By Himanshu V. Kishnadwala
Chartered Accountant
Illustration of Qualified
Opinion on account of alleged improper transactions with related parties
Fortis Healthcare Ltd (31st March 2018) From Auditors’ Report on Standalone Ind AS Financial Statements
Basis for Qualified Opinion
1. As explained in Note 30 of the Standalone Ind
AS Financial Statements, pursuant to certain events/transactions, the erstwhile
Audit and Risk Management Committee (the ‘ARMC’) of the Company decided to
carry out an independent investigation by an external legal firm on certain
matters more fully described in the said Note. The terms of reference for the
investigation, the significant findings of the external legal firm (including
identification of certain systemic lapses and override of internal controls),
which are subject to the limitations on the information available to the
external legal firm and their qualifications and disclaimers as described in
their Investigation Report, are summarised in the said Note.
Also, as
explained in the said note:
a) As per the assessment of the Board, based on
the investigation carried out through the external legal firm, and the
information available at this stage, all identified / required
adjustments/disclosures arising from the findings in the Investigation Report,
have been made in these Standalone Ind AS Financial Statements.
b) With respect to the other matters identified in
the Investigation Report, the Board intends to appoint an external agency of
repute to undertake a scrutiny of the internal controls and compliance
framework in order to strengthen processes and build a robust governance
framework. They will also assess the additional requisite steps to be taken in
relation to the significant matters identified in the Investigation Report
including, inter alia, initiating an internal enquiry.
c) At this juncture the Board is unable to make a
determination on whether a fraud has occurred on the Company in respect of the
matters covered in the investigation by the external legal firm, considering
the limitations on the information available to the external legal firm and
their qualifications and disclaimers as described in their Investigation
Report.
d) Various regulatory authorities are currently
undertaking their own investigation (refer Note 31 of the Standalone Ind AS
Financial Statements), and it is likely that they may make a determination on
whether any fraud or any other non-compliance/ illegalities have occurred in
relation to the matters addressed in the Investigation Report.
e) Any further
adjustments/disclosures, if required, would be made in the books of account
pursuant to the above actions to be taken by the Board / regulatory
investigations, as and when the outcome of the above is known.
In view of
the above, we are unable to comment on the regulatory non-compliances, if any,
and the adjustments / disclosures which may become necessary as a result of
further findings of the ongoing or future regulatory / internal investigations
and the consequential impact, if any, on these Standalone Ind AS Financial
Statements.
2. As explained in Note 12 of the Standalone Ind
AS Financial Statements, a Civil Suit has been filed by a third party (to whom
the ICDs granted by Fortis Hospitals Limited, a subsidiary of the Company, were
assigned – refer Note 30 of the Standalone Ind AS Financial Statements)
(‘Assignee’ or ‘Claimant’) against various entities including the Company
(together “the Defendants”), before the District Court, Delhi and have, inter
alia, claimed implied ownership of brands “Fortis”, “SRL” and “La-Femme” in
addition to certain financial claims and for passing a decree that consequent
to a Term Sheet dated 6th December, 2017 (‘Term Sheet’) with a
certain party, the Company is liable for claims owed by the Claimant to the
certain party.
The
Company has filed written statement denying all allegations made against it and
prayed for dismissal of the Civil Suit on various legal and factual grounds.
The Company has in its written statement also stated that it has not signed the
alleged binding Term Sheet with the said certain party.
Whilst
this matter was included as part of the investigation carried out by the
external legal firm referred to in paragraph 1 above, the external legal firm
did not report on the merits of the case since the matter was sub judice.
In
addition to the above, the Company has also received four notices from the
Claimant claiming (i) Rs. 1,800.00 lacs
as per notices dated 31st May, 2018 and 1st June, 2018
(ii) Rs. 21,582.00 lakh as per notice
dated 4th June, 2018; and (iii) and Rs 1,962.00 lakh as per notice
dated 4th June, 2018. All these notices have been responded to by
the Company denying any liability whatsoever.
Separately,
the certain party has also alleged rights to invest in the Company. It has also
alleged failure on part of the Company to abide by the aforementioned Term
Sheet and has claimed ownership over the brands as well.
