One of the world’s biggest audit firms, KPMG has pointed out discrepancies in food delivery firm Swiggy’s accounting practices in its audit report, reveals documents obtained by Moneycontrol.
KPMG has given a `qualified opinion’ to Swiggy. An auditor issues a qualified opinion when he is not convinced or has concerns about a specific aspect of the company’s accounting practices, and thinks it goes against the law.
Experts believe it is a result of technical errors and difference in opinion over laws documents said.
For FY19, KPMG (BSR & Associates LLP) gave Swiggy (Bundl Technologies Pvt. Ltd.) a qualified report because Swiggy’s financial statements do not classify the buyback rights that preference shareholders have as a liability as needed by the new Indian Accounting Standards (Ind-AS) that large Indian companies are now expected to follow.
Swiggy’s investors, including Prosus Ventures (Naspers), Tencent, Coatue Management and others, hold preference shares, which have a buyback right on them. This right is meant to protect investors when the company shuts down. However, these investors still do have a buyback right, which is why they need to be classified by law as a liability from the company’s perspective- which Swiggy did not do, as reported by Moneycontrol.
The KPMG’s report read, “Such preference shares that contain a buyback right with the holders need to be accounted for at fair value. As a result, the classification and measurement of the liability through profit and loss, the gain/loss from such adjustments, related income tax effects for the year 31st March 2019 are misstated.”
The buyback right means that after a certain pre-agreed period, if Swiggy is not able to give its investors an exit via an initial public offering (IPO) or a merger or acquisition, then the investors can sell their shares to Swiggy for an exit. However, is it highly unlikely that such a clause gets enforced. As reported by Moneycontrol.
Ind AS has been applicable to private companies with a net worth of over Rs 500 crore from 2016-17. However, many firms, particularly start-ups, have struggled to prioritise this transition as they have grown rapidly during the period and been more focused on fundraising, investor relations and core business rather than accounting- which is slowly changing today.
KPMG’s report also says that Swiggy later waived off the investors’ buyback rights irrevocably solving the issue altogether for further years.
“Subsequent to the balance sheet date, the majority preference shareholders having ability to trigger put option have irrevocably waived these rights. Basis this development and legal advice obtained by the Company as on date of the waiver, the buyback clause is neither enforceable nor exercisable. Accordingly, on the date of the waiver obtained, the above mentioned preference shares will be classified from equity to liability,” the report says.
As reported by Moneycontrol, a Swiggy spokesperson responded to a query raised them and said, “The audit qualification pertains to the Financial year 2018-19 and previous comparatives, as the Company transitioned from the previous Accounting standards (Indian GAAP) to IndAS. There are a lot of technical differences in both the standards specifically with respect to the accounting treatment of financial instruments. The classification of equity vs liability is a highly complex and often debated technical matter in the start-up industry. In the case of Swiggy, as the preference shareholders possessed certain buyback rights, which they never intended to exercise, the rights were waived off irrevocably by the investors.”
