(For Podcast click here.)The paradox of cash crunch and cash deluge unravels when viewed through the prism of corporate Financial Statements. It relates to those fateful and tumultuous last 52 days of the year 2016 when demonetization of INR 500 and INR 1000 currency notes (called Specified Bank Notes or SBNs) was the sole sound of the universe as far as India was concerned.
When the whole of India was facing the cash crunch. When the government was exhorting the people to go cashless when digital payments’ companies and apps were zooming. When even the mother of Indian Prime Minister Mr. Narendra Modi had to go to the bank to exchange the SBNs as per the permissible limit and the country also saw Rahul Gandhi, the vice-president of the largest Opposition party Indian National Congress, standing in queue to withdraw money, incredibly some companies have reported having received in cash thousands of millions in non-demonetized currency. A perusal of 66 companies of BSE-100 index (excluding one which did not disclose the details) reveals that when even small cash in the hands of commoners was a privilege, over INR 45 billion cash in non-demonetized currency landed in the accounts of most of these companies as per the statutory declarations and disclosures made by these companies. This humongous figure does not include disclosures by Banks, Public Sector Undertakings (PSUs) and the companies having the reporting period of December featuring in BSE-100.
Whether demonetization of SBNs of INR 500 and INR 1000 denomination at the stroke of midnight on November 8, 2016, was mayhem or magic? The jury is still out on this issue. However, demonetized SBNs have thrown up myriad patterns in the Financial Statements of some constituent companies of BSE – 100 Index.
The yoke of reporting on SBNs by companies on and after November 8, 2016, till December 30, 2016, in their financial statements for the financial year 2016-17 has certainly proved to be a cumbersome burden for some companies and their auditors. In 12 out of 67 companies of BSE 100 Index, the reportage on SBNs as required by law unravels astounding shifting of sands vis-à-vis SBN directives, accounting policies and auditing standards.
Some unique, bizarre and notable mentions on SBNs carrying just an auditor’s note instead of specific qualification in these Financial Statements are:
- NON-PERMITTED TRANSACTIONS IN SBNs (Also include NON-PERMITTED TRANSACTIONS CLASSIFIED UNDER OTHERS)
- JUSTIFYING NON-PERMITTED SBNs RECEIPTS
- NO AUDIT EVIDENCE ON SBNs’ TRANSACTIONS
- NONE OR PARTIAL DISCLOSURES ON SBNs
- IMPROBABLE CASH WRITE OFF
- NO MENTION OF CONTINGENT LIABILITY IN FINANCIAL STATEMENTS
When viewed and analyzed with tools like auditing standards, accounting policies and the Government of India and Reserve Bank of India circulars/notifications on SBNs, the above patterns do raise certain pertinent questions on possible lack of Corporate Governance or internal control in companies that can only be answered by the GoI or the auditors only if they chose to search for replies.
Demonetization Recall
The government of India spoke through Prime Minister Mr. Narendra Modi at around 2000 hrs (IST). on November 8, 2016. Mr. Modi announced that the currency notes of denominations INR 500 and INR 1000 shall cease to be legal tender from the stroke of the midnight. To oversee implementation of this decision that recalled around 86% of the Indian currency in circulation, the Government of India and the Reserve Bank of India constantly came up with guidelines regarding deposit of SBNs in financial institutions, business offering public utility services like electricity, fuel etc. and restrictions on withdrawal of money from bank accounts. The exercise for the return of SBNs by those possessing them expired on December 30, 2016.
Cheers!
Nitin Mangal
SEBI Registered Research Analyst (INH000004723)
Your feedback will be highly appreciated. You may reach me at nitin@nmadvisors.com
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