May 2005
Corporate Focus

Oriental Hotels Ltd.: Delayed Reports But still Incomplete

BY Jagadish Agrawal

The investors and the other users of the financial statements breathed a sigh of relief when Oriental Hotels Ltd. (that operates Hotel Radisson Kathmandu) published its financial statements for the income years 2056-57 to 2059-60 simultaneously to be approved by AGM to be held on 2060/12/30. Due to certain unavoidable circumstances the AGM was postponed. Meanwhile, the Hotel had published the financial statements for the year 2060-61 also, which the independent auditor had signed on 8th Ashwin, and ultimately, all the financial statements were approved by the AGM held on 2061/12/15.

It is good that these statements are at least made available now but they are quite useless to the shareholders and other users as lots of material information are hidden from the minority shareholders.

These financial statements and the directors’ reports from this company testify that the company is breaching the provisions of Companies Act and Securities Exchange Act. The fundamental right of the minority shareholders enshrined in the Companies Act that they could nominate statutory auditors to provide their opinion on the financial statements stands breached by the Company.

After going through the annual reports of 2056-57 to 2060-61, one is surprised to note that the board of the company has not taken pains to inform public about the basic indicator of a hotel’s performance. The board’s report claims in about every paragraph that the only national problems are responsible for the bad performance of the Hotel. But the overall comparative figures, the figures that show the performance of the management (such as the hotel’s average rate of room occupancy), and other required declarations are not provided properly.

A delay in providing financial statements to the public means the time is being used to manipulate the figures in the interest of the group that controls the management. Have a look on the date of signing on the annual report by the statutory auditors and the first scheduled date for the corresponding AGM (see table 1). It is surprising that the company was allowed to postpone the holding of the AGM for so long.

The board had provided a lot of time to the insiders including the members of the assurance team and their close relatives to play with the information available to them only.

The financial statement of 2060-61 shows the book value of the Hotel Rs. 7 only (see table 2) which indicates that the capital of the shareholders is very soon going to be vanished (perhaps it is negative now). The directors’ report for 2060-61 does not say anything about the solutions to bring out the company from the situation. In the absence of such plan how can an investor assume the company to be a going concern?

During the year 2057-58, Rs. 20.52 million and during the year 2059-60 Rs. 6 lacs are shown as adjustment for the previous year in the profit and loss appropriation accounts. As per the significant accounting policies and notes to the accounts mentioned in the statements, the Rs. 20.52 millions is reversal of interest expense provided during the previous year. This is clearly against the accepted accounting standards. Nepal Accounting Standard 2 related to “Net Profit or Loss for the Period, Fundamental Errors and Changes in Accounting Policies” has classified such items as profit and loss from ordinary activities and which are required to be disclosed separately. The standard further says that these items should be shown in the same income statement classification as was used previously for these items. So the below the line presentation of these amounts is not at all according to accepted accounting standards.

In the same tune, the administrative expenses for the year 2057-58 and 2059-60 include Rs. 3.66 million and Rs.1.70 million respectively shown as previous year’s expenses. Though the amounts were material, the company was not bothered to provide clarification as to the reasons for such errors (or frauds?). What were the mistakes in the financial statements of previous years that warranted such adjustments in the current year? It is a fact that these errors or frauds were detected before the financial statements of the respective year when these errors occurred were issued to the shareholders. Why the figures were not adjusted in the financial statements of the same year in which these errors belonged? Why Nepal Standard on Auditing (No. 16: Subsequent Events) was not followed?

The company has defined ‘operating profit’ in its own arbitrary way. According to the company’s report, operating profit means profit before administrative and other expenses, interest expenses, and depreciation. Let us compare that with the definition of ‘operating profit’ given in International Accounting Standards (see table 3).

The table shows that, according to IAS, operating income means net income of the enterprise before adjustment of income or loss from extraordinary items. But the management of Oriental Hotels has not adopted this principle. More interesting is the fact that the company’s management had adopted definition of operating profit quite different from that taken for the directors’ report. The figures of net profit/(net loss) as shown in director’s report differ from the figures shown by the management in the profit and loss accounts.

As on 31 Ashad 2061, the company had debtors of Rs. 40 million, which is about 34% of the current assets of the company on that date. Out of this, about 35% is due for more than six months. The figures of dues for more than one year and two years are not provided. In absence of that information, the debtors’ actual position could not be ascertained. Thus the report is useless for the stakeholders. The positions of debtors during the years are in table 4.