Since the
Civil Suit is sub-judice, the outcome of which is not determinable at this
stage, we are unable to comment on the consequential impact, if any, of the
above matters on these Standalone Ind AS Financial Statements.
3. As explained in Note 6(5) of the Standalone Ind
AS Financial Statements, related party relationships as required under Ind AS
24 – Related Party Disclosures and the Companies Act, 2013 are as identified by
the Management taking into account the findings and limitations in the
Investigation Report (Refer Notes 30 (d) (iv), (ix) and (x) of the Standalone
Ind AS Financial Statements) and the information available with the Management.
In this regard, in the absence of specific declarations from the erstwhile
directors on their compliance with disclosures of related parties, especially
considering the substance of the relationship rather than the legal form, the
related parties have been identified based on the declarations by the erstwhile
directors and the information available through the known shareholding pattern
in the entities. Therefore, there may be additional related parties whose
relationship may not have been disclosed to the Company and, hence, not known
to the Management.
In the
absence of all required information, we are unable to comment on the
completeness/accuracy of the related party disclosures/details in these
Standalone Ind AS Financial Statements and the compliance with the applicable
regulations and the consequential impact, if any, of the same on these
Standalone Ind AS Financial Statements.
4. As explained in Note 35 of the Standalone Ind
AS Financial Statements, the Company having considered all necessary facts and
taking into account external legal advice, has decided to treat as non-Est the
Letter of Appointment dated 27th September, 2016, as amended,
(“LoA”) issued to the erstwhile Executive Chairman in relation to his role as
‘Lead: Strategic Initiatives’ in the Strategy
Function. The external legal counsel has also advised that the payments made to
him under this LOA would be considered to be covered under the limits of
section 197 of the Companies Act, 2013. The Company is in the process of taking
suitable legal measures to recover the payments made to him under the LoA as
also to recover all the Company’s assets in his possession. The Company has
sent a letter to the erstwhile Executive Chairman seeking refund of the excess
amounts paid
to him.
In view of
the above, the amounts paid to him under the aforesaid LoA and certain
additional amounts reimbursed in relation to expenses incurred (in excess of
the amounts approved by the Central Government u/s. 197 of the Companies Act,
2013 for remuneration & other reimbursements), aggregating to Rs. 2,002.39
lakh is shown as recoverable in the Standalone Ind AS Financial Statements of
the Company for the year ended 31st March, 2018.
However,
considering the uncertainty involved on recoverability of the said amounts a
provision of Rs. 2,002.39 lakh has been made which has been shown as an exceptional item.
As stated
above, due to the nature of dispute and uncertainty involved, we are unable to
comment on the tenability of the refund claim, the provision made for the
uncertainty in recovery of the amounts, the recovery of the assets in
possession of the erstwhile Director and other non-compliances, if any, with
the applicable regulations and the consequential impact, if any, of the same on
these Standalone Ind AS Financial Statements.
Qualified Opinion
In our
opinion and to the best of our information and according to the explanations
given to us, except for the effects / possible effects of the matters described
in the Basis for Qualified Opinion paragraphs above, the aforesaid Standalone
Ind AS 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 Ind AS
and other accounting principles generally accepted in India, of the state of
affairs of the Company as at 31st March, 2018, and its loss, total
comprehensive loss, its cash flows and statement of changes in equity for the
year ended on that date.
Emphasis of Matter
We draw
attention to Note 33 of the Standalone Ind AS Financial Statements wherein it
has been explained that the Standalone Ind AS Financial Statements have been
prepared on a going concern basis for the reasons stated in the said Note.
Our
opinion is not modified in respect of this matter.
