Section A: Modified report on account on unconfirmed loans, advances and deposits to related parties, etc. (Part I)
United Spirits Ltd (31-3-2014)
From Notes to Accounts
26. Provision for doubtful receivable, advances and deposits
26(a) Certain parties who had previously given the required undisputed balance confirmations for the year ended 31st March 2013,claimed in their balance confirmations to the Company for the year ended 31st March 2014 that they have advanced certain amounts to certain alleged UB Group entities, and that the dues owed by such parties to the Company will, to the extent of the amounts owing by such alleged UB Group entities to such parties in respect of such advances, be paid/refunded by such parties to the Company only upon receipt of their dues from such alleged UB Group entities. These dues of such parties to the Company are on account of advances by the Company in the earlier years under agreements for enhancing capacity, obtaining exclusivity and lease deposits in relation to Tie-up Manufacturing Units (TMUs); agreements for specific projects; or dues owing to the Company from customers. These dues wereHI duly confirmed by such parties as payable to the Company in such earlier years. However, such parties have now disputed such amounts as mentioned above. Details are as below:
In response to these claims, under the instruction of the Board, a preliminary internal inquiry was initiated by the Management. The results of this inquiry were as follows:
i. One party (which falls under (a) above), who owes certain amounts to the Company, has disputed an amount of Rs. 2,240.7 million (including interest claimed by it as due from an alleged UB Group entity), alleging that it had advanced monies to such alleged UB Group entity based on an understanding that, to the extent of the amounts owed to it from such alleged UB Group entity in respect of such advance, it could withhold from the amounts payable by it to the Company, and such party has said that it would not pay its dues to the Company to the extent of the amounts claimed by it from such alleged UB Group entity as mentioned above, unless it received repayment of the amount advanced by it to such alleged UB Group entity along with interest.
ii. Certain parties (which falls under (a) above), who owes certain amounts to the Company, have disputed an aggregate amount of Rs. 984.5 million (including interest claimed by them as due from alleged UB Group entities), alleging that they had advanced monies to such alleged UB Group entities and that, to the extent of such dues from such alleged UB Group entity as mentioned above, unless it received repayment of the amount advanced by it to such alleged UB Group entity along with interest.
iii. Certain other parties (which fall under [(b) and (c)] above) changed their original stand and acknowledged that their dues from the alleged UB Group entities were based on transactions that were independent of their dealings with the Company. These parties have subsequently provided appropriate confirmations of the relevant balances due from them to the Company. The related balances are Rs. 2,681.8 million.
iv. In addition to the above, there is an additional party, being a TMU, whose allegations are on a similar basis to those of the parties mentioned at (iii) above and who has subsequently provided an appropriate confirmation of the balance due from it to the Company. However, this party’s undertaking has closed down and the related balance of Rs. 648.5 Million (including interest) has been provided in the current year.
v. The claims made in relation to the advances to the parties (including the additional party) mentioned above may indicate that all or some of such amounts may have been improperly advanced from the Company to such parties for, in turn, being advanced to the alleged UB Group entities. The aforesaid, however can only be confirmed by a detailed inquiry which has been authorised by the Board as mentioned below.
vi. The Company is proposing to more fully inquire into the allegations or claims by the parties in detail and does not acknowledge the correctness of the same. In any event, the Management does not believe that the parties referred to above are entitled to withhold payment/ repayment to the Company as claimed by them. The Management further believes that the Company is entitled to recover all the above amounts, including those disputed by certain parties as mentioned in notes (i) and (ii) above, as and when due from these parties. However, the Management has also examined the financial capability of some of these parties, based on which the Management has concluded that the ability of these parties to pay, and consequently the recoverability of, the relevant amounts is doubtful. After considering the above and other considerations and though the above claims were received only when the Company sought balance confirmations from the relevant parties for the year ended 31 March 2014, as a matter of prudence, a provision has been made in the accounts in respect of the dues from these parties (including interest claimed up to the various dates of the balance confirmations from these parties) as detailed below, and as these transactions relate to the period prior to 1 April 2013 they have been reflected as prior period items in the financial statements:
Based on the current knowledge of the Management, the Management believes that the aforesaid provision is adequate and no additional material adjustments are likely to be required in relation to this matter.
As mentioned in Note 26(c), the Board has: (i) directed a detailed and expeditious inquiry into this matter and (ii) authorised the initiation of suitable action and proceedings as considered appropriate by the Managing Director and Chief Executive Officer (MD) for recovering the Company’s dues. Appropriate other action will also be taken commensurate with the outcome of that inquiry.
