Fashion Knit using HR Textile assets without any rental agreement
HR Textile’s auditor SK Barua and Co has raised concern about the issue in the company’s financial statement for the fiscal 2022-23
Fashion Knit Garments Limited, a related party of the publicly listed HR Textile Mills Limited, is utilising the latter's factory premises for business operations without any formal rental agreement.
Also, shareholders of HR Textile were left in the dark as the listed firm did not publish any disclosure regarding leasing out its factory to facilitate another company's operations, that too without any apparent benefits.
HR Textile's auditor SK Barua and Co has raised concern about the issue in the company's financial statement for the fiscal 2022-23.
Fashion Knit and HR Textile share common directors. Moreover, the two companies have maintained business relations for several years, with HR Textile selling its fabrics to Fashion Knit. HR Textile also secured shareholders' approval for this related party transaction to adhere to the requirements set by the securities regulator.
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In the audit report, SK Barua and Co stated HR Textile and Fashion Knit are operating in the same building. Fashion Knit is using HR Textile's land and building, whereas HR Textile is using some spaces in the fabricated steel shed of Fashion Knit. However, there are no rental agreements between the two companies. HR Textile has not shown any rental income from Fashion Knit in its financial statement.
The Business Standard tried to reach HR Textile's Managing Director Mohammad Abdul Moyeed, and Director Mohammad Abdul Momen for a comment in this regard, but their phones were switched off.
Company Secretary Wali Ullah was also unreachable by phone, as multiple calls went unanswered.
Market insiders said the Bangladesh Securities and Exchange Commission (BSEC) has two directives about asset sales and related party transactions. But there is no direction about leasing out assets to related parties.
Seeking anonymity, a top official at a brokerage firm said businessmen are taking undue advantage by using the assets of listed companies to facilitate other firms they own.
"They are even mortgaging the assets of listed firms to borrow from banks and then using that loan to finance the related companies. Such practices are benefitting the owners, but it's the investors who are suffering."
According to BSEC guidelines, approval by shareholders is required for sale of more than 1% of total tangible assets to listed companies. And, in case of purchase or sale of goods from or to any related company, shareholders' approval is required if the amount is more than 1% of total revenue.
The auditor also expressed concern about the Tk76 crore closing balance of inventories of HR Textile, which is 16% of total assets. The auditor said it could not verify the amount.
Also, the company did not maintain a complete register for its fixed assets, informed the auditor. There was only a machinery list, where the quantities did not match with physical verification.
What's more, the auditor found that HR Textile sold wastages for Tk20 lakh, but it was not shown in the firm's financial statement. As a result, the net income of the company was understated.
At the end of FY23, the firm's total loan stood at Tk287 crore, which was 61.45% of total external liabilities. Also, the debt exceeded equity by a whopping 237%, according to the auditor.
Last year, the company decided to increase its paid-up capital by issuing right shares at a 1:1 ratio for the expansion of production facilities and repayment of high-priced loans from banks and financial institutions.
It wanted to issue the right shares at Tk20 each including a Tk10 premium on the face value.
But in May this year, the BSEC rejected the right shares issuance of HR Textile because the company failed to submit the required documents within the stipulated time.
Meanwhile, it took a Tk117 crore loan from the Al-Arafah Islami Bank to pay-off the Mutual Trust Bank's term loan.
In FY23, HR Textile's revenue fell by 22% year-on-year to Tk232 crore. Its net profit also dropped 78% to Tk1.59 crore.
Due to the profit fall, it declared a 5% cash dividend only for the general shareholders. Its sponsors and directors will not get any dividend for the last fiscal year.
