Sonali Paper's golden lure
The company's performance was spectacular at the stock market. A company that had always limped along with little or no production of its core products, Sonali Papers seemed to have found some magic lamp to soar on the stock market just within a year of its relisting. Its shares skyrocketed by 250% to Tk900. The market went gaga over it.
Then, the market regulators sniffed something wrong and instituted a special audit that found the skeleton in the cupboard.
Just to mention a few of its mischiefs, the audit has found that the company had reported fake sales, overstated its valuation and revenue and inflated profits through false disclosures in its financial reports for FY20 and FY21.
Not only that, it had diverted its loans which it had taken to buy raw materials to invest in stocks, a clear pronouncement of money laundering, to make the profits that never came from what it was supposed to do – making packaging materials.
In the end, those who bought the company's shares were defrauded.
The story does not end there. Despite its shady performances and reportings, the regulators had time and again exempted the company from rules, which helped the company owners take out seven times of their capital investment just in one and half years of relisting in July 2020 selling their shares.
And, the Bangladesh Securities and Exchange Commission (BSEC) ordered the audit only after all its exemptions that already helped to fuel the company's stock prices.
A special audit conducted by the BSEC revealed how the fraudster company evaded VAT (Value Added Tax) depriving the government of the revenue, concealed loan eliminating liabilities to show inflated net asset value.
The auditor was appointed to conduct an audit over financial reports for FY20 and FY21.
According to the audit report, the company overstated land value of Tk200 crore in FY20 and FY21, which increased its net asset value by 64.7% and 63.2% respectively.
Costs for raw materials, spare parts, repair maintenance and borrowing were shown as assets instead of expenditure in the financial statements, which inflated the profit by 117% in FY20 and 35% in FY20.
Even the company, owned by Mohammed Younus, diverted loans of Tk22.50 crore taken for working capital to the stock market, which is a violation of the anti-money laundering act, according to audit findings.
Also, the company, a concern of Younus Group of Industries, did not provide salary information of its employees and returns to the tax authorities as per the National Board of Revenue's (NBR) law to dodge income tax, according to the report.
Despite knowing all these facts, the BSEC, which monitors the companies to ensure that everyone is playing by the same rules and protects investors, gave the company a series of exemptions in listing regulations, right share issuing and lock-in period in directors' share selling.
Taking exemption from the regulator, the company owners took out more than Tk 100 crore from the stock market by selling shares, which was seven times more than capital investment of the owners, leaving retail shareholders with worthless stock.
The paid-up capital of the company was Tk15 crore before relisting in the main board of the Dhaka Stock Exchange (DSE) in June 2019 from the over-the-counter (OTC) market.
The DSE launched the OTC market in October 2009 with 51 poorly performing listed companies, including Sonali Paper and Board Mills.
The company was trying to come back to the main board from 2011, but the DSE board turned down its appeal several times due to non-compliance with listing rules, according to DSE sources.
Finally, the commission allowed the Sonali Paper to come back to the main board in July 2020, giving at least 18 exemptions from rules, including the listing rule of having minimum paid-up capital of Tk30 crore.
A company was directly relisted with the main board, having got the exemption from IPO (Initial Public Offering) process.
Moreover, the paper-based packaging manufacturing company was allowed to come to the main board when the company's main source of income was only the share market where it invested, violating the rules.
The share market investment of the company was Tk50 crore as of March this year when inventories worth Tk25.8 crore, which reflects the company invested in shares more than its core business.
The income from share investment was Tk26.60 crore in the January-March quarter of the current fiscal year, which was 71% of its total net profit before tax, according to the third quarter report of the company.
The company, which was non-performing before relisting, declared a 40% dividend in FY21, on the back of its stock market income. The regulator did not raise the question of how a company can declare such a high dividend despite not having core business. The company in its financial report for FY21 mentioned that extraordinary income from share market boosted its profit.
