Is Fortis going the Satyam way?

 

There have been lingering concerns and complaints about funds having moved out of Fortis. And there are discussions about a possible merger that will give its troubled assets a new lease of life.

Amid this, some people have begun to wonder if the top brass at Fortis Healthcare is riding an invisible tiger a la Ramalinga Raju? Is Fortis going the Satyam way?

At least two proxy advisory firms – Ingovern and Institutional Investor Advisory Services — think so.

The two reports, which came out two months of each other, have cited different reasons for drawing the Satyam comparison. Though Fortis had called such comparisons unfair and claimed that these were based on inaccuracies, it did not elaborate what the errors were.

An ET online e-mail to Fortis Healthcare spokesperson on Tuesday seeking comments on the increasing comparisons to Satyam and specific concerns raised by the two reports did not elicit any response.

‘Lending’ to promoters
In February, Bengaluru-based Ingovern Research Services published a report titled “Fortis: A repeat of Satyam” after Fortis admitted that it had lent around Rs 470 crore to some companies as of December 2017 and that these companies had now become part of the promoter group.

The Ingovern report had said, “The issue of transferring funds to a wholly owned subsidiary, which in turn lends to promoter entities in order to skirt the shareholder approval requirement, seems to be a blatant fraud. Much like the Satyam case, the cash and cash equivalents on the books of the company seem to be non-existent. The company’s subsidiary has conveniently given the loans to related parties without seeking shareholder approval and regulatory filings. Sebi has instituted an investigation and take it to a logical conclusion on the basis of Companies Act and LODR (Listing Obligations and Disclosure Requirements) Regulations.”

Ingovern had demanded that the statutory auditors of the company come clean on the matter as they had not been signing off on financial results for the previous two quarters.

Regulations by the market regulator require quarterly financial results to be published within 45 days of the quarter-ending date. “The statutory auditors, Deloitte Haskins & Sells, have a responsibility to the shareholders and should have reported to the regulator the reason for not signing off on the statements,” Ingovern had said.

Not audit, but a limited review
However, Fortis in its notification dated February 9 stated that financial results for quarters ended September 30, 2017, and December 31, 2017, are under the limited review of auditors. A limited review is short of a full-fledged audit and gives a “moderate assurance” about the financial statements. It is limited to enquiries with company personnel and provides less assurance than an audit.

After much delay, Fortis filed its results five minutes past midnight intervening February 28 and March 1. The limited review by Deloitte highlighted the investigation initiated by the audit committee of the company on inter-corporate deposits and related-party transactions. The auditors said they were not able to obtain “a sufficient appropriate evidence of financials” and have, therefore, not made any conclusion on the financial statements. Thus, even the limited review was not conclusive.

In its response to these points made by the auditors, the management comments said the effect of these investigations will be dealt with when the investigations are complete. In the meantime, the promoter holding in the company fell to 0.77% as pledges got invoked and they exited the board of the company.

More suitors than directors?
In the months before his famous confession in January 2009, Raju had unsuccessfully tried to merge Satyam and its sister concern Maytas, which dabbled in real estate. Fortis is also trying to achieve a three-way transaction where it will merge the hospital assets held by RHT Trust in Singapore with itself and then merge with a third-party suitor.

Despite the pitfalls mentioned above, the company has been receiving offers every other week. After Manipal Health, the Hero-Burman consortium and Malaysian chain IHH, Fortis on Tuesday said it had an offer from Chinese major Fosun. While each of these deals are complex and come with their own riders, investors have questioned the board’s ability to assess this and guide the management in choosing the offer that best suits the interests of stakeholders. Highlighting the issues, Mumbai-based Institutional Investor Advisory Services (IiAS), in a report earlier this week, invoked the S-word.

Its report titled “Sholay, Satyam and Fortis Healthcare” said, “The unusual development leaves Fortis’ shareholders asking if the board has sufficient depth to deal with the complexity of the sale and come up with a decision that best serves the company and its stakeholders.”

Moreover, to evaluate the three bids, shareholders need more credence at the board level. While chairman Harpal Singh is a close relative of the erstwhile promoters, Brian Tempest is a former CEO of Ranbaxy, which the former promoters sold in 2009. Tejinder Singh Shergill, whose appointment as independent director is up for shareholder approval, also has a long association with Fortis going back to 2003.

Shareholders are wondering if the promoters have actually exited. “The two recent appointments should worry bidders, and stakeholders more, about who holds the remote control,” IiAs had said.

According to the advisory, while the allegations (as yet unsubstantiated) are that like Satyam, funds have been diverted and that the company has cooked its books, the focus should be on drawing a solution that Satyam was offered. “Admittedly, one part of the solution – the Ministry of Corporate Affairs’ supersession of the board and appointing new directors, is neither in the company’s nor shareholders’ control,” IiAS had said.

Fortis Healthcare seems ripe for a takeover. Time will tell whether it will go to the suitors, who are queuing up with offers, or taken over by regulators and investigators, who are holding lenses over its puzzling account books. Meanwhile in a late-night announcement, Fortis said Jupiter, a minority shareholder, has moved a notice calling for an EGM to remove the current board. While this further queers the pitch, shareholders need to understand the credentials of the fund and people it seeks to appoint as directors before arriving at a decison.

Link: Economic Times- April 19, 2018