Report on
Other Legal and Regulatory Requirements
1. As required by section 143(3) of the Act, based
on our audit we report, to the extent applicable that:
a) We have sought and except for the matters
described in the Basis for Qualified Opinion paragraphs above, obtained all the
information and explanations which to the best of our knowledge and belief were
necessary for the purposes of our audit of the aforesaid Standalone Ind AS
Financial Statements.
b) Except for the effects / possible effects of
the matters described in the Basis for Qualified Opinion paragraphs above, in
our opinion proper books of account as required by law relating to preparation
of the aforesaid Standalone Ind AS Financial Statements have been kept so far
as it appears from our examination of those books.
c) The Standalone Balance Sheet, the Standalone
……….
d) Except for the effects/ possible effects of the
matters described in the Basis for Qualified Opinion paragraphs above, in our
opinion the aforesaid Standalone Ind AS Financial Statements comply with the
Indian Accounting Standards prescribed u/s. 133 of the Act
e) The matters described in the Basis for
Qualified Opinion paragraphs and the Emphasis of Matter paragraph above, in our
opinion, may have an adverse effect on the functioning of the Company.
f) On the basis of the written representations
………..
g) The qualification relating to maintenance of
accounts and other matters connected therewith are as stated in the Basis for
Qualified Opinion paragraph above.
h) With respect to the adequacy of the Internal
Financial Controls over Financial Reporting of the Company and the operating
effectiveness of such controls, refer to our separate Report in “Annexure A”.
Our report expresses an adverse opinion on the Internal Financial Controls over
Financial Reporting of the Company, for the reasons stated therein.
i) With respect to the other matters to be
included in the Auditor’s Report in accordance with Rule 11 of the Companies
(Audit and Auditor’s) Rules, 2014, as amended, in our opinion and to the best
of our information and according to the explanations given to us:
a. Except for the possible effects of the matters
described in paragraph 2 of the Basis for Qualified Opinion above, the
Standalone Ind AS Financial Statements disclose the impact of pending
litigations on the financial position of the Company. Refer Note 11 and 12 of
the Standalone Financial Statements
b. Except
for the possible effects of the matters described in paragraph 4 of the Basis
for Qualified Opinion above, the Company did not have any long-term contracts
including derivative contracts for which there were any material foreseeable
losses. Refer Note 9(e) of the Standalone Ind AS Financial Statements
c. There were no amounts which were …………….
2. As required by the Companies (Auditor’s Report)
Order, 2016 (“the Order”) issued by the Central Government in terms of section
143(11) of the Act, we give in “Annexure B” a statement on the matters
specified in paragraphs 3 and 4 of the Order which is subject to the possible
effect of the matters described in the Basis for Qualified Opinion paragraphs
of our Audit Report and the material weakness described in Basis of Adverse
Opinion in our separate Report on the Internal Financial Controls over
Financial Reporting.
From Report on Internal Financial Controls over Financial Reporting
Basis for Adverse opinion
The
matters described in the Basis for Qualified Opinion paragraphs of our Audit
Report on the Standalone Ind AS Financial Statements for the year ended 31st
March, 2018, and the control weaknesses observed in the Company’s
financial closing and reporting process in regard to assessment of the
impairment of goodwill and investments, where the Company did not have adequate
internal controls for identifying impairment indicators, selection and
application of various inputs to be used in testing, review and maintaining
documentation for workings used in testing and concluding whether there is any
impairment, have resulted in material weaknesses in the internal financial
controls over financial reporting as the Company have not (a) adhered to their
internal control policies (b) safeguarded their assets (c) prevented and
detected possible frauds and errors (d) ensured the accuracy and completeness of the accounting records, and (e) prepared
reliable financial information on a timely basis.
A
‘material weakness’ is a deficiency, or a combination of deficiencies, in
internal financial control over financial reporting, such that there is a
reasonable possibility that a material misstatement of the company’s annual or
interim financial statements will not be prevented or detected on a timely
basis.
Adverse Opinion
In our
opinion, to the best of our information and according to the explanations given
to us, because of the effect/possible effect of the material weaknesses
described in the Basis for Adverse Opinion paragraph above on the achievement
of the objectives of the control criteria, the Company, has not maintained
adequate internal financial controls over financial reporting and the internal
controls were also not operating effectively as of 31st March, 2018
based on the internal financial control over financial reporting criteria
established by the Company considering the essential components of internal
control stated in the Guidance Note on Audit of Internal Financial Controls
Over Financial Reporting issued by the Institute of Chartered Accountants of
India.
