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Forex scam may cause $ 20-25 mn loss this qtr: Hexaware

Published on Mon, Nov 26, 2007 at 10:51 | Source : Moneycontrol.com

Updated at Tue, Nov 27, 2007 at 09:47

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Hexaware 's Board has permitted the Special Committee to investigate foreign exchange option transactions. One of Hexaware's officials, who exercised unauthorised fiduciary powers, has been immediately suspended. The company plans to make provisions between USD 20-25 million to cover any potential exposure as a result of these transactions. The action has had to be taken due to concealed and potentially fraudulent forex transactions by one Hexaware official.

Hexaware's 9-month CY07 Net Profit was at USD 27 million.

Atul Nishar , Chairman, Hexaware said that in the last 3 days, an unauthorized option transaction came to light in forex transaction. Auditors will submit report in next 1 month on forex transactions, he informed. Nishar said that company does not have have any in house expertise to enter into forex deals. The loss will not be large according to Indian Standard of Accounting, he pointed out. They will have to unwind forex options, which may result in loss, he added. The actual losses will be booked in current quarter itself, he informed. The company will make provisioning in the current quarter for futures anticipated losses, Nishar said. He further informed that future risks arising would also be provisioned in current quarter. The actual loss/ potential losses could be in the range of USD 20-25 million, he predicted. The Q4FY07 EPS will be impacted due to provisioning, Nishar revealed.

According to analysts, Hexaware's management first identified this unauthorised transaction by treasury officials. It was actually an options contract that had been entered into without any information given to the senior management or the board.

It appears the company has not used the word fraudulent here, analysts said. The official entered into these contracts without informing the management. These are options contract and these should be taken separately from the forex cover. Hexaware's forex cover is above USD 400 million, at the rate of Rs 40.43 a dollar. These were other exotic options that the official had entered into.

Hexaware has spoken to bank officials with whom these contracts were signed, analysts said. They have indicated that the unwinding of these positions could potentially lead to a provisioning of USD 25 million. Hexaware has provision in case of any loss arising out of it.

The management is also giving mixed signals. From last Thursday onwards, the management said they have entirely looked into these contracts. They said it wouldn't exceed more than USD 25 million in case of any potential loss arising out of it.

The management said they are investigating more uncovering of such options that might have entered into, analysts said. So, it seems that it is very early. Hexaware's management said it has appointed a three-member committee to look into this entire transaction fiasco. The investigation is supposed to take a month. Post whatever report comes in, they will use that to further strengthen their processes.

Experts said there is a lot of pressure on CFOs and treasury department to mitigate the impact of the rupee. Due of that there is immense pressure, and this would have led to such a situation, they added.

Excerpts from CNBC-TV18's exclusive interview with Atul Nishar:

Q: Can you give us a clarification on the Forex transactions, the special committee that you have set up to track what has gone wrong?

A: Over the last three days, certain unauthorised, unreported option transactions came to light in Forex - and that started from Thursday evening when we came to know of just one transaction that had a smaller loss probability. But since the transaction was not approved and the company had no reason to get into such an auction deal, it alerted us and we started probing in it over Friday, Saturday and Sunday, and we find that there are several such transactions entered into during the last few months without proper authority and approval, and they were actively concealed from the management and the board.

That is the reason why we had our board meeting today morning and we appointed a board committee consisting of leading chartered accountants. Mr. Shailesh Haribhakti who is our audit committee Chairman, Preeti Mehta who is the Partner of Kanga & Co. solicitors and Mr. L.S. Sharma, banker and member of the audit committee, three independent directors to go deeper into this, and within the next 30 days cover the whole issue.

Q: Could you tell us what is the total quantum of the amount of options transactions that you have embargoed, since Thursday as you have mentioned and even over the last few months that have led you to take this action?

A: I would like to put this thus - firstly let me tell you that the options entered into, we do not have any in-house expertise to even enter into such deals. We do not understand these deals, they are difficult to grasp, and even the last two days, it took lot of time and experts' help to understand these transactions.

