A series of developments at Brightcom, a digital marketing solutions and services company, over the past few months has brought back memories of the Satyam Computer Services scam that rocked the country 15 years ago.
After finding serious corporate governance violations and accounting malpractice, the Securities and Exchange Board of India (SEBI) in April this year ordered a forensic probe into the company, alleging that it had resorted to concealment of information, non-compliance, and violating norms.
Not satisfied with its answers, SEBI imposed serious restrictions on Suresh Kumar Reddy, CMD, and Narayana Raju, CFO, restraining them from market transactions.
Invoking FEMA (Foreign Exchange Management Act, 1999) provisions, the Enforcement Directorate swung into action last week and conducted searches at five locations, including the residences of Suresh Kumar and Narayana Raju, and the company’s auditor P. Murali Mohana Rao. The law enforcement agency has seized “incriminating documents, digital devices, unaccounted cash, and jewellery”.
This forced the CMD and CFO to step down. The board, which met late on Sunday evening, took stock of the situation and announced that it would soon start the search for a new CEO. Till such time, it would set up a ‘transition team’ to run day-to-day operations.
Serious lapses
Both SEBI and ED found serious violations of accounting practices that were linked to ‘impairment of assets worth Rs 868 crore’ using its foreign subsidiaries.
. “Brightcom itself financed preferential issues by roundtripping funds through subsidiaries and conduit entities,” the ED said.
Also read: SEBI slaps ₹40 lakh fine on Brightcom Group, promoters
The company falsely claimed to have received full payment for preferential shares/ warrants by providing ‘forged and fabricated bank statements’ to the market regulator. It alleged that over Rs 300 crore, advanced as loans to subsidiaries, were partly siphoned off or remained unaccounted for. The statutory auditors, P Murali & Co. and PCN & Associates (a related entity of P Murali & Co.), too, are under the scanner for “failing to report outright fraud, colluded with the management/promoters of the company”.
Botched up acquisitions
The company made over 10 acquisitions through its 23-year journey. The list of acquisitions included Lycos and LGS Global, which raised eyebrows as they didn’t align with the company’s core activities. The acquisition of Lycos was projected as a ‘visiting card’ for the company, as it sought clients in the West, while the LGS acquisition was supposedly aimed at tapping the IT services market, which is not a core activity of the company.
The Lycos acquisition and its subsequent failure cost the company heavily – both financially and by eating away considerable leadership time dealing with the issue. Brightcom used the acquisition (merger) in 2011 to get listed on the Bombay Stock Exchange as its earlier attempt to go for the IPO five years earlier was shelved.
The company also called off a deal to buy a digital marketing start-up MediaMint for about Rs 560 crore, as it was reportedly unhappy over the clause that the bulk of the payments would be through share transfer.
Started as USA Greetings in the US, the company has changed its name several times from Ybrant Technologies to Ybrant Digital, then to Lycos, and finally to Brightcom.
Financials
The company reported a net profit of Rs 321 crore during the June quarter this year and a revenue of Rs 1,690. The company’s turnover went up to Rs 7,396 in 2022-23 from Rs 258 crore in 2018-19.
Keeping in mind the interest of retail investors, the company’s leadership should have resigned after the serious observations made by SEBI months ago. It should have gone for a leadership overhaul, handing over the responsibilities to a professional team, pending the SEBI investigation.
As it did in the case of Satyam, the Government should consider taking the help of Nasscom and other stakeholders and announce a leadership team to set the Brightcom house in order, pending investigations by the SEBI and ED.
This is important to protect the interests of retail investors and employees. Like in the case of Satyam, the area of operations (ad-tech) of the company has huge potential as digital consumption of content is witnessing unprecedented growth, thanks to the roll-out of digital technologies, devices and 5G.
The fact that the share value of the company plummeted by 60 per cent to Rs 19 on Monday from a 52-week high of Rs 46, reflects the state of affairs at the company.