Accounting Gimmicks: How promoters take out money from own company
We are talking about the unusual ways by which promoters take out money from business. As we know usual ways are in form of dividends & remuneration. But by twisting some of the accounting standards they can easily take out money and invest it in their other ventures like real estate etc.
1) Loans & Advances: Often we see a Loans & Advances (L&A) item in B/S for which there is no schedule attached with that. We can find out the advances given to group companies in Notes to Schedules. But there are many companies to whom advance has been given which belong to promoter indirectly. As these advances increase, more and more money is going out of company. After few years, either the company write off these advances or realize it as cash (when promoters return it after utilizing for their purpose)
Learning: Look for L&A in B/S and get the proper breakup of it from the company. Also see the trend in L&A
2) Write off of debtors: I have encountered one B/S where almost every year 5% of debtors are write off without providing any further breakup. These debtors are often group companies. So in this way promoters take out money from one without having any liability in future. Now no one is accountable for it and promoter can use it for their own purpose.
Learning: Try to get the hang of business profile of company and understand whether the write off is typical characteristic of the business. Also see the writeoff amount in expenses too and see whether they are matching with the B/S no.
3) Buyback of shares: Sometimes company buyback promoter shares for a large security premium. And then after sometime issue warrants to the same at minimum rate prescribed by ICAI. This will give promoter good money to invest in their own ventures.