Pending completion of the inquiry mentioned in note 26(c), the Company is unable to determine whether, on completion of the inquiry, there could be any impact on these financial statements; and these financial statements should be read and construed accordingly.
26(b) Certain pre-existing loans/deposits/advances due to the Company and its wholly-owned subsidiaries from United Breweries (Holdings) Limited (UBHL) which were in existence as on 31st March 2013, had been taken into consideration in the consolidated annual accounts of the Company drawn up as of that date. Pursuant to a previous resolution passed by the board of directors of the Company on 11th October 2012, such dues (together with interest) aggregating to Rs.13,374 million were consolidated into, and recorded as, an unsecured loan by way of an agreement entered into between the Company and UBHL on 3rd July 2013. Further, the amounts owed by UBHL to wholly-owned subsidiaries have been assigned by such subsidiaries to the Company and are recorded as loan from such subsidiaries in the books of the Company. The merger of one of such subsidiaries with the Company is currently under process. The interest rate under the above mentioned loan agreement dated 3rd July 2013 is at 9.5% p.a. to be paid at six months intervals starting at the end of 18 months from the effective date of the loan agreement. The loan has been granted for a period of 8 years and is payable in three annual installments commencing from the end of 6th anniversary of the effective date of the loan agreement.
Certain lenders have filed petitions for winding up against UBHL. UBHL has provided guarantees to lenders and other vendors of Kingfisher Airlines Limited (KFA), a UB Group entity. Most of these guarantees have been invoked and are being challenged in Courts. The Company has also filed its affidavit opposing the aforesaid winding up petitions and the matter is sub-judice.
The management has performed an assessment of the recoverability of the loan and has reviewed valuation reports in relation to UBHL prepared by reputed independent valuers that were commissioned by UBHL, and shared by UBHL with the Company. As a result of the abovementioned assessment and review by the management, in accordance with the recommendation of the management, the Company, as a matter of prudence, has not recognised interest income of Rs. 963.069 million and has provided Rs. 3,303.186 million towards the principal outstanding as at 31st march 2014. the management believes that it should be able to recover, and no further provision is required for the balance amount of rs. 9,956.806 million, though the Company will attempt to recover the entire amount of rs.14,223.061 million. however, the management will continue to assess the recoverability of the said loan on an ongoing basis.
26(c) the Board has directed a detailed and expeditious inquiry in relation to the matters stated in Notes 26(a), 26(b) and 30(f), the possible existence of any other transaction of a similar nature; the role of individuals involved; and potential non-compliance (if any) with the provisions of the Companies act, 1956 and other regulations applicable to the Company in relation to such transactions. The Board has directed the managing director (“md”) to engage independent advisers and specialists as required for the inquiry. The Board has also authorised the MD to take suitable action and proceedings as considered appropriate by him for recovering the Company’s dues. Appropriate other action will also be taken commensurate with the outcome of that inquiry. On the basis of the knowledge and information of the management, the management believes that no additional material adjustments to the financial statements are likely to be required in relation to the matters mentioned above in this note. However, pending completion of the detailed inquiry mentioned above, the Company is unable to determine the impact on the financial statements (if any), on completion of such detailed inquiry, and these financial results should be read and construed accordingly.
30(f) Subsequent to the balance sheet date, the Company received a letter dated 5th may 2014 from the lawyers of an entity (alleged Claimant) alleging that it had given loans amounting to rs. 2,000 million to Kfa at an interest rate of 15% p.a. purportedly on the basis of agreements executed in december 2011 and january 2012. this matter came to the knowledge of the Board for the first time only after the management informed the Board of the letter dated 5th may 2014. the letter alleges that amongst several obligations under these purported agreements, certain investments held by the Company were subject to a lien, and requires the Company, pending the repayment of the said loan, to pledge such investments in favour of the alleged Claimant to secure the aforesaid loans. the Company has responded to this letter received from the lawyers of the alleged Claimant vide its letter dated 3rd june 2014, wherein the Company has disputed the claim and denied having created the alleged security or having executed any document in favour of the alleged Claimant. the Company has reiterated its stand vide a follow-up letter dated 28th july 2014 and has asked for copies of purported documents referred to in the letter dated 5th May 2014. Subsequent to the above, the Company has received a letter dated 31st july 2014 from the alleged Claimant stating that in light of certain addendums to the aforesaid purported agreements (which had inadvertently not been informed to their lawyers) the alleged Claimant has no claim or demand of any nature whatsoever against inter alia the Company, including any claim or demand arising out of or connected with the documents / agreements referred to their lawyer’s letter dated 5th May 2014. The Company has replied to the alleged Claimant vide a letter dated 6th august 2014, noting the above mentioned confirmation of there being no claim or demand against the Company, and asking the alleged Claimant to immediately provide to the Company all the alleged documents referred to in the letter dated 5th may 2014 and the addendum referred to in the letter dated 31st july 2014, and to also confirm the identity and capacity of the signatory to the letter dated 31st july 2014.
