Brightcom Group’s Never-Ending Troubles: Hyderabad-based Adtech Company Is In SEBI's Crosshairs For Dubious Accounting Practices

Hyderabad-based adtech company Brightcom Group has been pulled up by the Securities and Exchange Board of India (SEBI) for its accounting practices. 

In a strongly-worded notice, the SEBI charged the group with resorting to ‘dubious’ accounting practices and financial shenanigans to camouflage impairment losses of more than Rs 1280 crores in the financial years 2018-19 (FY19) and FY20.

A Series of Name Changes  

The Brightcom Group is no stranger to controversy. 

Initially started as an online greeting cards business in 1994, the group changed its name to Ybrant Digital, focusing on digital advertising. 

In 2010, the group decided to buy out Lycos Internet, one of the pioneers in the search engine space. 

Lycos was bought by Daum Communications from Terra Networks in 2004. Ybrant Digital bought Lycos for $ 36 million. Nevertheless, in 2014, Ybrant changed its name to Lycos Internet. They began introducing wearable technologies, which didn’t work out too well.

In the meanwhile, Daum had filed a case against Ybrant for not paying up the entire amount for Lycos Internet. For over a decade, the company continued to promise investors that the issue would be sorted out, but a district court in New York handed back the receivership of 56 per cent shares to Daum. Around the same time, the company changed its name from Lycos to Brightcom.

Hiding Expenses to Artificially Inflate Profits

It was around this time, SEBI says that the company began manipulating its accounts to make numbers look much better than they really were. The company’s financial statements from 2019 show a loss of investment written off for Rs 411 crores under the Other Comprehensive Income side, but there was little explanation about the nature of these losses. It turns out that these were impairment charges. 

According to SEBI, the company should have disclosed the events that led to the impairment of assets, but the company made no such disclosures. Further, SEBI said that these should have been recorded in the profit and loss statements and not in the Other Comprehensive Income part.

Of these 868 crores, Rs 504 crores were current assets that were impaired. These current assets were the capitalised costs of developing products, which SEBI says the company should have expensed and not capitalised.

Why Did Brightcom’s Auditors Not Raise Concerns?

SEBI’s report said that the company’s deeds did not receive a qualifying statement from the auditors of the company. 

Usually, if auditors note that a company’s reporting is not in line with the actual required standards, they usually issue a qualified or adverse opinion. Between FY15 and FY17, P Murali & Co was Brightcom’s auditor, while between FY18 and FY20, PCN & Associates were the auditors. It appears that despite not conforming to the accounting standard rules, the auditors approved all of Brightcom’s financial statements without qualifications.

SEBI’s investigation also found relations between the two auditing firms, with three of PCN’s partners having worked with P Murali and Co earlier. Further, Aarthi Consultants Private Limited, which is the registrar and share transfer agent for Brightcom, is promoted by the wife of the partner of P Murali & Co. Further, the company shares the same address as other firms owned by the same partner. In addition, Brightcom had allotted 45 lakh shares in 2021 to a limited liability partnership named Palace Heights Avenues – a firm once again owned by the same partner.

Promoter Stake Has Continued Falling.

SEBI has said that the promoter stake in the company has fallen from 40.4 per cent in 2014 to 3.5 per cent in 2015. It believes that the company had used accounting irregularities to prop up stock prices, which allowed promoters to sell off their stake. 

The company has said that the fall in promoter stake is because the shares were pledged, and the financial institutions had sold off the stock to recover their money.

Apart from the issue highlighted by SEBI, several other issues were highlighted by investors and analysts in the past. 

For instance, in FY19, the company said it had defaulted on loans worth Rs 71 crores, despite its consolidated cash flow from operations amounting to Rs 509 crores for the year. Most of the cash generated by the company is outside India, but the company could certainly have made its subsidiaries pay dividends or give out a loan in order to be able to pay loans. 

There were similar occurrences in FY17 and FY18, where the company generated strong cash flows but still ended up defaulting on loans. Unfortunately, most of the people stuck in the stock are retail investors who were attracted to the stock by continual profit growth, bonus shares, and positive management commentary.