Hello, experts. I am in a serious quandry over a potential investment in a private limited company. The company itself if a major brand in India (even though it is a small company), and I was approached by the owners to take a 30% stake in the firm.
However, when I carried out my own due diligence, I have found a number of discrepancies in the various filings of the company with regards to I-T, CST, Excise and Bank Finance.
My local lawyer tells me that many companies have such discrepancies and it's not a big deal. He stated that the problems can be solved with "Speed Money" after the purchase of shares, but it is not a path I want to follow.
I would very much appreciate your expert take on the matter. I have jotted down the parameters below:
Overview
1. Persons X and Y own Company A and Company B (both private limited companies).
2. Company A is engaged in manufacturing of goods.
3. Company B is engaged in trading activities.
4. Company A has submitted an Audited Balance Sheet showing approximately Rs.8.00 Cr. of turnover and approximately Rs.15.00 Lakhs of profit to the Registrar of Companies.
5. Company A has submitted a second Audited Balance Sheet showing approximately Rs.3.75 Cr. of turnover and approximately Rs.10.00 Lakhs of loss to the Income Tax Department.
6. The current auditors of Company A have duly audited and signed the two variations balance sheets against a “special” fee (the same CA Firm has been signing the two separate balance sheets for the last 8 years).
7. Company A has disclosed the Audited Balance Sheet filed at the RoC to a PSU Bank in order to avail a finance facility (cash/credit) of Rs.6.40 Cr. The PSU Bank has not been given access to the actual I-T return documents nor has the second audited balance sheet (showing a turnover of Rs.3.75 Cr.) been disclosed to the said PSU Bank.
8. The discrepancy in filing of Company A’s balance sheets to the RoC and the I-T departments has been going on for the last 8 years (since 2005).
9. Company A manufactures approximately 1,00,000 KG of finished goods. Of which, its sales pattern is as follows:
- Sold to Customers at market price: 20,000 KG
- Sold to the black market: 30,000 KG
- Sold to Company B at below market price: 50,000 KG
10. As a result of the above, Company A’s excise returns (which account for total production) are also doctored, which is reflected in the road challans for the dispatch of the finished product and the RG-1 register.
Observations:
11. It is difficult to ascertain the actual financial performance of Company A due to the discrepancies in filing of Balance Sheets.
Questions:
12. Is the discrepancy in RoC and I-T filings a major legal risk?
13. If I were to buy 30% shares in Company A, what are my immediate risks?
14. As I have not been involved so far in Company A (nor in Company B), would I be held responsible for past financial transgressions after I purchase a stake in Company A?
15. What are the legal charges that may be faced by the Directors of company A (should I choose to take a stake in Company A and be appointed as a Director) with regards to the mismatch in the RoC and I-T filings?
16. What are the risks of the forged RG-1 register of Company A?
17. Would you recommend purchase of shares in Company A, keeping in mind the above information?
18. Is there a way to solve this issue after I take the shares in Company A and hold a controlling position?
Your expert opinions / assessments will be much appreciated.
With regards,
Sumon
CAclubindia