Subsequently, in September 2014, the Company obtained scanned copies of the purported agreements (including the purported power of attorney) and various communications between KFA and the alleged Claimant. these documents indicate that while the purported agreements may have sought to create a lien on certain investments of the Company, subsequently, the Alleged Claimant and KFA sought to negotiate the release of the purported obligation to create such lien, which was formalised vide a second addendum in September 2012.
The Management has verified from a perusal of the minutes of meetings of the board of directors of the Company that the board of directors of the Company at the relevant time had not approved or ratified any such purported agreement. the management has represented to the Board that till the receipt of scanned copies of the purported agreements in September 2014, the Company had no knowledge of these purported agreements. The management, based on legal advice received, does not expect any liability or obligation to arise on the Company out of these purported agreements.
From auditors’ report (given in italics in the original report) Basis for Qualified Opinion
1. As stated in Note 26(a) to the financial statements, certain parties who had previously given the required undisputed balance confirmations for the year ended 31st march 2013, alleged during the current year, that they have advanced certain amounts to certain alleged UB Group entities and linked the confirmation of amounts due to the Company to repayment of such amounts to such parties by the alleged uB Group entities. Also, some of these parties stated that the dues to the Company will be paid/refunded only upon receipt of their dues from such alleged UB Group entities. These dues of such parties are on account of advances by the Company in the earlier years under agreements for enhancing capacity, obtaining exclusivity and lease deposits in relation to tie-up Manufacturing Units; agreements for specific projects; or dues owing to the Company from customers. These claims received in the current year may indicate that all or some of such amounts may have been improperly advanced from the Company to such parties for, in turn, being advanced to the UB Group entities. however, this can only be confirmed after a detailed inquiry. Based on the findings of the preliminary internal inquiry by the management, under the instructions of the Board of Directors; and Management’s assessment of recoverability, an aggregate amount of rs. 6,495.4 million has been provided in the financial statements and has been disclosed as prior period items. Based on its current knowledge, the management believes that the aforesaid provision is adequate and no additional material adjustments to the financial statements are likely to be required in relation to this matter. As stated in paragraph 4 below, the Board of directors have instructed the management to undertake a detailed inquiry into this matter. Pending such inquiry, we are unable to comment on the nature of these transactions; the provision established; or any further impact on the financial statements;
2. As stated in Note 30(f) to the financial statements, subsequent to the balance sheet date, the Company received a letter dated 5th may 2014 from the lawyers of an entity (alleged Claimant) alleging that the alleged Claimant had advanced loans amounting to rs. 2,000 million to Kingfisher Airlines Limited (hereinafter referred to as “KFA”), a UB Group entity, in an earlier year on the basis of agreements, executed in december 2011 and january 2012, through which the Company was alleged to have created a lien on certain investments in favour of the alleged Claimant as security for the aforesaid loans. The letter alleged that KFA had defaulted in repayment of the foresaid loans as well as interest of Rs. 790 million due thereon and demanded that the Company should pay the aforesaid amounts and pending such repayments, create a valid pledge on the specified investments. The Company responded to the aforesaid letter vide its letters dated 3rd june 2014 and 28th july 2014, wherein the Company denied knowledge of the purported loan transactions and the purported agreements for the creation of security on such investments held by the Company. A letter dated 31st july 2014 was received from the alleged Claimant wherein they have stated that the notice sent earlier did not take into account an addendum to the loan agreement; and after examining the aforesaid addendum, they have no claim or demand of any nature against the Company. In September 2014, scanned copies of the purported agreements and certain related documents were obtained by the Company. These documents indicate that while the agreements may have sought to create a lien on certain investments of the Company; subsequently, the Alleged Claimant and KFA sought to negotiate the release of the lien, which was formalised vide a second addendum in September 2012.