We have
considered the material weaknesses identified and reported above in determining
the nature, timing, and extent of audit tests applied in our audit of the
Standalone Ind AS Financial Statements of the Company for the year ended 31st
March, 2018 and these material weaknesses have, inter alia,
affected our opinion on the said Standalone Ind AS Financial Statements and we
have issued a qualified opinion on the said Standalone Ind AS Financial
Statements.
From Notes
to Standalone Financial Statements
30) Investigation
initiated by the erstwhile Audit and Risk Management Committee
(a) There were reports in
the media and enquiries from, inter alia, the stock exchanges received
by the Company about certain inter-corporate loans (“ICDs”) given by a wholly
owned subsidiary of the Company. The erstwhile Audit and Risk Management
Committee of the Company in its meeting on 13th February, 2018
decided to carry out an independent investigation through an external legal
firm.
(b) The terms of reference of the
investigation, inter alia, comprised: (i) ICDs amounting to a total
of Rs. 49,414.00 lakh (principal), placed by the Company’s wholly-owned
subsidiary, Fortis Hospitals Ltd (FHsL), with three borrowing companies as on 1st
July, 2017; (ii) the assignment of these ICDs to a third party and the
subsequent cancellation thereof as well as evaluation of legal notice (now a
civil suit) received from such third party (refer Notes 12 above); (iii) review
of intra-group transactions for the period commencing FY 2014-15 and ending on
31st December, 2017 (refer Note 27 above); (iv) investments made in
certain overseas funds by the overseas subsidiaries of the Company (i.e. Fortis
Asia Healthcare Pte. Ltd, Singapore and Fortis Global Healthcare (Mauritius)
Limited); (v) certain other transactions involving acquisition of Fortis
Healthstaff Limited (“Fortis Healthstaff”) from a promoter group company, and
subsequent repayment of loan by said subsidiary to the promoter group company.
(c) The investigation report (“Investigation
Report”) was submitted to the re-constituted Board on 8th June,
2018.
(d) The re-constituted Board discussed and
considered the Investigation Report and noted certain significant findings of
the external legal firm, which are subject to the limitations on the
information available to the external legal firm and their qualifications and
disclaimers as described in their investigation report, as follows:
(i) The Investigation Report, on the basis of
documents / emails reviewed and interviews conducted, revealed that the ICDs
were not given under the normal treasury operations of the Company/ FHsL
including under the treasury policy and the mandate of the Treasury Committee;
and were not specifically authorised by the Board of FHsL. All ICDs from
December 2011 were repaid until 31st March, 2016. However, from the
first quarter of the financial year 2016-17, it has been observed that a
roll-over mechanism was devised whereby, the ICDs were repaid by cheque by the
borrower companies at the end of each quarter and fresh ICDs were released at
the start of succeeding quarter under separately executed ICD agreements.
Further, in respect of the roll-overs of ICDs placed on 1st July,
2017 with the borrower companies, FHsL utilised the funds received from the
Company for the purposes of effecting roll-over.
(ii) In respect of ICDs granted, the Investigation
Report revealed that there were certain systemic lapses and override of
controls including shortcomings in executing documents and creating a security
charge. To clarify, the charge was later created in February, 2018 for the ICDs
granted on 1st July, 2017, while the Company/ FHsL was under
financial stress.
(iii) While the Investigation Report did not
conclude on utilisation of funds by the borrower companies, there are findings
in the report to suggest that the ICDs were utilised by the borrower companies
for granting/ repayment of loans to certain additional entities including those
whose current and/ or past promoters/ directors are known to/ connected with
the promoters of the Company.
(iv) In terms of the relationship with the
borrower companies, there was no direct relationship between the borrower
companies and the Company and / or its subsidiaries during the period December
2011 till 14th December, 2017 (these borrower companies became
related parties from 15th December, 2017). The Investigation Report
has made observations where promoters were evaluating certain transactions
concerning certain assets owned by them for the settlement of ICDs thereby
indirectly implying some sort of affiliation with the borrower companies. The
Investigation Report has observed that the borrower companies could possibly
qualify as related parties of the Company and/ or FHsL, given the substance of
the relationship. In this regard, reference was made to Indian accounting
Standards dealing with related party disclosures, which states that for
considering each possible related party relationship, attention is to be
directed to the substance of the relationship and not merely the legal form.
