Educomp Solutions’ (ESL) directors Shantanu Prakash and Jagdish Prakash have been fined Rs 1.1 crore and Rs 1 crore each by the market regulator, for various charges including misleading investors with financial statements that painted a false picture about the listed company.
Shantanu has been barred from dealing in securities and from holding any directorial or key managerial personnel position in any listed company or intermediary registered with the Securities and Exchange Board of India (Sebi) for five years. Similar conditions have also been imposed on Jagdish, but for a period of three years.
Proceedings against ESL were disposed off without any directions because the company is under the Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code. But if the CIRP is reversed by the Principal Bench of National Company Law Tribunal, then the company would have to pay a penalty of Rs 1 crore and be stopped from accessing the securities market for five years.
According to the Sebi order, ESL’s inflated figures came to light after it declared Edu Smart Services (ESSPL) as its subsidiary. Till then, ESL had been showing ESSPL as a client and this, through a complex arrangement, allowed ESL to hide the total amount outstanding from debtors. Once ESSPL was declared as a subsidiary, following the amendment to Company Act 2013, “the profitability of ESL took a beating”.
Net profit of ESL in 2010, 2011 and 2012 were Rs 282 crore, Rs 342 crore and Rs 137 crore, respectively. But from 2013, it started posting losses. In FY13, the company posted a loss of Rs 143 crore and it kept rising; in FY17, ESL posted a net loss of Rs 782 crore.
“Further, it is noted from the financials of ESL that there was a steep rise in the provisions on trade receivable and write-offs subsequent to FY 2012-13,” stated the Sebi order.
Provisions as a percentage of sales was 2 percent in FY13, it went up to 19 percent in FY14 and a whopping 125 percent in FY15.
“The sharp rise in provisions can be attributed to ESL acknowledging that ESSPL was a subsidiary of ESL and disclosing it in its books consequent to the 2013 Act coming into effect (April 01, 2014), and also because of the fact that the lenders of ESL had taken ESL to CDR (Corporate Debt Restructuring)” stated the Sebi order.
The company’s share price plunged in parallel.
The Sebi order noted, “ESL’s shares reached their peak price of Rs 985.57 on NSE on October 01, 2009. However, the price of the scrip progressively declined and was trading at around Rs 30 in April 2014, by which time ESSPL had been declared as a subsidiary of ESL. This downward trend continued in the subsequent years, and since June 2017 the share-price of ESL has been in single digits. The scrip is currently trading at Rs 2 (as on May 29, 2023 on NSE).”
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