14 | Chapter 2
subsidiary at a highly inated value. This practice
has been noticed even with regard to listed com-
panies where exact market value of the shares can
be determined from the stock exchange records.
Investigation into a business group that siphoned
o large amounts of funds as loans from a nan-
cial institution revealed that this group, on the
pretext of restructuring operations, decided that
the shares of two major group companies—deal-
ing in iron and ferro products—held by the ag-
ship company would be transferred to another
newly created holding company. Shares of one
of these companies had been continuously fall-
ing for more than two years. A share with a face
value of INR 10 was being traded at INR 3.35
as per the stock exchange records. Instead of
providing permanent diminution in value of in-
vestments, the shares were transferred at a much
higher value than the market value, and higher
than the carrying value of the share. Similarly
the shares of the second company were also
transferred at higher than the carrying value and
the market value. All this was done to project a
higher net worth of the company which would
allow it to avail more loans.
Over-valuation of Long Term Investments
Managements also choose other devious meth-
ods to build a hyped up image of solvency and
Financial Statement Frauds | 15
nancial strength of the companies. It has been
observed that some companies, in order to falsely
inate their borrowing capacity to obtain huge
quantum of loans from banks and nancial In-
stitutions, indulge in over-valuation of their long
term investments. Accounting Standards (AS 13)
prescribe that the long term investments are to be
valued only at cost. Such over valuations lead to a
hyped up image of the net worth of the company
thus justifying higher borrowing.
In the case of a company that wanted to fraudu-
lently obtain higher bank loans, the management
decided to revalue their long term investments in
terms of the so-called ‘market value’. The long
term investments were primarily equity shares
in their own subsidiary companies. The cost of
acquisition of these shares was INR 375 crores,
as reected in the balance sheet of a particular
nancial year. In the very next nancial year,
these long term investments (in the equity
shares of the subsidiary companies) were reval-
ued and shown as INR 1478 crores, thus inat-
ing the value of investments of the company
by INR 1103 crores. It is clearly stipulated in the
Accounting Standards (AS 13) that investments
classied as long term investments should
be carried out in nancial statements only
at cost. Here the company claimed that they

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