Fake Profits, Inflated Statements !! Magic of Business !!

My founded company has posted a sales of Rs. 1 crores this month. Don't believe? Well, you have to, coz there's no other choice dear ;)

Jokes apart, the truth is that I don't have a company, so there are no sales. But assume I have registered a private limited company, its not hard for me to post such extravagant figure as sales or even profits ! How? Read below...

Lets say you have a service-imparting firm JootaPolish Pvt. Ltd., which takes contract of polishing shoes. Making dull shoes look shiny black, isn't that an interesting business !! You have big dreams regarding your company and plan to list it and file an IPO within 2 years. But there's a little problem....you are not getting any deserved contract, of shining anybody's shoes. So, how will you show the prospective investors that your company is doing good business and posting ample profits? Here's a way...

Contact a friend. Maybe me, why not !! I'll be happy to help !! Give me Rs. 100 and ask me to give you a contract of shining my shoes for Rs. 100. Only me and you know that neither I gave you any of my shoes nor you polished them. Also, you got your 100 rupees back. But you can show in your 'Sales' in  Profit Loss Statement that I availed a service from you for Rs. 100 and deducting your manual labour of Rs. 20 for the royal job of polishing shoes as 'expenses', your Profits are Rs. 80 !! Wow !!

Neither you did anything, nor I got anything, but as we are friends/relatives, we both kept our mouth shut and your profits rose by Rs. 80 and sales by Rs 100 !! Isn't that sexy??

Politics Promoters Play; How Promoters of Listed Companies increase their Bank Balances !!

It is legal, nobody can challenge it and it is profitable. That's why it is a game some promoters love to play.

In this post, I will highlight a common practice how promoters increase their 'net-worth' by creating nothing extra but by just doing certain adjustments, that is, moving some things from here to there. I will elucidate with a fictitious example.

Lets say, House Builders Ltd. is a listed company having a Market Capitalisation of Rs. 500 crores and a shareholding of 50% by its Promoter and the rest 50% by the public. It is engaged in the business of Construction and Real Estate Development. The construction business of House Builders is valued at Rs. 400 crores and real-estate business at Rs. 100 crores.

In order to increase his worth, Mr. Promoter plays a simple game. He creates a company Land Buyer Ltd. with the minimum required Rs. 1 lac share capital and makes it a wholly owned (100%) subsidiary of House Builders Ltd. Take notice that Land Buyer is not doing any business as yet and its Memorandum of Association says that it will be engaged in real estate business. Now, Mr. Promoter, as the Chairman of House Builders, takes approval from shareholders to transfer the Real Estate business of House Builders into its 100% subsidiary Land Buyer Ltd. for a consideration (payment) of Rs. 150 crores (approved by an independent valuer of-course). Shareholders won't have any apprehensions as both the companies belong to them (from a ownership viewpoint) and a fair value is being paid. Now, Land Buyer Ltd. avails a bank loan of Rs. 150 crores to finance the purchase, pays to Home Builders and thus, gets the real estate business.

After 6 months, Mr. promoter applies to list Land buyer Ltd. on the stock exchange and proposes to raise Rs. 500 crores from the public giving them a 50% shareholding in it. Thus, the market cap. of the newly listed company becomes Rs. 1,000 crores. Land Buyer Ltd. then pays off the Rs. 150 crores loan from the just raised Rs. 500 crores and uses the rest Rs. 350 crores in its further growth and corporate purposes.

What happened here? Mr. Promoter and the shareholders of Home Builder did nothing productive. Home Builder Ltd. didn't constructed an extra building or Land Buyer didn't sold an extra plot of land. But shareholders (including Promoter) of Home Builder got richer by Rs. 550 crores !! How?? Do the math !!

 They sold their real estate biz. of Rs. 100 crores for Rs. 150 crores: Profit - Rs. 50 crores.

Their shareholding in Land Buyer Ltd. is now worth Rs. 500 crores: Proft - Rs. 500 crores

Net Profit: Rs. 550 crores !! Isn't that a nice game??