Modern Denim Limited, a Rajasthan-based textile manufacturing company, has disclosed a significant audit qualification in its financial statements for the year ending March 31, 2024. The qualification centers on the company's failure to recognize interest on cumulative redeemable preference shares as per Ind AS 109 – Financial Instruments, marking a serious compliance deviation.

As per the company’s Statement on Impact of Audit Qualifications, the auditors from J.T. Shah & Co., Chartered Accountants, have raised concerns over non-recognition of ₹110.75 lakh in interest for FY24. This amount pertains to financial liabilities, primarily preference shares, for which interest should have been computed using the effective interest method. However, the company has not provided for this interest, citing ongoing corporate restructuring efforts.

Key Financial Figures Before and After Adjustment

The unrecorded interest leads to a notable variance in reported and adjusted figures. As per the audited disclosure:

• Total Expenditure was ₹3050.75 lakh before adjustment and ₹3161.50 lakh after adjusting for the qualification.

• Net Loss stood at ₹533.52 lakh unadjusted and worsened to ₹767.13 lakh post-adjustment.

• Total Comprehensive Loss increased from ₹535.39 lakh to ₹769.60 lakh.

• Earnings per Share (EPS) declined from ₹-1.42 to ₹-2.05.

The Total Liabilities figure post-adjustment surged to ₹15697.85 lakh, compared to ₹9727.72 lakh originally reported. The Net Worth became more negative, shifting from ₹-6071.20 lakh to ₹-12041.63 lakh.

Background to the Qualification

The audit qualification is not new. A similar issue was raised in the previous financial year, and the cumulative impact has reached alarming levels:

• The total unprovided interest on financial liabilities till March 31, 2024, is ₹3670.11 lakh, up from ₹3559.36 lakh last year.

• This includes ₹569.12 lakh in Dividend Distribution Tax (DDT).

The company’s justification for this continued non-recognition lies in its ongoing legal and financial restructuring process. Earlier, Modern Denim had approached the Board for Industrial and Financial Reconstruction (BIFR) for relief. However, after BIFR was dissolved, the company pursued a Scheme of Compromise, Arrangement and Amalgamation under Sections 230-232 of the Companies Act, 2013.

As of the audit report dated May 30, 2024, the approval for this scheme is still pending from the concerned regulatory bodies.

Management’s Explanation and Stance

The management of Modern Denim, led by Chairman & Managing Director Sachin Ranka, provided the following explanation:

“In view of accumulated losses and considering relief expected under restructuring schemes, the company has not provided for the interest liability. Recognition of the same will take place once approvals are in place.”

This position is supported by Audit Committee Chairman Rahul Singhvi and Chief Financial Officer C.S. Jain, who also signed off on the statement submitted to the stock exchanges.

Auditor’s Perspective

The auditors maintained that the non-compliance violates Ind AS 109, and if the interest had been recognized:

• Finance costs would have increased by ₹110.75 lakh for FY24.

• The debit balance in retained earnings under “Other Equity” would have worsened by the cumulative total of ₹3670.11 lakh.

Their conclusion emphasizes that the financial statements, as reported, understate both expenses and liabilities, thereby misrepresenting the true financial health of the company.

Implications for Shareholders and Stakeholders

This audit qualification could significantly influence the perception of Modern Denim's financial stability, especially for:

• Investors and lenders, who rely on audited figures to make funding and investment decisions.

• Shareholders, whose equity value is affected by the accumulated losses and worsening net worth.

• Regulators, especially SEBI and stock exchanges (NSE & BSE), who require accurate disclosure for market integrity.

Furthermore, the ongoing legal restructuring under the Companies Act has created uncertainty about timelines and outcomes, compounding the financial ambiguity.

Comparative Context and Industry Outlook

While the Indian textile sector has shown signs of recovery in FY24, companies like Modern Denim—particularly those burdened by legacy liabilities—continue to grapple with structural inefficiencies and historical debt. Audit qualifications of this nature often become recurring, particularly when there is dependency on uncertain legal outcomes.

It is noteworthy that Modern Denim’s revenues stood at ₹2517.23 lakh, but the losses—after adjustments—nearly matched one-third of the revenue, highlighting poor operational leverage or excess financial burden.

Conclusion

Modern Denim Limited's FY24 audit disclosure is a stark reminder of the long-term impact of unresolved financial liabilities. Despite active restructuring attempts under legal frameworks, the lack of recognition of over ₹3670 lakh in interest raises questions about transparency, governance, and compliance with Indian Accounting Standards.

While management maintains hope for relief under the pending scheme, stakeholders would do well to monitor regulatory outcomes and assess how these qualifications may influence future business continuity, credit ratings, and operational viability.

Until such time as approvals are received and interest is recognized transparently, the company will continue to be under regulatory and financial scrutiny.

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