Gujarat NRE Coke is in an accounting mess. Businessworld writes that the company’s Australian subsidiary, Gujarat NRE Coking Coal, listed on the Australian Stock Exchange, is in serious trouble. Grant Thornton, who audits the Australian subsidiary, has said they have doubts on its continued solvency because of too many unpayable liabilities and lack of conviction in their ability to raise further funds.
That would be a small thing if the AU subsidiary was a small thing. With losses of Australian $112 million, which is more than Rs. 600 cr. rupees, the australian subsidiary is significant - Gujarat NRE Coke’s entire revenues (standalone) are less than these losses!
The outrage should be against the audit procedures in Gujarat NRE Coke, the Indian company. The person heading the Audit committee of the company is Subodh Agarwal, the president of the Institute of Chartered Accountants of India (ICAI) which is the regulator of the CA profession (of those that audit accounts). How did something like this get off his radar?
The legal position is that the accounts were audited as of May 30, and the Australian Subsidiary had the audit warning on August 15. So they didn’t have to disclose it.
But the signs have been there. GujNRECoke’s subsidiary took an advance of $10 million from Coeclerici, a Singaporean company, for delivering coke. They couldn’t agree on a price, and they needed to return the advance - but they only gave back $2 million. Gujarat NRE Coke doesn’t deny the liability but says it needs RBI approval which they’ve applied for but isn’t forthcoming. A judge, on Monday, rejected their appeal against the arbitration award where they have to pay nearly $9.5 million including interest.
Workers in an Australian subsidiary haven’t been paid since September 18. They’ve not going to work as that situation continues.
The share itself has fallen by more than 40% this year, from 23 to 13.
It’s my belief that management was aware of the situation at its subsidiaries, and this information hasn’t been used by the auditors to negate their accounts. They haven’t withdrawn their opinion, despite an obvious problem in the unaudited accounts (as of May 30), which account for 91% of the company’s assets, and 65% of revenues! (Read Moneylife’s piece on it)
The problem for you as a shareholder is: do you trust company accounts? Even if an auditor has signed off something, there’s no real way for you to know it’s what’s truly reality. In fact, the auditors will get away without blame, most likely, since the president is on the board of this company.
A lot in company accounts and news is about what is left unsaid. You have to only read between the lines. In such a situation, investing based on accounts is a matter of luck, not trust.