CG Power stock plummets after reports of massive fraud

C G Power and Industrial Solutions has reported unstated liabilities and potential receivables worth thousands of crores, carried out by some employees of the firm, pulling down the company’s stock by 20 per cent on Tuesday.

The Gautam Thapar-promoted company on Tuesday informed stock exchanges that an investigation by an independent law firm had found that some employees had carried out unauthorised transactions, which led to a potential understatement of not only the liabilities of CG Power but even advances to related and unrelated parties of the company and the group.
CG Power shares crashed 20 per cent on Tuesday. Following this, the share price of financial institutions, including YES Bank and asset management companies, with exposure to the company also crashed.
The promoters of CG Power have pledged 100 per cent of their holding in the company to various creditors. 
YES Bank fell 7.1 per cent as it holds a nearly 13 per cent stake in the company, acquired through the revocation of a pledge.
Other large shareholders include HDFC MF with 9.18 per cent, Aditya Birla MF 8.94 per cent; Franklin Templeton 3.1 per cent; LIC 2.25 per cent; Reliance Capital 2.03 per cent and IDFC Sterling Fund 1.53 per cent. 
“The total liabilities of the company and the Group may have been potentially understated by approximately Rs1,053.54 crore and Rs1,608.17 crore, respectively, as of 31 March 2018; and by Rs601.83 crore and Rs401.83 crore, respectively, as of 1 April 2017,” the company said in the statement to exchanges. 
CG Power further disclosed that the advances to related and unrelated parties have been potentially understated by Rs1,990.36 crore and Rs2,806.63 crore, respectively, as of 31 March 2018 and by Rs1,479.34 crore and Rs1,331.47 crore, respectively, as of 1 April 2017. 
Reports said CG Power managing director K N Neelkant was not involved in the day-to-day management of the group during the time of the investigation and that chief financial officer VR Venkatesh, who had resigned on 8 March, was asked to continue till the year ended 31 March 2019. 
Investigations have found that certain assets of the company were purportedly provided as collateral without due authority; and in some cases, the company was made a co-borrower and/or guarantor for enabling ostensibly unrelated third parties obtain loans without due authorisation. “The moneys so obtained were immediately and without due authorisation routed out of the company, either by itself or from its subsidiaries or ostensibly unrelated parties to certain related parties,” CG Power disclosed.
The net worth of the company was also understated due to unauthorised and inappropriate writeoffs and charges debited to the profit & loss statement in FY18 and FY17, the company stated. 
The company said these transactions were purportedly carried out by identified company personnel, both current and past, including certain non-executive directors, certain key managerial personals (KMPs) and others 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. These may have potentially resulted in misstatement of past financial statements,” CG Power said. The board has ordered a forensic investigation in the entire matter.
Shares of CG Power and Industrial Solutions lost one-fifth of their value to hit the lower circuit limit of 20 per cent at Rs 14.75 at the opening bell Tuesday, recording the biggest drop in six months. Retail investors, holding up to Rs 2 lakh shares (or 11.9 per cent stake) in the firm are now stuck as they may not be able to exit the stock.