The underlying financial health of at least some BSE 500 corporates (excluding banking and financial services) is not reflected through their key reported financial numbers such as EBITDA, PBT and PAT, tentatively said India Ratings & Research (Ind-Ra).
As a group, corporates ranking between 100 and 200 based on market capitalisation have lesser discrepancies in financial reporting than the 100 corporates with the largest market capitalization, it said.
The quality of financial reporting deteriorated sharply in years where there was a sudden economic shock or when the ‘markets’ were not anticipating a poor performance. Financial numbers for FY09, followed by FY13 raise the highest number of statistical flags attributable to possible poor reporting. The number of financial entries which were statistically flagged off reduced in FY10 and FY11; however, there is a strong likelihood of discrepancies in reporting PAT for both these years. A limited analysis of P&L variables of FY14 suggests that the quality of reporting particularly the earnings variable may have improved, Ind-Ra added.
The study supports Securities and Exchange Board of India's endeavours to restrict promoter holding in listed entities. Deterioration in the quality of financial reporting increased in tandem with an increase in promoter holding. Additionally, the study did not find any significant difference in reporting quality based on the type of promoter (Indian or foreign).
"Each industrial sector has several corporates, which are anecdotally known for corporate governance. However, when corporates are grouped by sectors, statistical flags are raised against variables, some of which are critical in capturing the performance of corporates in the specific sector," according to the study.
FMCG, pharmaceuticals, fertilisers are the sectors where over the years the highest number of financial entries has exhibited a high likelihood of discrepancy, as per the statistical test. The variables flagged included gross sales, inventory, debtor, bad debt and provisions.
Sectors such as oil & gas, infrastructure and construction have flags for discrepancy raised against variables such as net fixed assets, depreciation, COGS, debtors and loans & advances.
IT is widely considered as a safe sector in terms of corporate governance. While the number of financial entries with possible discrepancies is in the middle of the range, the variables that have been flagged are worrisome. These variables are employee cost, selling & distribution expenses, depreciation, changes in working capital, capex, deferred tax and net fixed assets.