The auditor to the troubled engineering firm McNally Bharat Engineering Co Ltd has heavily qualified the fourth quarter and full-year results prepared by the company, noting that the financial statement “does not give a true or fair view” and casting “significant doubt” about McNally’s ability to continue as a going concern.

Chartered accountants V. Singhi & Associates said the basis for the adverse opinion is that McNally did not recognise interest expense for the quarter and the year.

The company has not recognised interest expense on bank borrowings and inter corporate borrowings amounting to Rs 290.44 crore (including Rs 74.66 crore for the quarter) and Rs 10.59 crore (including Rs 8.92 crore for the quarter), respectively, for the year ended March 31, 2020.

Moreover, it had not recognised Rs 92.16 crore interest on inter corporate borrowings in the last fiscal too.

“As a result, finance cost, liability on account of interest and total comprehensive loss for 2019-20 are understated to that extent,” the independent auditor wrote.

McNally Bharat, a part of Williamson & Magor Group, reported full-year revenues of Rs 564.67 crore versus Rs 1,515.85 crore in the previous year. Total loss was shown as Rs 380.88 crore versus a loss of Rs 466 crore in the previous year.

The company management defended the statement citing an RBI guideline. The lenders have stopped debiting interest on their outstanding debt according to prudential norms on income recognition issued by the RBI.

Accordingly, the company did not recognise the interest on bank borrowings and inter corporate borrowings, a note to the financial statement said.

An official of the company clarified that a comprehensive debt restructuring proposal is pending with the banks. “Our proposal is to convert the interest payable into a long term non interest bearing instrument according to the restructuring plan. Hence, we have not taken an interest charge for the quarter and the year,” the official said.

However, as no confirmation has been received by the company on its proposal, auditors qualified the statement, he said.

Investor interest

The official said an investor had submitted a binding term sheet to the lenders for debt restructuring but the process has been impacted by the pandemic. The company also disclosed in the result that, “in the meanwhile, with the Covid-19 lockdown in the country, progress of the funding of the investor has been impacted”.

Ban on international flight has prevented the overseas investor to fly down to India and carry out necessary due diligence, sources said.

McNally has an outstanding debt of around Rs 3,000 crore only to the banks, led by Bank of India. It includes Rs 1,750 crore of fund-based debt which has turned into a non performing asset. Moreover, it has borrowed close to Rs 1,000 crore from group firms.

The auditor noted that the ability of McNally to continue as a going concern is solely dependent on bankers accepting the debt recast proposal of the company.

The debt trap of McNally had been a serious drag on the two other manufacturing companies of the WM Group, McLeod Russel and Eveready Industries. Promoter Khaitan family borrowed heavily by pledging their shares in bulk tea producer McLeod and battery maker Eveready to cover losses in McNally.

The two other firms also lent from their balance sheets to the engineering firm. The cumulative effect of all has dragged down the entire group.

A successful resolution to McNally can bring relief to the entire group.