rules.
The company has also requested SEBI to conduct an investigation to ascertain if the incorrect financial statements had any impact on the securities market and investors under SEBI Prohibition of Insider trading Regulations, 2015 and SEBI Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Market Regulations, 2003.
Further to various investigations undertaken by the company and various independent parties including PwC, the company estimates a loss at Rs 1,123 crores for the year ended 31 March 2016. The promoters Ricoh Japan will infuse funds in Ricoh India to cover this loss. But, in order not to affect the shareholding pattern, the existing shares of the promoters in Ricoh India would be cancelled without reduction in capital and simultaneously the company capitalized to the extent of its cancelled capital and premium to the extent of the losses suffered.
An elegant solution. Not since Tata Sons bailed out Tata Finance
Shareholder requisitioned meeting
Coming back to the meeting requisitioned by the shareholders.
The shareholders in Ricoh India Limited (Ricoh India’), the subsidiary of Ricoh Japan (‘Ricoh Japan’ or parent) have requisitioned for a shareholder meeting on 5 August 2016. This EGM has been requisitioned by shareholders under section 100(2) of Companies Act 2013. The agenda of the meeting primarily is to remove UP Mathur, RK Pandey, Ashish Garg and Hiroyasu Kitada all four members of the audit committee from the board, for failing to conduct a fair and accurate review of the company’s financial statements. It is also to appoint a new independent director. All resolutions proposed in this EGM have been put forth by the shareholders of the company – and IiAS supports all of these resolutions.
The audit committee, a critical operating committee of the board, has a crucial role in ensuring the integrity of the company’s financial statements to its shareholders. Its roles and responsibilities include
1. monitoring the integrity of the financial statements of the company and any formal announcements relating to the company’s financial performance
2. reviewing significant financial reporting judgements contained in them
3. reviewing the company’s internal financial controls and risk management systems;
4. monitoring and reviewing the effectiveness of the company’s internal audit function;
5. appointing and monitoring the external auditor’s independence and objectivity and the effectiveness of the audit process.
With the passage of the Companies Act 2013, the committee now has oversight over related party transactions and a few other non-audit services.
This the beginning
This is not the first meeting to be requisitioned by shareholders, but it certainly marks a new milestone.
Before this, shareholders in Sanghi Industries called for one in 2012. This was then postponed indefinitely. And last year shareholders of S Kumars Nationwide enacted what can best be described as a circus. There may have been a few others, but most of these were without merit.
But this time a substantive, well documented agenda is being put to vote where the parent itself has been forced to pay the price.
While Ricoh Japan, having made the minority investors whole again, continues to have full faith in the members of the audit committee, the shareholders who have requisitioned the meeting feel strongly that the committee has let them down. And while it will always be difficult to spot pre-meditated, planned fraud, the shareholders have signalled their higher expectations from audit committees.
Earlier shareholders grouped together to battle managements – and even today, they are trying to do so in Maharashtra Scooters and Bharat Forge. But, regulations have empowered shareholders, and much more importantly explained to them their rights. Armed with a supportive regulatory environment, managements who let down their shareholders, need to recognize that increasingly it will be these very shareholders who will determine what’s put on the agenda.
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