The company had provided for doubtful debts of Rs. 1.09 million during 2059-60 and Rs. 1.35 million during 2060-61, which is about 3.74% and 3.28% of the total debts respectively. Where the notes to the accounts say that the confirmations were not obtained from the debtors, the appropriateness of the amount of the provision made for doubtful debt is highly suspect. As per the financial statements, Rs. 1.09 million during the year 2059-60, and Rs. 1.6 million during the year 2060-61 were provisioned for doubtful debts. In other words, a total amount of Rs. 2.69 million was shown as the provision, whereas the balance sheet as on 31 st Ashad, 2061 shows Rs. 1.35 million as the outstanding provision. This means, the company had written off Rs. 1.34 million as bad debts. The amount is material and requires clear declaration, such as who were the parties and what were the reasons for writing them off.

The company is now totally based on loan capital. The debt equity ratio is 93:07. The significant accounting policies and notes forming part of the financial statements for the year ended on Ashad 32, 2060 and Ashad 31, 2061 say that the figures as given in the balance sheet and profit and loss account for loans taken from banks and promoters and interest paid or payable to them are unconfirmed from the banks and the other parties concerned. This makes the entire financial statement doubtful. How can it be regarded as true and fair when the loan capital and the interest amount are unconfirmed from the respective parties? The company has neither made a provision for penal interest nor is the amount included in contingent liability. Therefore, this financial report is useless for those who are thinking to invest in the company’s shares. Those who have already invested in this company should panic due to the absence of these information.

The note further says that the leave encashments are being shown in the statements on cash basis. At least the management should disclose as a contingent liability the amount of leave encashment earned but not paid up to the year.

Neither the International Accounting Standards nor the Income Tax Act have allowed revenue expenditures to be shown as deferred revenue expenditures that can be claimed in parts in subsequent accounting years. But this company has deferred revenue expenditure and it has not bothered to give any valid reason for doing so.

The administrative expenses of the company include Rs. 329 thousand, 414 thousand, 81 thousand, and 460 thousand during the years 2056-57, 2057-58, 2058-59 and 2059-60 respectively for customs and other duties. Custom and other duties are always considered as part of the cost of the respective items purchased. Therefore, they should be included in valuation of an inventory and cannot be shown as administrative expenses.

The company has been providing Rs. 3.6 million per annum as remuneration and allowance to directors regularly from 2057-58. It is not clear from the financial statements whether the amount includes remuneration paid or payable to managing director and joint managing directors. As per International Accounting Standard 24: Related Party Disclosures, the financial statements should include the full disclosure with regard to any payment made or due to any of the related parties. If it is being paid to other directors who do not hold any executive post, the payment should be classified as reward to director, which is restricted by the Company Act in case the company has negative operating results.

Minority shareholders of the company are complaining: Why the financial statements are not made available to the public in time, why the regulators are not taking effective action against the management that delays the publication of the financial statements, and why the company is not prosecuted for breaching the provisions of a number of Regulations? But who is to answer these questions?

A note of caution to this company’s board members would be pertinent here. Please don’t think the public shareholders as innocent of what you are doing. You and the independent auditors of your company are the trustees of the funds provided by the public shareholders. You can’t embezzle it and hide the information about how these funds are being used.

(Agrawal is practicing Chartered Accountant)

Subisu International broad banding

A year ago some fresh engineers and their friends started, for the first time in Nepal, a new business - providing the Internet through cable TV network. Subisu International, their company, shares a good chunk of cable TV business in Nepal and now it is leaping to become a leading Internet Service Provider (ISP) as well. The charm of accessing both the Internet and TV through one cable is certainly irresistible for the subscriber.

Sudhir Parajuli CEO, Subisu International (P) Ltd.

Earlier known as Subisu Cable Net, the company was established in late nineties with a little more than Rs. 100,000. The partners were the schoolmates and college friends who were dreaming all along of working for their own company. For some years, they continued selling cables to the cable TV providers, and gradually were becoming fidgety as there was no excitement in this business. The breakthrough came when Sudhir Parajuli, one of the team and now the CEO of Subisu International, while studying MBA in India read a newspaper article about a successful pilot project carried out in Bangalore of India to provide the Internet connection through TV cable. He immediately put a call to his friends in Nepal and informed them about his find. After conducting some research on the new idea, they decided to invest their technical expertise in it and thus was Subisu Cable Net transformed into Subisu International.