The management has represented to us that the Company had no knowledge of these purported agreements; that the Board of directors of the Company have not approved any such purported agreements; and it is not liable under any such purported agreements. We are unable to conclude on the validity of these agreements; any required compliance with the provisions of the Companies act, 1956; and any consequential impact of the same;
3. As stated in Note 26(b) to the financial statements, the Company and its subsidiaries had various preexisting loans/advances/deposits due from united Breweries (holdings) limited (hereinafter referred to as “uBhl”). During the current year, pursuant to a previous resolution passed by the Board of directors on 11th october 2012, these dues (together with interest) were consolidated into an unsecured loan aggregating rs. 13,374 million vide an agreement dated 3rd july 2013.
The loan has been granted for a period of 8 years with a moratorium period of 6 years. Certain lenders have filed petitions for winding-up against UBHL. UBHL has provided guarantees to lenders and other vendors of Kingfisher Airlines Limited, which have been invoked and are currently being challenged in courts. the Company has also filed its affidavit opposing the aforesaid winding up petition and the matter is sub- judice. Based on its assessment of the recoverability of the loan, the Company has made a provision of rs. 3,303 million against the loan outstanding and has not recognised the interest income of Rs. 963 million on the loan. Given the various uncertainties involved with respect to the litigations involving UBHL as aforesaid and the extended period for repayment of the loan, we are unable to comment on the level of provision established;
4. As stated in Note 26(c) to the financial statements, the Board of directors have instructed the management to undertake a detailed inquiry in relation to the matters stated in the paragraphs above; the possible existence of any other transaction of a similar nature; the role of individuals involved; and potential non-compliance (if any) with the provisions of the Companies act, 1956 and other regulations applicable to the Company. The Board has also instructed the management to engage independent advisers and specialists, as required, for the inquiry. As the inquiry is yet to be carried out, we are unable to comment on any further adjustment that could be identified as a result of the inquiry; its resultant impact on the financial statements; and any potential non-compliances with the provisions of the Companies act, 1956 and other regulations; and
5. Though the observations in paragraph 1 above relate to claims received in the current year, the underlying transactions were entered into in earlier years. Accordingly, the financial statements of those earlier years and consequently the opening balances may be incorrectly stated to that extent. Further, the detailed inquiry as referred to in paragraph 4 above may result in further adjustments that may have an impact on the opening balances.
Opinion
In our opinion and to the best of our information and according to the explanations given to us, except for the effects of the matter described in the Basis for Qualified Opinion paragraph, the financial statements give the information required by the Act in the manner so required and give a true and fair view in conformity with the accounting principles generally accepted in India. …
From Directors’ Report
BOARD OF DIRECTORS’ RESPONSES TO OBSERVATIONS, QUALIFICATIONS AND ADVERSE REMARKS IN AUDITOR’S REPORT
The Statutory Auditors have qualified their opinion in relation to the matters specified in Notes 26(a), 26(b), 26(c) and 30(f) of the Financial Statement as follows:
1. Auditor’s observations under Paragraph 1 of the Auditor’s report to the financial statement (“the Statement”): Not reproduced
Director’s Response: Information and explanation on the qualification on paragraph 1 of the audit report is provided in Note 26(a) to the Statement. In particular, as stated in note 26(a), the transactions referred to in the said note are on account of amounts that were advanced by the Company in the earlier years and were duly confirmed by the relevant parties as payable to the Company in such earlier years, but were disputed by such parties for the first time when the Company sought balance confirmations from them for the year ended 31st march 2014. This was brought to the attention of the Board after 31st march 2014. Accordingly, as mentioned in note 26(a), as a matter of prudence, the amounts mentioned in the note 26(a) have now been provided for. Since the transactions referred to in the said note 26(a) were entered in to prior to 31st March 2013, they have been reflected as prior period items in the financial statements.
Further, as mentioned in Note 26(a), the Board has:
(i) Directed a detailed and expeditious inquiry into this matter and (ii) authorised the initiation of suitable action and proceedings as considered appropriate by the Managing Director and Chief Executive Officer (MD) for recovering the Company’s dues. Appropriate other action will also be taken commensurate with the outcome of that inquiry.
