Analysts express concern on R-Comm's accounting policies

It might turn out to be a good quarter in terms of subscriber additions for Reliance Communications, but when it comes to its consolidated profit and loss, analysts express concern on lack of clarity on its alleged below-the-line accounting policies. CNBC-TV18's Sajeet Manghat delves deeper.

Even though Reliance Communications' quarterly additions brought cheer to the street, analysts are still grappling with the below the line accounting practice that R-Comm follows for its consolidated accounts. Over the last three quarters, analysts have been raising questions seeking clarity on the financial charges on its consolidated financials. The concern is the alleged mismatch in its financial charges in its standalone and consolidated numbers.

R-Comm's standalone results for the nine months ending December 2008 had a financial charge of Rs 937.91 crore. While in the consolidated statement, it posted net interest income of Rs 618.86 crore. A clear difference of Rs 1556.77 crore.

Which, according to analysts, means on a standalone basis the company has an interest cost of Rs 937.91 crore. On the consolidated profit and loss which includes its subsidiaries, it gained Rs 1556.77 crore, thereby reflecting a net interest income of Rs 618.86 crore.

Analysts are finding it difficult to understand how a company could earn interest income when its net debt rose by Rs 3400 crore to Rs 18,600 crore in Q3. In a conference call, transcript of which is available on the R-Comm website, analyst Vinay Jaising raised a query on the same issue, "Firstly on the balance sheet, we have seen that net debt increased by Rs 34 billion up to Rs 186 billion, despite that we have net finance income coming in at Rs 1.5 billion. Last quarter, we were explained that there could be some derivative gains and higher other income on account of cash in hand. If you can throw some light out there?"

Satish Seth, Vice-Chairman, R-Comm, responded saying, "The finance charges comprise of interest income and expense, foreign exchange gains and losses, including foreign exchange gains on bank balances and financial investments and amounts receivable from foreign subsidiaries. A composition of this is giving a net result of income."

Analyst Vijay Jaising further probed saying, "Just on that, I understood the break up. But when you have such high net debt, how do we get interest income?"

To which Satish Seth replied, "Primarily depends between the cost of debt and income on cash balances. That's one difference. Secondly, on the foreign exchange gains and financial investments, because part of the interest also gets capitalized because it's part of the capital work in progress."
Not Just Vinay Jaising, other telecom analysts and CNBC-TV18 have raised similar concerns. CNBC-TV18's repeated attempts since March 26 on the same issue and reconciliation between standalone and consolidated profit and loss have elicited no response from the company.

source: http://www.moneycontrol.com/india/news/cnbctv18comments/relaincecommunicationsaccounting/analystsexpressconcernrcommsaccountingpolicies/market/stocks/article/393658