With planful offers, the company succeeded to increase the price of its each share to above Tk900 in the first year of relisting. However, such an unusual price hike did not come to the regulator's attention and the company was not inquired about unusual price hiking.
Amid this rising share price, company owners sold their shares taking exemption from the lock-in period.
The company was relisted on the condition that directors cannot sell their shares and issue right shares in three years of relisting.
However, Mohammad Javed Noman, one of the directors of the company and son of Mohammed Younus gave a sell declaration of 10 lakh shares in January this year when the share price was above Tk900.
At the market price, the value of 10 lakh shares was more than Tk90 crore.
The company sold 15 lakh shares in 16 months from June 2021 to September 2022, according to the DSE website. The value of sold shares was nearly Tk135 crore at the market price.
In light of an unusual price hike and abnormal profit growth that raised huge criticism in the market, the BSEC finally in February this year appointed a special auditor to probe the financial statements of Sonali Paper for FY20 and FY21.
Meanwhile, on 20 April, the commission approved the company to raise Tk11 crore through issuing right shares amid the ongoing audit.
The BSEC appointed a special auditor after nearly two years in February 2022 and found the final audit report in June. The commission did not take any action against the company despite having evidence of fraud.
The BSEC had an audit report about fraudulent activities of Sonali Paper, but Mohammed Younus, chairman of the company, recently flew to Dubai to attend an event of memorandum of understanding signing between the BSEC and the Securities and Commodities Authority, United Arab Emirates.
When contacted on Thursday (6 October) Mohammed Younus could not be reached. However, the company secretary of Sonali paper Md Rashedul Hossain on the same day confirmed to The Business Standard that Younus was in Dubai to attend the aforementioned event.
Overvaluation of assets
According to the valuation of a special auditor, the present market price of 11.50 acres land located in Rupganj of Narayanganj was Tk316.25 crore when the valuation was shown Tk517.50 crore in the audited financial statement of FY21. The special auditor commented that the company overstated the valuation of Tk201 crore.
The financial statement of the company was audited by MABS & J Partners, Chartered Account for two years – FY20 and FY21.
The valuation of the same land was also overstated by Tk362 crore in 2016, according to the special auditor.
The auditor marked the overvaluation as a high-risk category, and equity and net asset value of the company was overstated with this overvaluation.
Overstating profit
The company recognised revenue of total Tk282.3 crore in two years, FY20 and FY21, but the special auditor could not confirm the figure because of non-maintenance of sales record.
The company took verbal orders from the customers, and the auditor asked them to provide "sales order books" where orders of customers were recorded. But the management could not provide the book. As a result, the auditor could neither identify the contract with customers, nor confirm where the goods were delivered and nor recognise the amount of revenue, according to the audit report.
The company spent Tk2 crore for purchasing spare parts and Tk7 lakh for raw materials in two years, but it showed that amount as an asset instead of expenditure by overstating profit, net asset value and earning per shares.
The company borrowed Tk1.5 crore from different banks for opening LC (Letter of Credit) to import raw materials but financing cost was not recognised in the financial report, causing understatement of expenditure and overstatement of profit.
VAT dodges
Differences of Tk2.29 crore were found between the amounts reported in the VAT return and revenue shown in the sales ledger and financial statements. Not reporting the actual number of sales in the VAT return is a non-compliance with the VAT Act and it is an offense.
The company purchased a second-hand generator with a high value of Tk21.50 lakh in cash without complying with any norms of purchase and without deducting VAT and tax at source. Cash purchase of more than Tk50,000 is a non-compliance with Income Tax Ordinance and it is also an offense, according to the report.
False disclosure about relevant parties' transactions
Despite having transactions with related parties, the company declared in policy notes of the financial report that there were no related party transactions during FY20 and FY21, which seemed to be misleading information in the financial statements.
The auditor observed that board members of Sonali Paper Mahfuza Younus and Mohammed Younus are also the board members of Express Insurance. Sonali Paper has insurance with Express insurance.
Not disclosing related party transactions is a non-compliance of International Accounting Standard.