Dubious financial info raise questions over BD Paints’ IPO move

Mostafizur Rahman | Published: 22:20, May 30,2020


A question mark hangs over the move of BD Paints to go for initial public offering as a series of irregularities including deceptive information, low pay, non-payment of taxes, and poor disclosure have been detected in its IPO documents.

The Financial Reporting Council has recently launched an investigation into the financial reports of BD Paints as it suspected various anomalies.

There is prima facie evidence that the company showed doubtful revenue in its financial statements, said FRC officials.

The FRC also queried its auditor Mahfel Huq & Co about the various irregularities in the financial statements of the company.

BD Paints applied to the Bangladesh Securities and Exchange Commission in the past year to raise Tk 20 crore through its IPO in order to expand its production capacity.

However, the company mentioned its IPO documents that more than 60 per cent of existing capacity was remained unutilised, which raised question about its need for more fund for further expansion.

BD Paints pre-IPO paid up capital stood at Tk 50 crore after issuing placement shares worth Tk 28 crore in 2018 and Tk 12 crore in 2015.

An IPO review panel of the Dhaka Stock Exchange observed that the company had not recognised and paid tax expense in the books of accounts correctly.

The company did not pay any tax except advance income tax in any year. The AIT was related with imports.

However, it was observed that the amount of tax paid by the company is not 75 per cent of its total amount of payable tax, which was a non-compliance with rules.

Moreover, the company, for failing to pay the amount, was required to pay 10 per cent simple interest in addition on its payable amount, but it again did not pay any amount for such reason.

The company recognised current tax provision Tk 1.68 crore and Tk 65.95 lakh for the year ended on June 30, 2019 and June 30, 2018 respectively.

BD Paints had capital gain of Tk 2.70 lakh and treated the gain as other income and applied tax rate at 35 per cent, which was erroneous and incorrect.

The tax rate on capital gain on sales of fixed assets is 15 per cent while the tax rate on other income is 35 per cent.

According to the DSE panel, the tax-based depreciation calculated by the company and by the tax authority was not same and it was obvious to have under/over provision in tax expense which needed to be adjusted with the current tax amount of a year, but the company did not do so breaching rules.

BD Paints paid employees’ salary through cash, breaching Income Tax Ordinance 1984, the panel observed.

Its chief financial officer and company secretary’s basic salary is Tk 15,600 and gross salary Tk 27,400 per month, which is really a matter of concern and cast significant doubt about recruiting well experienced professionals/employees.

About the non-payment of taxes, BD Paints company secretary SM Mamum Ar Rashid told New Age that the company had presumed that the government would provide it a tax holiday.

But, at the end the company did not get the exemption.

However, BD Paints will pay taxes after the general holidays end.

Asked about the poor salary of its workers and executives, Mamum said that it was how the company pay wages.

The company does not need expert employees as most of them are field workers and commission-based workers, he said.

The company mistakenly treated capital gain tax on sales of fixed assets as accounting profit and pay 35 per cent tax instead of 15 per cent, he said.

Thus, the profits showed in the financial statements would be lower if the company pays the taxes.

The company’s revenue increased by 7.42 per cent to Tk 36.45 crore, cost of goods sold advanced by 10.15 per cent to Tk 22.75 crore, cash received from customers rose by 9.41 per cent to Tk 34.03 crore and cash paid to suppliers surged by 11.38 per cent to Tk 24.51 crore during the year ended on June 30, 2019.

Asked about the related documents to justify the amounts, the company failed to provide all the required documents, the DSE panel said.

The company did not give any bills/invoices for local purchase and bank statements, and without the documents it was not possible to make any justification of revenue growth, cost of goods sold, cash received from customers and cash payment to suppliers, it said.

Mamum also said that BD Paints could not provide bank statements and bills invoices due to a short time given by the DSE.

DSE officials said that the company was reluctant to provide necessary documents as per the DSE requirement regarding a list of top 10 buyers and sellers in home and abroad stating the individual customer’s and total sales/purchase amount for the last two years.

The company did not mention in the prospectus anything regarding various types of risk (credit risks, liquidity risks and market risks) and its concern as per IFRS 7 Financial Instruments. The company admitted the mistakes, the officials said.

The company recognised earnings per share Tk 1.03 and Tk 2.13 for the years ended on June 30, 2019 and on June 30, 2018 respectively, but it did not provide any reason for such significant deviation, they added.

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