2. Auditor’s observations under Paragraph 2 of the Auditor’s report to the financial statement: not reproduced
Directors’ Response: Information and explanation on the qualification at paragraph 2 of the audit report is provided in Note 30(f) to the Statement. In particular, as stated in note 30(f), the claim is based on documents purportedly executed by the Company in the months of december 2011 and january 2012. however, the claim was received by the Company only after the year ended 31st march 2014. this matter was only thereafter brought to the knowledge of the Board by the management. a letter dated 31st july 2014 was received from the alleged Claimant wherein they have stated that the notice sent earlier did not take into account an addendum to the loan agreement; and after examining the aforesaid addendum, they have no claim or demand of any nature against the Company. Subsequently, in September 2014, the Company obtained scanned copies of the purported agreements (including the purported power of attorney) and various communications between KFA and the alleged Claimant. These documents indicate that while the purported agreements may have sought to create a lien on certain investments of the Company, subsequently, the Alleged Claimant and KFA sought to negotiate the release of the purported obligation to create such lien, which was formalised vide a second addendum in September 2012.
The Management has verified from a perusal of the minutes of meetings of the board of directors of the Company that the board of directors at the relevant time had not approved or ratified any such documents. accordingly, the Company has, in its responses to the alleged Claimant, disputed the alleged claim and denied having created the alleged security or having executed any document in favour of the alleged Claimant. Further, the management, based on legal advice received, does not expect any liability or obligation to arise on the Company out of these allegations.
3. Auditor’s observations under Paragraph 3 of the Auditor’s report to the financial statement: Not reproduced
Directors’ Response: Information and explanation on the qualification at paragraph 3 of the audit report is provided in Note 26(b) to the Statement. In particular, as stated in note 26(b), the management has performed an assessment of the recoverability of the loan and has reviewed valuation reports in relation to UBHL prepared by reputed independent valuers that were commissioned by UBHL, and shared by UBHL with the Company. As a result of the above mentioned assessment and review by the management, in accordance with the recommendation of the management, the Company, as a matter of prudence, has not recognised interest income of Rs. 963 million and has provided Rs. 3,303 million towards the principal outstanding as at 31st march 2014. The management believes that it should be able to recover, and no further provision is required for the balance amount of Rs. 9,957 million, though the Company will attempt to recover the entire amount of Rs.14,223 million. However, the management will continue to assess the recoverability of the said loan on an ongoing basis.
Further, the Board has directed the management to review the underlying loan agreement(s) and / or other relevant documents (“loan documents”), to inter-alia assess: (i) whether any event of default(s) under the loan documents has occurred on the part of UBHL;
(ii) the legal rights and remedies which the Company has under the loan documents; (iii) whether the Company should invoke any of the remedies available to it under the loan documents (including recalling of the entire loan); and (iv) whether there is any scope of renegotiating the terms and conditions under the loan documents.
In this regard, the management should expeditiously take all the necessary steps to fully protect the interest of the Company and shareholders.
4. Auditor’s observations under Paragraph 4 of the Auditor’s report to the financial statement: Not reproduced
Directors’ Response: Information and explanation on the qualification at paragraph 4 of the audit report is provided in Note 26(c) to the Statement. In particular, as stated in note 26 (c) above, in addition to commissioning the inquiry, the Board has also authorised the md to take suitable action and proceedings as considered appropriate by him for recovering the Company’s dues. Appropriate other action will also be taken commensurate with the outcome of the inquiry commissioned by the Board. on the basis of the current knowledge and information of the management, the management believes that no additional material adjustments to the financial statements are likely to be required in relation to the matters mentioned above in notes 26(a), 26(b) and 30(f). However, pending completion of the detailed inquiry mentioned above, the Company is unable to determine whether, on completion of such detailed inquiry, there could be any impact on the financial statements.
5. Auditor’s observations under Paragraph 5 of the Auditor’s report to the financial statement: Not reproduced
Directors’ response: Information and explanation on the qualification at paragraph 5 of the audit report is provided in Note 26(a) to the Statement. In particular, as stated in note 26 (a), while the claims referred to in note 26(a) were received only when the Company sought balance confirmations from the relevant parties for the year ended 31st march 2014, the transactions referred to in the said note were entered in to prior to 31st march 2013 and therefore, they have been reflected as prior period items in the financial statements. Further, as stated in note 26(a) (iii), the management has stated to the Board that, on the basis of their current knowledge, no additional material adjustments to the financial statements are likely to be required in relation to the matters mentioned in the said Note. As mentioned in Note 26(c) to the financial statement, the Board has commissioned the inquiry referred to in note 26(c). Upon completion of the inquiry, the Board will consider impact on the financial statements, if any.
Compilers’ note
The Auditors’ Report also contains qualifications in the CARO report, which are in turn explained in the Directors’ report. the same will be reproduced in the next issue of BCAJ.
