The Joke Called Indian Accounting Standards

There is an old saying that goes "You can fool some people all the time, and all people some of the time, but you cannot fool all the people all the time". Corporate India and Accountants, however, disagree with this truism.

As FASB goes about suspending mark-to-market for illiquid securities, the Indian NACAS has come up with something even better - suspending mark-to-market for forex gains and losses, when one can argue that of all the markets, the currency markets are the ones which are the most liquid and the most efficient.

The vast majority of Indian companies do not report quarterly balance sheets or cash flow statements, so one can't look at the "Other comprehensive income" item on the balance sheet to figure out what exactly has happened. There is no way for anyone now to figure out what uneconomic transactions all these companies have done.

This is from ET: "The demand to suspend this rule, known in accounting circles as AS-11 , was made by the Confederation of Indian Industry [CII] on grounds that it could severely distort the earnings of many companies. It was contended that this accounting standard, designed to address normal conditions, should be suspended for the time being, as the present market conditions were not normal"

Are they telling me that the currency markets are distorted in some way, and they are in normal order only when Rupee is at Rs 40 against the dollar? This is a joke.

One day in the next 3 years, all these transactions will mature, and the companies will make cash payments, or receive less cash than projected. Suddenly, the net debt on the companies' balance sheet will zoom up much beyond what analysts are projecting. And suddenly, the companies' leverage ratio will go out of whack. And just as suddenly, retail investors, who wouldn't have focused on this issue, will find that their company has gone insolvent.

It makes sense to stick with only the highest quality names in this environment like Infosys (INFY). Third tier managements like Crompton Greaves are out to screw shareholders now.

Comments

[Ajay Widge,...:]

Hi Gaurav,

I totally agree with you ... any time that there is a call to suspend MTM requirements, you know someone is trying to hide something. If the managements "forgot" to hedge their FX exposures, then they deserve to be kicked hard by investors (ever harder if they are family managed firms, because they will be siphoning funds out anyway!!!).

On the matter of Crompton Greaves, I am a former employee and always had a great impression of the management; I carried these feelings to my later jobs and duly invested in the GDR when it was first listed (circa 1998). Sure enough, the issue was priced at it's peak and never saw the issue price again. The lead managers (Jardine Fleming) cut a sorry figure in our office and were too embarrassed to offer advice for a long time. They are a sharp bunch and give a damn for the investors ... I stay away from them as far as I can.

And I agree on the comment on INFY; to this list i would like to add ICICI (IBN) as I feel that stock will lead any market rally.

Regards.

Mar 26 08:07 AM

[donzelion:]

I like Infosys (esp. compared to the other outsourcers in India), and have been impressed with several Indian accountants. While the accounting standards do seem different, my concerns run more toward legal risk and less toward accounting - while the enforcement capabilities in India are somewhat limited, the skill by which managers can exploit shareholders is immense.

Still, that goes without saying in all emerging markets (and India is considerably better than China). Usually, it's not that the standards or the laws are problematic - it's that everyone knows full well how to evade the rules.

Mar 26 05:49 PM

[robert99:]

I hold INFY, SLT, and TTM. Of the three, INFY is the best.

Mar 26 08:30 PM

[kaps:]

Totally agree with you... and i never understood why we cannot see most of the indian companies quarterly balance sheets and cash flows... the world has undergone a drastic change since Mar 31, 2008...

Mar 31 10:58 AM

[kaps:]

(ending of FY2008 in india)...and even for annual statements you have to wait till June in most of the cases..

Mar 31 11:00 AM

[Raution:]

I consider Mark to Market as a tool that has its merit and demerits. Lets talk about it first and then draw a conclusion. MTM was favorable to all companies when the prices of the stocks were rising and thus the companies were more than happy to follow this rule as it will help them reflected higher market capitalization and strong balance sheet. But now the game is reversed. After taking heavy beating in the market, companies are not inclined for MTM as it will make them look bad due to lower capitalization and weaker Balance sheet.
I hope it is clear that the issue is not completely the case for illiquidity but more about company benefits from the rule.

Mar 31 03:03 PM

[Atim Kabra:]

The guys who make money in India are the managements of these companies. You have to follow their lead if you got to make money consistently. Probably the best indicators of markets being frothy. They are the ones who sell high during good times and then buy back at lower levels.
Please analyze the Convertibles issued out of India in this boom to get a clearer picture of what i am saying.

All the best
On Mar 26 08:07 AM Ajay Widge, CFA wrote:

> Hi Gaurav,
>
> I totally agree with you ... any time that there is a call to suspend
> MTM requirements, you know someone is trying to hide something. If
> the managements "forgot" to hedge their FX exposures, then they deserve
> to be kicked hard by investors (ever harder if they are family managed
> firms, because they will be siphoning funds out anyway!!!).
>
> On the matter of Crompton Greaves, I am a former employee and always
> had a great impression of the management; I carried these feelings
> to my later jobs and duly invested in the GDR when it was first listed
> (circa 1998). Sure enough, the issue was priced at it's peak and
> never saw the issue price again. The lead managers (Jardine Fleming)
> cut a sorry figure in our office and were too embarrassed to offer
> advice for a long time. They are a sharp bunch and give a damn for
> the investors ... I stay away from them as far as I can.
>
> And I agree on the comment on INFY; to this list i would like to
> add ICICI (seekingalpha.com/symbo...) as I feel that stock
> will lead any market rally.
>
> Regards.

Apr 01 01:30 AM

[JMcLeod:]

If only this would affect only those companies which failed to hedge their foreign exposures.... there were many others who went seriously short JPY, USD etc. for purely speculative reasons when the INR appreciated, thinking that the Indian economic wonder was self-reliant and would further attract huge inflows of capital. This accounting change adds another smoke screen to the many existing ones that especially foreign investors face in India. One more reason not to put your money there.

Apr 01 11:18 AM