CG Power discloses serious financial irregularities as probe reveals fraudulent related-party transactions

CG Power and Industrial Solutions saw its share price plummet 20 per cent to Rs 11.80 apiece on Wednesday after the Gautam Thapar-led electric equipment maker reported major corporate governance issues involving unauthorised transactions and understatement of liabilities and net worth. On Tuesday, too, the share price fell to lower circuit limit of 20 per cent to Rs 14.75. CG Power said in an exchange filing on Monday that its board and Risk and Audit Committee ("RAC") held a meeting to discuss the status of annual financial statements. "The Board was briefed on certain findings which may have potential implications on the financial position of the Company," it informed the bourses.

To begin with, it disclosed that the total liabilities of the company and the Avantha Group may have been "potentially understated" by around Rs 1,053 crore and Rs 1,608 crore, respectively, as on March 31. As of April 1, the respective figures stood at nearly Rs 602 crore and Rs 402 crore. Moreover, advances to related and unrelated parties of the company and the group may have been potentially understated by over Rs 1,990 crore and Rs 2,806 crore, respectively, as of March-end.

All these suspect transactions were purportedly executed by former as well as current company personnel, including certain non-executive directors, key managerial personnel and other "identified" employees. "These transactions appear to have been carried out by various means including inappropriate netting off, using ostensibly unrelated third parties, routing transactions through subsidiaries, promoter affiliate companies and other connected parties," read the regulatory filing, adding that the financial results for FY17, FY18 and FY19 "could be impacted" due to the adjustments.

CG Power further alleged that some of its assets had been provided as collateral without due authority and that the company was made a co-borrower/guarantor for enabling ostensibly unrelated third parties to obtain loans without due authorisation. The funds so obtained "were immediately and without due authorisation routed out of the company".

On account of the above, along with unauthorised and inappropriate write-offs and charges debited to the company's Profit & Loss statement in the past years, the net worth may also have been potentially understated. While such write-offs are restored in the Management Compiled Financial Information, the company pointed out that due to the challenges of recovering the amounts flagged above, "appropriate provisions may have to be recognised by the company", which have not yet been factored in.

CG Power said the above lapses came to light when an operations committee set up under the chairmanship of one of the independent directors in March was seeking refinancing of certain facilities and was conducting a financial analysis in this regard. An independent law firm was subsequently appointed to conduct further investigation into the suspect transactions. The company has now called for a detailed forensic investigation into the matter and promised shareholders to address and rectify all weaknesses in the system.

Reacting to this development, the shares of domestic private lender YES Bank that holds a 12.79 per cent stake in CG Power has also tanked over 11 per cent since Monday to Rs 70.15 apiece currently. According to Mint, due to the Avantha Group's inability to meet debt obligations, it had to cede control of CG Power to lenders, although they are still listed as the promoter group. Apart from Yes Bank, the other major stakeholders in the company are HDFC Mutual Fund, Aditya Birla Sun Life, Franklin Templeton and Life Insurance Corporation of India. CG Power's share price has dived 67 per cent in this year. As per Bloomberg data, CG Power's consolidated debt has swelled over 33 per cent year on year to Rs 2,664 crore in end-March.

Also read: CG Power share price falls another 20%, investors lose Rs 396.25 crore in two days