Company wrongly records investments in 57 struck-off, inactive companies; SEBI slaps Rs 6 lakh fine

A company overstated the value of its assets by Rs 16.79 crores by wrongly recording the value of investments in 57 unlisted companies that were either struck off or inactive.

These wrongly recorded investments amounted to a massive majority–nearly 87 percent–of its total investments of Rs 19.33 crore.

An order issued by the Securities and Exchange Board of India (SEBI) on November 12 penalised LCC Infotech Rs 6 lakh; its Managing Director Kirti Lakhotia Rs 1 lakh; its directors Sidharth Lakhotia and Pratik Lakhotia Rs 1 lakh each; and its Audit Committee Members Kamaljit Singh, Rajat Sharma and Mayur P Shah Rs 1 lakh each.

Besides wrongly recording the value of its investments, the company also committed other violations such as non-provisioning of long-standing trade receivables, which constituted 32 percent of the company’s assets; non-provisioning of loans that had been outstanding for more than 20 years; not disclosing a related-party transaction; and not impairing its investment in a subsidiary whose financial health had deteriorated over multiple financial years, during which it did not generate revenue.

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Non-existent assets

The company was recording value of investments in these 57 companies at amortized cost–which is arrived at by considering the present value of future cash flows–rather than at the fair value, which was contrary to the current accounting standard. The accounting standard requires the recording of the fair value and impairment of financial assets measured at amortised cost.

As the order issued by the Adjudicating Officer, Asha Shetty noted, “By not recognising Expected Credit Loss (ECL), the company was alleged of overstating its investment value of Rs 16.79 crore.”

The company and its senior personnel acknowledged the omission, which happened in FY22 and was corrected only in FY24.

The company also had trade receivables of Rs 19.64 crores, out of which Rs 3.68 crore were related to government entities.

The total trade receivables had been outstanding for three years but the company had made no provision against them, noted the order. The company’s chief financial officer too admitted that a provision or write-off for this should have been done in FY22 but it was not done.

As the order noted, “it is alleged that by not recognizing the ECL or writing off the Rs 15.95 crore in long-outstanding debtors the company overstated its receivables, thereby inflating its assets in contravention” to the accounting standard.

With trade receivables forming a significant part of the company’s assets–nearly a third of it or 32 percent of it–“the lack of provisioning significantly affected the company’s financial statements”.