(v) Objections on record indicate that management
personnel and other persons involved were forced into undertaking the ICD
transactions under the repeated assurance of due repayment and it could not be
said that the management was in collusion with the promoters to give ICDs to
the borrower companies. Relevant documents/information and interviews also
indicate that the management’s objections were overruled. However, the former
Executive Chairman of the Company, in his written responses, has denied any
wrongdoing, including override of controls in connection with grant of the
ICDs.
(vi) There were certain systemic lapses in respect
to the assignment of the ICDs from FHsL to a third party in September 2017 (and
subsequent termination of the arrangement in January 2018), viz., no diligence
was undertaken in relation to the assignment, it was not approved by the
Treasury Committee and was antedated. The Board of FHsL took note of the same
only in February 2018.
(vii) Separately, it was also noted in the
Investigation Report that the aforesaid third party to whom the ICDs were
assigned has also initiated legal action against the Company. Whilst the matter
was included as part of the terms of reference of the investigation, the merits
of the case cannot be reported since the matter was sub-judice.
(viii)
During the year, the Company through its subsidiary (i.e. Escorts Heart
Institute and Research Centre Limited (“EHIRCL”)), acquired 71% equity interest
in Fortis Healthstaff Limited at an aggregate consideration of `3.46 lacs. Subsequently,
EHIRCL advanced a loan to Fortis Healthstaff Limited, which was used to repay
the outstanding unsecured loan amount of Rs 794.50 lakh to a promoter group
company. Certain documents suggest that the loan repayment by Fortis
Healthstaff Limited and some other payments to the promoter group company may
have been ultimately routed through various intermediary companies and used for
repayment of the ICDs /vendor advance to FHsL / Company.
(ix) The investigation did not cover all
related party transactions during the period under investigation and focused on
identifying undisclosed parties having direct/indirect relationship with the
promoter group, if any. In this regard, it was observed in internal
correspondence within the Company that transactions with certain other entities
have been referred to as related party transactions. However, no further
conclusions have been made in this regard.
(x) Additionally, it was observed in the
Investigation Report that there were significant fluctuations in the NAV of the
investments in overseas funds by the overseas subsidiaries during a short span
of time. Further, similar to the paragraph above, in the internal
correspondence within the Company, investments in the overseas funds have been
referred to as related party transactions. The investment was realsed in April
2018 with no loss in the principal value of investments.
(e) Other Matters:
In the
backdrop of the investigation, the Management has reviewed some of the past
information/ documents in connection with transactions undertaken by the
Company and certain subsidiaries. It has been noted that the Company through
its subsidiary (i.e. Fortis Hospitals Limited (“FHsL”)) acquired equity
interest in Fortis Emergency Services Limited from a promoter group company. On
the day of the share purchase transaction, FHsL advanced a loan to Fortis
Emergency Services Limited, which was used to repay an outstanding unsecured
loan amount to the said promoter group company. It may be possible that the
loan repayment by Fortis Emergency Services Limited to the said promoter group
company was ultimately routed through various intermediary companies and was
used for repayment of the ICDs /vendor advance to FHsL.
(f) Related party relationships as required under
Ind AS 24 – Related Party Disclosures and the Companies Act, 2013 are as
identified by the Management taking into account the findings and limitations
in the Investigation Report (Refer Notes 30 (d) (iv), (ix) and (x) above) and
the information available with the Management. In this regard, in the absence
of specific declarations from the erstwhile directors on their compliance with
disclosures of related parties, especially considering the substance of the
relationship rather than the legal form, the related parties have been
identified based on the declarations by the erstwhile directors and the
information available through the known shareholding pattern in the entities.
Therefore, there may be additional related parties whose relationship may not
have been disclosed to the Group and, hence, not known to the Management.
