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Wrong Doings at Jet Airways

The deep financial crisis that Jet Airways faces today is not an overnight or sudden phenomena. It has been in the making for years and has now spilled over in the open, because the alleged management misconduct is no longer sustainable.  The airline may have been India’s largest in the past and is now its second largest, but its management and financial practices have not been above board. The present delay in the announcement of its quarterly results for June 2018, is the culmination of a litany of questionable corporate and financial dealings, which were perpetrated for many years. Its huge losses and eroded networth, have been due to rampant siphoning of funds and dubious payments to related parties, year after year, which have now run out of steam, with a hugely depleted kitty. The company’s management and its statutory auditors were cozy with such practices over all these years, but we are now in an era, where auditors are not being spared for any kind of a collusion, and hence the standoff between companies and their auditors, as in the case of the delayed quarterly results of Jet Airways.

While the auditors apparently did not question the financial dealings of Jet particularly with its related parties, in the past, they have now chosen to do so, though in a very indirect manner. The quarterly results of Jet have been delayed, primarily due to a rift between its management and the statutory auditors, who are now questioning the very ability of the airline to survive and continue its operations. The airline’s cash reserves have fallen to such lows, that unless it does not immediately raise USD 500mn, it will default on its repayment commitments to lenders, apart from being unable to meet its daily expenses. Jet’s survival depends on raising funds immediately, as also cutting costs drastically, the key element of which is its untenable related party payments.

This delay in declaration of quarterly results, has resulted in the opening of a Pandora’s box for Jet. The SEBI and MCA are not just probing the reasons for the delay, but also direct charges of siphoning of funds by Jet. The focus of such siphoning is the huge selling distribution costs, that Jet pays to Jetair Pvt. Ltd, a company owned by its promoter Mr.Naresh Goel and his family members. Apart from paying a huge sum of money by way of annual retainership fees, which was Rs.76 crores in 2018, Jet also pays 12% of its gross revenue to this company, by way of selling & distribution costs. Such payments are linked to its gross sales/revenues and thus whether Jet makes profits or not, it is forced to make such payments to its promoter’s company, which is a clear case of siphoning of funds. This is further evident from the fact that while in the case of Spicejet such costs are merely 2% of sales and in the case of Indigo, the figure is 3.80%, the figure for Jet is a stunning 12% of sales. No wonder, the MCA has initiated a probe akin to a forensic audit in Jet and the report could be very damning.

The Jet saga is already one of enrichment of the promoter, at the cost of the company itself. Jet defends such payments as being of a contractual nature, but the contract itself is inimical to the company’s interests. Its promoter claims to be embarrassed by the massive erosion of shareholders wealth but that is of no solace for those who trusted its audited financial statements and invested in the company’s shares. The MCA investigation must not be restricted to Jet and its management but must be expanded to its statutory auditors too, who approved such shady financial practices, for all these years.

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