Keya’s assets melt down after figure jugglery

Transferring toxic assets of private concerns to the public company and hiding weakness through questionable accounting over years – all have come to roost now as Keya Cosmetics Limited has announced an annual loss for the fiscal year 2018-19 that surpasses its capital.

The huge loss has eroded the listed company's net asset to almost zero.

Thanks to actions taken by accounting regulator Financial Reporting Council (FRC), the company was compelled to correct its false accounts.

The company posted a meagre profit for the FY20, but the amount is far from being significant in terms of asset rebuilding.

The rise of Keya 

Keya Group – established by a hardworking entrepreneur, Adbul Khalek Pathan – was doing well in its detergent and soap business until it went too aggressive in textile business in the 2000s, and also as a stock market issuer.

Pathan – a professional driver turned entrepreneur – significantly popularised Keya soaps across rural Bangladesh mainly through sponsoring Ityadi, the most popular TV magazine programme in the country.

Keya Group also received export trophies in its golden days of rise during the 2001-2005 period.

Over that period, the group got two of its flagship businesses – Keya Cosmetics and Keya Detergent Ltd – listed on the bourses. Alongside garments, the group also used to export some soap and detergent.

Keya Cosmetics, by making annual profits more than half of its paid up capital, amalgamated Keya Detergent and its backward linkage Keya Soap Chemicals Ltd in 2010.

The beginning of fall

The amalgamation appeared to be a synergy killer in contrast to the common expectation for synergy boosts as the post-amalgamation listed company's profit dropped by two-thirds within three years.

The same story of unwelcomed amalgamation was repeated in the mid 2010s when the group attempted merging three of its textile companies – Keya Spinning Mills, Keya Cotton Mills, and Keya Knit Composite – which had already failed to get listed on the bourses.

Investigative media reports that unveiled the proposed amalgamation scheme's fraudulent nature were challenged by the company in the court. And in 2015, the securities regulator approved the amalgamation widely believed to have merged nearly Tk1,000 crore of fake assets.

The company showed the same receivables repeatedly which were baseless, said an FRC official seeking anonymity as his office is yet to complete the investigation because of the company's nonresponse in submitting details.

The FRC launched its investigation into Keya Cosmetics' financial statements in February last and found that the company had been overstating assets worth more than Tk1,000 crore along with showing fake profits.

Since the 2015 amalgamation, the listed company made regular disclosure of its accounts only for the first year, FY17, and began to hide the quarterly accounts later on.

The Bangladesh Securities and Exchange Commission (BSEC) fined the company directors for not publishing its 2018 financial reports in time.

However, the company suddenly posted its annual disclosures for FY18 and again went for a disclosure blackout that might have unveiled the shaky base of the accounts even before the FRC investigation this year.

The shocking fall

The Business Standard phoned Keya chairman, company secretary, and the chief financial officer to learn the accounting treatment for correcting its toxic amalgamated assets, but none of them responded to the queries.

An FRC official hinted that the company is likely to have made provisions against its questioned receivables and to ensure the provisioning it had to post huge losses for FY19.

Keya Cosmetics' loss per share deepened to Tk12.94 for FY19 that dragged its net asset value against each share to Tk0.02 from Tk14.02 at the end of June 2018.

However, absorbing the one-off shock, the company posted Tk0.24 in net profit for FY20 against each share having a face value of Tk10. But, the lame profit only helped to recover its net asset per share up to Tk0.25 at the end of last June.

At the expense of shareholders

Continuous stock dividend issuance over the last decade on top of the amalgamations helped Keya cosmetics grow to an over Tk1,000 crore company in terms of paid-up capital.

Over the same period, its shareholders lost most of their invested money into Keya as the stock price came down to less than Tk7 from more than Tk140 a decade ago.

Not all the shareholders are laymen, a large portion of Keya Cosmetics shares are still held by giant institutions like the Investment Corporation of Bangladesh.

Pubali Bank Limited, one of the Keya's bankers, also holds a huge number of Keya shares which came as collateral against loans the bank gave to Keya Group entities.

Betting on Keya's rise, Pubali Bank joined the team of lenders to the group that now owes more than Tk3,000 crore to banks against its initial receipts of less than Tk1,500 crore.

Poor corporate practices is the main reason behind Keya's fall today, believe Md Abdul Halim Chowdhury, managing director of Pubali Bank.

Like a team of investment bankers at an international firm's Dhaka office who tried and failed to arrange a large US investment for Keya in 2018, the Pubali Bank MD also hopes that the listed company still has the potential to come back and compensate its shareholders.

"Like soap and detergent, each of its textile units has well equipped production facilities. All of its products have market demand as well," Halim Chowdhury said.

The entrepreneur is trying his best to remain in the game, arranging at least delayed payments of bank loan instalments, according to the banker.  

Keya Chairman Khalek Pathan was arrested in 2018 for defaulting on bank loans and the event is believed to deter the potential US investors then.

Nonetheless, the damage to the shareholders is too much and the regulator should seriously step in to reconstruct the board of such companies with appointing qualified and committed independent directors there, said Rakibur Rahman, director at the Dhaka Stock Exchange.

He demanded stern action against those who committed accounting fraud.

On the other hand, stock market expert Abu Ahmed, an honorary professor of economics at Dhaka University, opined that neither the auditor, who okayed the company's financial statements, nor the regulator, who approved the controversial amalgamation scheme can avoid their responsibilities.

"How can a company that was rejected an IPO be amalgamated?" the veteran professor asked.