Is HERO a villain?

Summary

The recent developments surrounding Hero Motor Corp Ltd, a leading company in the automotive
industry, have raised significant concerns regarding the Board's responsibilities and actions. The
allegations of possible excess booking of expenses and potential diversion of money involving a third-
party vendor have prompted questions about the Board's duty to investigate independently and
protect the interests of shareholders. Additionally, the prolonged delay in the Income tax
investigation and the lack of initiative from the Board and auditors to conduct a comprehensive
forensic audit have further aggravated the situation.

Article

In March 2022, Income tax authorities raised concerns about the possible excess booking of
expenses amounting to Rs.800 crore in Hero Motor Corp Ltd. The audit report issued by the previous
auditor, M/s BSR & Co LLP, for the year ended March 2022 emphasized the uncertainty surrounding
the tax proceedings and their implications on the financial statements. The Board had expressed its
cooperation with the authorities in providing the necessary information.

Despite the change in auditors due to legal rotation requirements, the newly appointed auditor, M/s
Deloitte Haskins Sells LLP, continued the emphasis of matter on the Income tax investigations.
Surprisingly, within just three days of their appointment, Deloitte issued a report on the unaudited
results for the first quarter. While this speedy completion of a limited review may be impressive, it
raises questions about the thoroughness of the audit process.

For those who believe that such practices are commonplace in the industry, let's consider a
hypothetical scenario: If we assume that Deloitte began its audit work unofficially before its official
appointment, it is important to note that this hypothetical situation raises serious concerns about
confidentiality and insider information. If unauthorized access to financial data occurred prior to its
official release, it would be a clear violation of regulations and ethical standards. Insider trading and
unfair advantage would undermine the integrity of the financial markets. If this scenario were true,
it is unlikely that the stock's price action would have occurred after the result date.

Recently, a news item on June 16, 2023, indicated that the Department of Company Affairs (DCA) is
considering a probe into an alleged relationship between Hero Motor Corp Ltd and a third-party
vendor involving potential money diversion. The company claims to be unaware of the matter.
However, this development, combined with the previous Income tax investigation, demands
attention from the independent directors, audit committee, and auditors.

The Board of a listed company with a significant institutional shareholder base and institutional
holdings has a paramount fiduciary obligation. It is not merely a mouthpiece of the promoter but is
responsible for independently investigating serious allegations and ensuring transparency and
accountability.

While the Income tax investigation may eventually conclude with any outcome, which does not
absolve the Board from seeking the truth independently. The Board should have initiated a forensic
audit by a competent agency to assess the extent of the alleged problems. However, their failure to
take such action is striking and raises doubts about their commitment to fulfilling their fiduciary
duties.
The role of independent directors is crucial in situations like these, especially when the promoter
holds an executive position within the company. They have an opportunity to atleast show that they
act in the best interests of shareholders and conduct independent investigations when credible
doubts arise. In this case, the independent directors' and regulators failure to seek a comprehensive
forensic audit is a glaring omission.

Similarly, the auditors' responsibility goes beyond issuing reports with emphasis of matter. They
should actively engage in the investigation and ensure a thorough examination of the allegations.
Mere reliance on management's confirmation may not be sufficient, particularly in cases of
suspected diversion of funds and related party transactions.

The recent allegations and investigations surrounding Hero Motor Corp Ltd highlights the need for a
proactive and responsible Board of directors. The prolonged Income tax investigation, the lack of an
independent forensic audit, and the Board's failure to fulfil its fiduciary duties raise concerns about
corporate governance practices within the company. Independent directors, audit committees, and
auditors must take a more proactive approach to protect the interests of shareholders a nd ensure
transparency, accountability, and integrity within the organization.