How they artificially inflate the cash position?

It is always recommended to invest in cash rich companies but Do you know that some companies can even fake that cash? Read it

1) They open an FD with Bank A.
2) After few days, they inform the bank that they have lost the FD certificate and get a new FD certificate issued.

3) After few days they liquidate that FD and surrender the duplicate certificate.

4) Then with the liquidated amount of previous FD, they open a fresh FD with Bank B.

5) They do the same with Bank B as they did with Bank A.

6) They do this with multiple banks. (C,D,E,F,G)

7) Now that they have multiple original FD certificates, they show the same to auditor. Auditor dont verify this.

If they had 1 crore real cash, it May reflect as even 10 crore in the books.

So please apply your due deligence before investing and try to verify the promoter/ owner's reliability.

 

I think Ramalinga Raju did this in Satyam scam. Auditor reported that there was money in bank when in fact there was nothing.

 

For this very reason, it is important to know that background of promoters, their past history as well as their attitude towards the minority shareholders. Every company faces tough time and sooner or later each company would have to undergo difficulties in one way or the another. It is at this time the quality and integrity of promoters provides a safeguard. While, it was sad to watch Satyam scam, but the point to note is that many genuine promoters would place goodwill and integrity of the companies above anything else. It is impossible to imagine such thing to happen in say maybe a TATA group company or Infosys or maybe a Wipro because the quality of promoter and management have been known to for their sincerity and goodwill.

 

How about Amabanis ??

 

Well, I just mentioned the name of TATA and other companies as an example to elaborate on my point. These are the companies that have over time increased shareholder value tremendously and thus are generally regarded with high respect.Having said that neither I am in a position nor do I have any authority to comment on integrity or goodwill of any corporation. So once again, I would like to say is that kindly do proper due diligence before buying. The companies that I mentioned were just as an example to say my point and I do not take any responsibility over their actions.

 

Very nicely explained.

 

But what is the best way to judge the management good or bad..

 

Your thoughts match that of ours. Glad to connect.

 

I just feel that you can't judge a man at any time as to how he will change. Satyam used to be good management when it was riding high. Then Raju did what he did, and the rest is history. Its really amazing how management turns from 'bad' to 'good' as the price of the stock changes . I am bullish on India Cements, even though ppl think that Srinivasan is a corrupt man and bad in management (stock is also down from the highs). But I feel that the company has huge potential in terms of stock price. Its 5th largest producer of cement in India and mainly focusing on South India (where the action is because of Telangana and Andhra building new cities). Its just a matter of perception that a management is good or bad, which changes according to the profits and stock price and nothing else.

 

@guru : having been an auditor many years ago : no auditor only relies on FDR's only. There is a process of 3rd party confirmation of bank balances - whereby auditors insist that banks and debtors directly confirm what is the amount they owe and which is then tallied or reconciled to the records of the company.

This is absolute basic and easy to catch unless there is a collusion of the banks and debtors in the fraud

 

Some auditors are very careless. Even reputed ones like PWC. The whole Satyam scandal happened because the auditor believed the forged FDRs to be genuine.