Photographer: Graham Crouch/Bloomberg

Alleged Fraud Undoes 5,800% Surge at Unit of ‘Most Ethical’ Firm

  • Ricoh India’s shares have been suspended since May this year
  • Saga puts spotlight on Indian corporate governance standards

Two months after Japanese camera and printer maker Ricoh Co. was again recognized as one of the world’s most ethical companies, the shares of its Indian unit were suspended following a rout exacerbated by allegations of fraud.

Ricoh India Ltd. climbed almost 5,800 percent in about two decades to a record in August last year, before erasing most of those gains until the suspension of trading from May 26. The Indian unit said it’s a victim of a fraud allegedly perpetrated by people acting individually and conspiratorially. Ricoh India’s auditors said profits may have been inflated.

The episode highlights the wider question of whether India needs to bolster corporate governance to help Prime Minister Narendra Modi achieve his goal of wooing more foreign investment to stoke rapid growth. The nation’s banks, for instance, are grappling with about $120 billion of soured debt that for critics signals flawed business standards at many lenders and some industrial groups.

"Indian corporate governance is generally poor, with some bright spots, but the regulators have been constantly improving their processes and reaction times," said Naveen Fernandes, vice president at investment adviser Right Horizons Financial Services Pvt. in Bengaluru.

New Delhi-based Ricoh India began life as a joint venture with RPG Group in 1993 and was reincorporated as Ricoh India Ltd. in 1998, according to the company’s website. Ricoh Co. in Japan owns 73.6 percent of Ricoh India, the website shows. About 10 percent of the Japanese company’s sales stem from regions outside Japan, the Americas and Europe, the Middle East and Africa.

Chartered accountants BSR & Co. LLP said in a May 18 report to Ricoh India’s board that "our review procedures, those of the independent investigations and of the management indicate a large number of irregularities and suspected fraudulent transactions in many areas."

On May 27, Ricoh India said in a statement it had filed a complaint with Delhi police that some employees and other persons may have committed offences related to violations such as cheating, criminal breach of trust, forgery and falsification of accounts. 

Rajan Bhagat, a spokesman for Delhi police, said he couldn’t comment on the case without knowing where the complaint was filed. Ricoh India declined to specify the police station when asked.

Delayed Results

Deepa Menon, a spokeswoman for Ricoh India, declined to make an executive available for an interview, and declined to comment beyond the company’s public statements.

Ricoh Co. said that like other shareholders in the Indian company, it wants to know what happened, and that it’s working on measures to prevent any recurrence. Those plans will be finalized once the results of internal and external probes into the Indian unit are available, the spokesman for Ricoh Co. said in an interview. The situation in India developed after Ricoh Co. had received recognition for ethical standards, the spokesman added.

Ricoh India told exchanges on Nov. 6 that the earnings release for the quarter ended September would be delayed. 

Some employees, including Chief Executive Officer Manoj Kumar, were put on leave with pay, the company said in an April 1 filing. The statement didn’t accuse Kumar of doing anything wrong. Kumar resigned from the board not long after.

Widening Losses

“There’s been no irregularity in accounting under me," Kumar said in a phone interview on June 3. "I’ve resigned on my own and no one has forced me to do so.”

The delayed results were eventually released May 19, showing losses widened to 1.47 billion rupees ($22 million) for July through September from 28.3 million rupees a year earlier. On June 6, the company said some employees had been suspended. 

Like most major economies, India is no stranger to business scandals. One of the nation’s biggest, at Satyam Computer Services 2009, spurred the Securities and Exchange Board of India to tighten company disclosure rules.

Exchanges now often ask companies to file replies on unusual share-price swings as well as speculation and rumors in the media. Bourses hired more staff to enforce disclosure rules, and will fine firms that don’t provide timely reports on disruptions.

Companies Act

Corporate governance in India is more robust now thanks to the Companies Act of 2013, but the example of Ricoh India shows that there can still be problems for businesses active in Asia’s No. 3 economy, according to New Delhi-based James Owen, the senior managing director for India and South Asia at consultancy Control Risks.

Activist investors of the kind typified in the U.S. by billionaire Carl Icahnor Daniel Loeb and his hedge fund Third Point are also few and far between in the $2 trillion economy.

"Any way in which companies and boards can be held more accountable through regulatory and legal processes, or through more shareholders putting the focus on accounts and scrutinizing the company more, I think that’s a good thing," Owen said. "I don’t think that is really happening at a very fast pace in India right now."

A spokesman for the Securities and Exchange Board of India didn’t immediately reply to an e-mail and text message seeking comment on the Ricoh India saga.

‘Most Ethical’

Japan’s Ricoh Co. was named as a 2016 World’s Most Ethical Company by Ethisphere Institute, receiving the accolade for a seventh time, according to a release on the Japanese firm’s website.

Ethisphere Institute, based in Scottsdale, Arizona, seeks to define and advance the standards of ethical business practices, according to its website. A framework covering ethics and compliance programs, corporate responsibility, culture and governance, as well as leadership, innovation and reputation, is used to evaluate which companies count as among the most ethical in the world, the website also shows.

Clea Nabozny, a spokeswoman at Ethisphere, didn’t immediately respond to an e-mail seeking comment.

Ricoh Co. reported revenue of 2.21 trillion yen ($21 billion) in the year through March 31, 2016, and according to its website employs more than 100,000 people worldwide.

The sheen of the global brand may have shielded the local unit from closer investor scrutiny, according to Fernandes from Right Horizons Financial Services.

"It’s the brand that was more important to investors than financials," he said.

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