BSE lens on firms reporting puffed-up figures

Bombay Stock Exchange (BSE) has started investigations into financial jugglery by several small-sized companies which have reported phenomenal growth rates in sales and net profits in their unaudited quarterly results.

The bourse also plans to join hand with the Securities and Exchange Board of India (Sebi), the department of companies affairs (DCA), the Institute of Chartered Accountants of India (ICAI) and the income-tax department to take strict action against the promoters of such firms.

"We have started seeking detailed explanations in writing from a number of companies which have been announcing impressive financial results although their record suggests otherwise. If these companies fail to provide appropriate replies, they will be transfered to the 'Z' category or may even be suspended from trading," a senior BSE offcial associated with the investigations told Business Standard.

Riding on the bullish market sentiment, several small-sized firms have been issuing big advertisements in newspapers announcing impressive financial performance without giving additional information.

Often, they even included pending placement of shares on a perferential basis in a tentative price range, the names of potential shareholders, proposals to pay out high dividends / bonuses.

In many cases, these announcements have been tucked away in the footnotes.

BSE officials said they had recently transferred the scrip of an Ahemedabad-based firm which, in its audited performance for the December quarter, had reported a net sales of Rs 26.15 crore compared with Rs 15 lakh in the corresponding quarter of the preceding fiscal.

Moreover, it reported a net profit of Rs 5.18 crore compared with nil profit in the year-ago quarter. The company is even alleged to have failed to pay out a dividend of 40 per cent that it announced last year.

"Some of these companies have also violated several provisions of the Companies Act, and we are sending letters to the DCA to initiate strict action," a broker-member of the BSE connected with the investigations confirmed.

"Violation of some of the sections of the Companies Act may result in convictions and imprisonment, if (the promoters are) found guilty."

Simultaneously, the BSE has also taken appropriate cases with the ICAI for "peer audit" to check if statutory auditors have done their job properly.

Given that some shareholders could be in collusion with the promoters to cash out when the markets react positively to the strong announcements, the BSE is also roping in the Sebi to book the final clients, if found guilty, for violation of insider trading regulations.