But the government permission for implementing the new concept was very hard to come by. Parajuli blames that to both the strong lobby of the then existing ISPs and cable TV providers, as well as skepticism of the NTA officials. While ISPs and Cable TV Operators were afraid of the competition, NTA officials wondered if people could afford the new service when the modem itself would cost Rs. 16,000.

However, they obtained the license for cable TV somehow and operated as cable TV provider to begin with, while pinning their hope to get the coveted license for Internet service as well, as they were convinced that there was no logic to bar them from the license. So they designed their technical setup in such a way that the moment they would get the license they would be able to immediately distribute the Internet connections as well. Finally in 2004, after putting the application for the fourth time, they got the precious license. For that they had to first convince the other cable TV operators. Then a delegation of the Cable TV Operators Association went to the Minister of Information and Communication. As the minister too was convinced, he formed a committee to look into the matter. After several rounds of presentations to the committee and the Nepal Telecommunication Authority, the concept was approved.

Though the license was granted to another cable TV operator as well together with Subisu, Parajuli’s firm is still the sole player in this technology and he says no other player will come any close to his company in competition for at least two years. Reason? Once ahead is always ahead and the followers will have to start from the scratch. Moreover, he is not afraid even from the wireless Internet providers. “Our company provides the internet connection of upto 1 giga bites per second (gbps) speed as it uses optical fibres. In wireless technology there is no equipment so far to support more than 2 mega bites per second (mbps) speed.”

Apart from cable internet, Subisu now provides 70 TV channels through its cable network out of which 32 are pay channels. And Parajuli informs that his company can provide upto 100 channels, a capacity other cable TV networks do not posses as yet, according to him. Area-wise, the company covers around 45% of Kathmandu and Parajuli says it already has the potential to provide 60,000 home paths for internet. Giving hint about his company’s market standing, Parajuli says, his company may be in the 4 th or 5 th position from the top in terms of market share.

Government intervention seems to have been the major problem that the company is facing. The day the company started to provide the internet services, the policemen raided the company’s office and took with them the equipments and arrested two directors on the charge of not paying the taxes. Though the company and its directors were cleared of the charges very soon, the company faced similar harassment from the VAT authorities, Internal Revenue Department (IRD) and Revenue Investigation Department (RID) too. As Sudhir recalls, the VAT authorities raided their office once a month for four consecutive months last year without any guilt that could be established.

The cable TV industry has to pay 4% of the revenue as royalty to the government. But Parajuli complains that there are no clear cut provisions in the policies, laws and rules about this. The situation is such that if the company starts a new business other than cable internet or cable TV, it still has to pay 4% royalty out of its revenue including that from the new business. Now this company generates revenue from providing cable internet as well and for that the royalty to be paid to the NTA is 6%. Therefore, he wonders if the Ministry of Communication and Information too would start charging it 6% royalty also for cable TV business.

Lack of expertise is another problem for this business. As Parajuli puts it there are not enough experts in cable TV sector, let alone the cable internet sector. However, while the other cable TV operators complain of pilferage of the signals by some clients, Subisu is not facing this problem. “In our case, pilferage has not exceeded 10% of the total revenue and it is not a big issue when compared to the other cable TV operators who are able to collect only about 40% of their revenue,” he says. It may be noted that some cable TV operators do not disconnect their clients even when the clients do not pay the charges for months in a row. This is just to make the clients stick with the cable service provider and ensure that they do not switch over to the competitors.

Subisu has 105 employees now, out of which 13 are engineers and six are MBAs. About 60% of the employees are unskilled, Parajuli informs drawing attention to the contribution of his company in generating employment to the lower level people. The company follows a flexible work schedule for the employees. They do not have to come to office regularly. The only requirement is that they must execute the tasks given to them on time. And there is no dress code. ‘An engineer who works here for Rs. 12,000 per month did not leave the company even when he was offered a US $ 3,000 per month job by an INGO. I believe it’s the environment that kept him with us,’ Parajuli adds.

What next then? Parajuli’s reply is: “As the company already has the expertise and equipments unmatched with any other companies, and is capable to start a standard TV broadcasting station immediately if additional Rs. 10 million are invested, we may start trying in that direction soon.”