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Does corporate India need to get its books in order?

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Published: Tuesday, May 29, 2012, 9:13 [IST]

Does corporate India need to get its books in order?

An increasing number of analysts are beginning to question the accounting practices and corporate governance standards that some of the Indian companies follow.

Look at what analysts had to say on Educomp, one of the leaders in diversified education solutions. The Economic Times reported that according to Espirito Santo analysts, Soumitra Chatterjee and Nitin Padmanaban, documents show that the address for EduSmart's auditor - Sanjay Rastogi & Associates - is the same as that of the firm, potentially jeopardising auditor independence.

"Any sense of excessive closeness between company and auditor will naturally concern investors," they wrote in a client note a fortnight ago.

Citing another questionable accounting practice, the analysts flagged some expenses incurred by EduSmart being taken on the books of Educomp, a practice they cautioned is detrimental to the interests of minority shareholders.

A few days earlier a report in the Business Standard saw Espirito Santo raising concerns over the accounting processes of Bangalore-based biotechnology company Biocon. In a report released to the investment community the financial group had asked questions related to Biocon’s accounting, mainly during its split with Pfizer on the $350-million insulin deal and its divestment of stake in AxiCorp.

Espirito Santo is not the only one. Earlier, The Children's Investment Fund (TCI), based in the UK, said it would will file two separate lawsuits in India for abuse of rights of the minority shareholder by Coal India. The firm had problems with corporate governance of Coal India.

India's largest real estate firm DLF, which also sponsors the DLF IPL had questionable accounting practices according to the Canada based Veritas.

An article in the Economic Times said that Veritas Investment Research, in its report titled 'A Crumbling Edifice', had raised doubts about the company's disclosed book equity and asset base. According to report, DLF had inflated sales by Rs 11,236 crore and net profit by Rs7,233 crore through its dealings with DLF Assets, a firm floated by the company's promoters. DLF Assets, promoted by DLF founders KP Singh and his son Rajeev, was set up to acquire finished commercial projects of the company.

While these are all allegations that need to be proven and are likely to be rebuffed by promoters, it's time corporate India gets its books in order. Profitability is one premise on which investors buy a stock and if that very premise has turned suspicious, investors might be paying large sums for a penny stock.

It's time that greed and nepotism, make for honesty and integrity, which will go a long way in improving corporate governance in India. This is likely to restore better confidence among investors and pave the way for healthy corporate India and hence healthy equity markets

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