Therefore, the more appropriate answer will be to say what it would result into. Now the lots may not necessarily occur, and if you are not to cancel these transactions, the loss in this quarter by the Indian-GAAP accounting, may not be very large.

But we would like to make a provisioning of all future possible loss as well. And we would also like to unwind some or many of these options at the earliest possible opportunity. And once you unwind there would be an immediate loss arising out of that.

Q: Are you going to be booking this entire loss in the fourth quarter of this cyclical year because as I understand it they are provisioning at a higher end USD 25 million is over 80% of what analysts are expecting to do, you to do in terms of total profitability for CY07. So will you be booking this entire USD 25 million, before this calendar year runs out, or will this be done in phases as and when you feel the need arising as and when the unwinding has to happen?

A: Whatever is the actual loss, anyways has to be booked in the current quarter itself. Plus what we believe is the risk arising in future also, we will make provisioning in this quarter itself. So we would want to be done with this problem in the current quarter itself, and therefore the current accounting year. We do not want to take forward the problem to the next accounting year.

Q: Just going back to the original point saying these are complex transactions that you do not understand completely - just for the record, the official that you have quoted in the press release that belongs to Hexaware, was he a board member or not a board member?

A: He was not a board member, certainly not.

Q: But he was a member that was actively involved with the treasury department of Hexaware?

A: He was handling treasury, reporting to the CFO.

Q: What you are saying is that the losses could essentially be much higher than USD 25 million, but you are in the current scenario on the basis of what you have already embargoed as options transactions, only book USD 25 million as provisioning as right now, this figure or USD 25 million could be increased subsequently?

A: That is not what I said. what I am saying is the actual loss likely in this quarter plus any potential loss we are providing, all inclusive, the amount we expect to be in the range of USD 20-25 million.

Q: Which means that you will not essentially go ahead and report a Rs 9 earnings per share as a general consensus on the street for CY07. Does EPS FOR quarter be impacted quite significantly on account of this; is that a correct assumption to make?

A: Q4 EPS will be impacted negatively; also the accounting year 07 EPS will be impacted negatively. The total provisioning including loss, we expect between USD 20-25 million that covers the future risk as well.

Q: You have also significantly increased your provisioning as of the end of the previous quarter to USD 400 million versus about USD 90 million previously. From where is this USD 25 million going to come out of? When it's eventually reflected in your books, will it be a part of that additional USD 400 million provisioning that you have done?

A: The forward cover that we have of more than USD 400 that we have sold. US dollars at Rs 40.43 average price - that is what is continuing. The option deals are in addition to that, which was unapproved and not reported to the board. And therefore, they are not included in the USD 400 plus million of hedge - the two are different transactions.

Q: Just to sum it up, you are saying that as things stand today, you are absolutely confident that USD 25 million will take care of whatever fraud, hidden transactions took place on the options side in the treasury department of Hexaware. And you are absolutely confident that there are no such further instances that could come up, that could lead to this USD 25 million getting opt into the first quarter or maybe the second quarter of the next calendar year, is that correct?

A: We have talked to all the banks by now with whom we have dealings; Saturday was a bank holiday, inspite of that we physically met the bankers on Saturday as well as Sunday. So we have reconciled the banks with whom we have got dealings. And based on that information, we believe that all the transactions in the nature of options with future unauthorized and concealed formers are now to our knowledge. And all these transactions are at today's value, if we were to look at to unwind the possible loss, would warrant provisioning of below upto USD 25 million.

Q: So you will report earnings per share of how much for CY07?

A: We are not giving earnings guidance; we have given guidance that includes Q4. Our topline will be in the same range as last quarter. In the last three quarters, we have had a profit of USD 21 million, and current year profit we have not given guidance, I would not like to add anything more.

But we believe at this point of time, that the current year's profit is adequate to take care of this entire provisioning. And also our cash position of USD 82 million, though all may not result in immediate cash outflow. But at the same time I want to assure that Hexaware is a debt-free company, the USD 82 million of cash that we have is more than adequate to overcome this problem. And also I want to say that the next year's growth, and the business will remain unaffected by this development, as this is a one-time development.