Veritas-Indiabulls slanging match continues

Exclusive: Neeraj Monga explains Indiabulls downgrade

Here is Veritas response to Indiabulls response to Veritas report:

Facts related to the allegations:
1. Note 37(g) on Page 96 of the Annual Report of FY-2012 states: ‘The repayment of the loans granted by the Company to the Trust is dependent on the exercise of options of the eligible employees, at the exercise price as determined by the Trust based on its Carrying Cost and the market price of the underlying shares of the unexercised option ..’.

Note 37(g) makes it abundantly clear that the eligible employees who are beneficiaries of the Employee Stock Option Schemes will pay to the Trust the Total Cost of the Trust, ( including interest cost less dividend) at the time of exercising the Options granted to them.

Veritas Response: Given that repayment is contingent upon the granting of options, and the exercise of the granted options, only if such awards are in the in the money at the time of exercise, it is pure conjecture at this moment to decide any beneficial economic outcome associated with the EWT. Therefore, any loans to the EWT are questionable assets, as long as the EWT is unable to meet its interest commitment to IndiaBulls Financials (“IBULL”) on a recurring basis.  Our argument is economic and cash flow based.

2. EWT is being levied interest @12% per annum and the total interest income is INR 0.99B and not INR 1.2B. More importantly the Net Interest Income (NII) is Rs. 18 crores given that IBFSL has cost of funds of 10.1% for FY-2012. Rs.18 crores is less than 1% of the NII of Rs. 1866 crores earned by the company in FY 12.

Veritas View Page no. 96 para (g) of IBULL F12 annual report:

The Company along with its subsidiaries has provided loans to the "Indiabulls Employees' Welfare Trust" (Trust) (Refer Note no. 3) and Ceraon Ventures Private Limited (Subsidiary of Trust) for purchase of Equity Shares, of which Rs. 9,761,752,700 (Previous Year Rs. 6,119,700,000) (excluding Rs. 1,196,925,223 Previous Year Rs. 322,468,505)) being interest accrued but not due) was outstanding as at March 31, 2012.

More importantly, if you see our release, we refer to the increase in PBT and NOT the entire PBT of F12. Furthermore, since no actual funds have been received by IBULL, the recognition of income on an accrual basis creates a receivable on its books, which is unlikely to be realized in the near future. Therefore, a conservative accounting treatment would expense the cost of funds (10.1% as per the Company) associated with the loan to EWT, and would only recognize income once the funds advanced to EWT, are repaid.