(g) As per the assessment of the Board, based
on the investigation carried out through the external legal firm, and the
information available at this stage, all identified/required
adjustments/disclosures arising from the findings in the Investigation Report,
have been made in these Consolidated Ind AS Financial Statements.
(h) With respect to the
other matters identified in the Investigation Report, the Board will appoint an
external agency of repute to undertake a scrutiny of the internal controls and
compliance framework in order to strengthen processes and build a robust
governance framework. Towards this end, they will also evaluate internal
organisational structure and reporting lines, the delegation of powers of the
Board or any committee thereof, the roles of authorised representatives and
terms of reference of executive committees and their functional role. We will
also assess the additional requisite steps to be taken in relation to the
significant matters identified in the Investigation Report, including inter
alia, initiating an internal enquiry.
(i) The regulatory authorities are currently
undertaking their own investigation (refer Note 31 below), and it is likely
that they may make a determination on whether any fraud or any other
non-compliance/ illegalities have occurred in relation to the matters addressed
in the Investigation Report on the basis of facts, including those facts that
the independent investigator would not have had access to, given their limited
role and limitations stated in the Investigation Report. Accordingly, in light
of the foregoing, the Board of Directors at this juncture is unable to make a
determination on whether a fraud has occurred. That said, the Board of Directors
is committed to fully co-operating with the relevant regulatory authorities to
enable them to make a final determination on these matters and to undertake the
remedial action, as required under, and to ensure compliance with, applicable
law and regulations.
Except for
the findings of the Investigation Report, including matters on internal control
described above, and inability of the Board of Directors to, at this juncture
(as stated above), make a determination on whether a fraud has occurred on the
Company considering the limitations on the information available to the
external legal firm and their qualifications and disclaimers as described in
their Investigation Report, proper and sufficient care has been taken for the
maintenance of adequate accounting records in accordance with the provisions of
the Act for safeguarding the assets of the Company and for preventing and
detecting fraud and other irregularities.
In the
event other exposures were to come to light, the Company / FHsL are committed
to appropriately addressing the same, including making additional provisions
where required.
(j) Any further adjustments/disclosures, if
required, would be made in the books of account pursuant to the above actions
to be taken by the Board / regulatory investigations, as and when the outcome
of the above is known.
31) Investigation by Various Regulatory Authorities
(a) The Company received a communication
dated 16th February, 2018 from the Securities and Exchange Board of
India (SEBI), confirming that an investigation has been instituted by SEBI in
the matter of the Company. In the aforesaid letter, SEBI has summoned the
Company u/s. 11C (3) of the SEBI Act, 1992 to furnish by 26th February
26, 2018 certain information and documents relating to the short-term
investments of Rs. 473 crore reported in
the media. Failure to produce the information required for investigation could
result in penalties as provided u/s. 15A and criminal proceedings under section
11C(6) of the SEBI Act, 1992. SEBI has also appointed forensic auditors to
conduct a forensic audit, who are also in the process of collating information
from the Company and certain of its subsidiaries. The Company / its
subsidiaries are in the process of furnishing all the requisite information and
documents requested by SEBI and its forensic auditors.
(b) The Registrar of Companies (ROC) u/s.
206(1) of the Companies Act, 2013, inter alia, had also sought information
in relation to the Company. All requisite information in this regard has been
duly shared by the Company with the ROC.
(c) The
Company has also received a letter from the Serious Fraud Investigation Office
(SFIO), Ministry of Corporate Affairs, u/s. 217(1)(a) of the Companies Act,
2013, inter alia, initiating an investigation and seeking information in
relation to the Company, its material subsidiaries, joint ventures and
associates. The Company in the process of submitting all requisite information
in this regard with SFIO and has in this regard requested SFIO for additional
time to submit the information.
(d) The Investigation Report of the external
legal firm has been submitted by the Company to the Securities and Exchange
Board of India, the Serious Frauds Investigation Office (“SFIO”) on 12th June,
2018.
The Company is fully co-operating with
the regulators in relation to the ongoing investigations to enable them to make
their determination on these matters. Any further adjustments/disclosures, if required,
would be made in the books of accounts as and when the outcome of the above
investigations is known.
