Vakrangee. Manpasand. Who's Next to Resign? Protect Your Wealth, Avoid these Stocks

Jun 14, 2018

Editors note: The markets are a mess - a fact that a buddy of ours over at the 5 Minute Wrapup laid out really well... Kunal approaches the markets like Sherlock Holmes - we like to call him the stock detective. Read on for his incisive piece - and his warning...


Kunal Thanvi, Research analyst

If you look for the biggest risk in the small and mid-cap space... corporate governance and the integrity of their accounts would top the list.

It is here that auditors play a crucial role.

However, historically, they have failed to raise red-flags in time.

And when frauds are revealed - the auditors resign.

This is not the first time when cases like Vakrangee, Gitanjali Gems, Shilpi Cable, and Manpasand Beverages have emerged. The list is a long one.

However, I believe, this is just the beginning.

Did you know, so far in 2018, thirty-two auditors have already resigned?

In most of the cases, the main reason was non-disclosure of information by the companies.

Are Auditors Forced to Exit?


The big question is - why are these resignations happening now? What has changed suddenly? Are they being forced to exit?

Well, I can confirm that nothing has changed as far as company disclosures are concerned.

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But there has been one big change that very few are talking about.

Enter, the National Financial Reporting Authority (NFRA) under the Companies Act 2013.

You may be aware dear reader, in India, the Institute of Chartered Accountants (ICAI) is the regulator for auditing and accounting standards.

ICAI is a self-governed body and regulates its own members (a monopoly) in India.

However, post the PNB fraud, the finance ministry approved an independent regulator for listed companies - the NFRA.

In simple words, the NFRA, an independent body, is the new regulator for auditing and accounting standards of listed companies and large public sector unlisted companies.

This move conforms with the global standards and has led to a strict control over auditors. This has led to the series of resignations.

There is a good possibility that the number of resignations in the small and mid-cap space may increase. This has struck fear in the minds of investors.

The smallcap index fell 19% from its peak.

Currently, 560 stocks are trading at 52-week lows. And most of these beaten down stocks are small caps.

Should you worry?

I believe, this can lead to some short-term pain but will help to improve corporate governance standards.

I understand there is a lot of fear in the minds of the aam investor. However, at the same time, I think these are exciting times for picking high-quality stocks.

For upcoming Smart Money Secrets recommendations, my team and I will meet more than twenty company managements in this AGM season (time when management meet shareholders at company's Annual General Meeting). These companies, I believe, have excellent corporate governance standards in place already.

And with the sharp correction in the market, I'm confident I can publish some very good recommendations.

As far as frauds are concerned, I have my Smart Money Score to reject companies with suspicious numbers and practices.

Regards,

Kunal Thanvi
Kunal Thanvi (Research Analyst)
Editor, Smart Money Secrets

PS: In this volatile market, what are the best investors in India doing with their portfolios? Wonder no more. Kunal is on a mission to find their best picks for you. All you need to do is follow India's top 40 super investors here...

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