Profits due to a/c standards, Macquarie report false: Keki

Keki Mistry, vice-chairman and CEO, HDFC explains to CNBC-TV18 that the earnings, alleged to be overstated by a Macquarie report, are based on accounting adjustments and systems that are widely used and accepted.

Mistry is surprised that the share of profits of Rs 1,400 crore in the subsidiaries is not reflected in the P&L account and will reflect when HDFC adopts the IFRS system of accounting. He is surprised that the Macquarie report is bringing to light facts which are well-known to all institutional investors. Below is an edited transcript of the interview on CNBC-TV18. Also watch the accompanying video Q: According to a report from Macquarie, HDFC adopted aggressive accounting practices by passing provisioning through reserves and adjusting for zero coupon bonds through reserves as well. This resulted in FY11 and FY12 earnings being overstated by 38% and 24%. What do you have to say about this?
A: There are due to accounting adjustments that are recognised and accepted. HDFC is not only a mortgage company, it is also a financial-holding company. So we hold equity in our bank, in our life insurance, in our asset management and in the general insurance business. Q: Is it true that if you do pass the profits of the various businesses through the P&L, the return on equity will fall quite substantially?
A: No, the return on equity will, in fact, go up because then we would also be reflecting the share of profits of our subsidiaries. We have investments in the bank, life insurance, general insurance, venture capital and asset management businesses. Many of these businesses make accounting profits. Also Read: Macquarie downgrades HDFC, sets target price of Rs 550
The bank, of which we own 24%, for example had a profit of Rs 5,200 crore last year. So our share of the profits of the bank, according the IFRS system of accounting, is reflected as income. But according to the Indian GAAP system of standalone accounts, it is not required or allowed to reflect the share of profits of the subsidiaries.
And because the share of the subsidiaries is not reflected, the interest cost attached is also not reflected in the P&L account. We have been following this practice for a long time.
So we were to move to the IFRS standard of accounting, our accounting profits would actually go up from Rs 4,100 crore, which the standalone profit last year, to around Rs 5,500 crore after accounting for the zero coupon bonds in the P&L accounts. Q: Can you clarify the amount of profit?
A: Our share of profits at the subsidiary would be Rs 1,400 crore which is not reflected in the P&L account. So in actual practice when we move to IFRS accounting hopefully it will  increase between 30-32%, a fact which is well known to our institutional investors.
We have been explaining this to each and everyone of them over the last two or three years. In fact I am surprised Macquarie is talking about it today because this is something we have been saying for a very long time. Q: So, where does the RoE stand at currently?
A: If you look at last five years, two-thirds of our lending has been for individual loans and one-third for non-induvidial loans. Within these non-individual loans, construction constitutes 12-13%.
So, it's not correct to say that in the individual business, the RoE is low or the profits are lower. The interest rate on individual loan is lower than the interest rate on non-individual loans, but on non-individual loans there is a higher provisioning that is required, whereas in individual loans the provisioning is lesser. On non-individual loans there is a higher risk base, for individual loans there is a lower risk base.