India Inc, brokerages on accounting war

The last two months have seen a few blue chip companies go head-to-head with influential brokerages over accounting policies. Brokerages are increasingly seeking more transparency and disclosure from corporates raising doubts over what they see as aggressive accounting practices. India Inc has hit back calling the reports misleading. With the accounting regulator and the market regulator staying silent, it is upto shareholders to make sense of the charges and clarifications, reports CNBC-TV18's Sajeet Manghat and Animesh Das.

Accounting policies of India Inc are being scrutinised more closely by leading brokerages, who are seeking more transparency and disclosure. Over the last few months, brokerages have raised questions over the accounting practices at Biocon and HDFC with JSW Steel being the most recent case. In a report on JSW Steel issued on the July 6 Credit Suisse wrote, "While the reported FY12-end net debt was Rs166 bn, we believe it was understated by at least Rs119 bn."
The JSW Steel management issued a strong denial the same evening and followed it up with newspaper advertisements, calling the report misleading.
JSW Steel clarified that its financial statements are in accordance with Indian GAAP and consistent with the practices being followed by the company for years.
72 hours later, Credit Suisse issued a clarification stating "We have no reason to suspect any such thing, and it is far from the intent of our analysis. The phrase "debt effectively higher" better describes what we sought to put across."
CSFB seems to have accepted the arguments made by JSW Steel but this is not the first time India Inc's accounting policies have been questioned.
On May 21, foreign brokerage Espirito Santo raised a red flag over Biocon's accounting policy.
The brokerage wrote, "We see this accounting policy as aggressive (the auditors have drawn an emphasis in this regards). We believe it will lead to consistent over-reporting of EPS (and potentially over-valuation) to the tune of 20% every year during FY13-15."
Biocon responded saying "The accounting method followed is in compliance with GAAP and appropriate disclosures have been provided. Auditors have drawn reference to this method of treatment as matter of emphasis."
HDFC took on Australian Brokerage firm Macquarie in June over its report titled "The last bastion falls", Macquarie said, "We believe a structural de-rating is likely because the quality of earnings and ROE reported is being driven more by its corporate book and aggressive accounting practices."
HDFC responded strongly saying, its accounts are as per Indian GAAP and consistent with its long term policy. HDFC also questioned the timing of the Macqurie report.
It said "It is surprising that Macquarie, in its report as recently as May 7, had put a price target of Rs.775 on HDFCs stock with an outperform rating based on the same facts and figures. We are, therefore, unable to understand as to what prompted the analyst to change his recommendation and outlook within a month's time."
This war of words between brokerages and managements has led to uncertainty and shareholder losses, but so far the matter has not been taken up either by the market regulator SEBI or the accounting regulator, the ICAI. Unfortunately so far it has been left to shareholders and investors to make up their minds on the veracity of charges and clarifications. Also watch the accompanying video......