Last week, we highlighted a piece in The Economist which highlighted that the ongoing economic crisis will bring to the fore a decade’s worth of accounting fraud (see We also highlighted one of our older blogs where we had laid out the link between liquidity crunches and accounting fraud – see
Given that accounting fraud is the single biggest risk facing investors in the Indian market (by our estimate, 80% of listed Indian companies fiddle their figures), we were intrigued by the coverage given by the Indian Express to alleged accounting irregularities at the now bankrupt travel firm Cox and Kings. As the Indian Express says, “Cox and Kings was sent to bankruptcy court in October 2019, after it defaulted on payments. While the promoter group owns 12.20 per cent shares in the company, the public owns the remaining 87.80 per cent. The travel and tour company owes Rs 5,500 crore to banks and financial institutions.”
So how did the Indian Express build such a detailed picture of the alleged fraud that was perpetrated? “Records of the audit, done in February 2020 by PricewaterhouseCoopers (PWC) at the behest of lender Yes Bank, and official records accessed by The Indian Express detail how the company allegedly fudged records and window-dressed its figures.”
The Cox & Kings episode has expanded our knowledge of accounting shenanigans in three different ways:
  1. Do you trust the CFO? We tend to focus overly on the Promoter and his role in perpetrating accounting fraud. That could be a mistake. Quoting the Indian Express: “The investigation has found that Cox and Kings gave Rs 1,100 crore to Alok Industries, a stressed firm that went bankrupt in 2017, even as the travel firm did not have any business relationship with the company. Significantly, when the loan was given, the Chief Financial Officer of Alok Industries was Sunil Khandelwal, who is also brother of Cox & Kings CFO Anil Khandelwal.”
  2. Do you believe the ‘related party’ disclosures in the annual report? We tend to take at face value the related party disclosures given in an annual report. That too could be a mistake. Quoting the Indian Express: “Apart from this, in financial year 2019 alone, Cox & Kings loaned Rs 589 crore to at least 11 related parties “without executing loan agreements”. “Prima facie it appears that these loans have been granted to related parties without obtaining the requisite approvals/documentation, which raises a suspicion that these transactions have been done with the intent of siphoning off funds,” said the investigation report.”
  3. Do you understand how the circular flow of funds can be used to create a false & misleading picture of a listed company’s credit worthiness and its access to debt finance? We know about circular trading in the stockmarket. Its cousin brother in the debt market is a circular flow of loans which deludes investors into having greater faith in the balance sheet than they should. Quoting the Indian Express: “…a firm promoted by Cox and Kings, Ezeego One Travel and Tours Ltd, allegedly “siphoned” Rs 150 crore it borrowed from Yes Bank and invested it in Redkite Capital. This was done in two tranches between January 2018 and March 2019 through non-convertible debentures (NCDs).
Redkite Capital, set up in 2010, is owned by four firms controlled by Anil Khandelwal, Chief Financial Officer (CFO) of Cox and Kings; his father, Om Prakash Khandelwal; Naresh Jain, the internal auditor of Cox and Kings; and the Jain and Khandelwal family.
Redkite, records show, used the Rs 150 crore raised from Ezeego to acquire a controlling stake of 32.81 per cent in a government-promoted financial institution, Tourism Finance Corporation of India (TFCI), between February and March 2019 after the approval from the Reserve Bank of India (RBI)….Probe records show that Ezeego did not disclose its first investment of Rs 80 crore in Redkite Capital in January 2018, in its audited balance sheets of that financial year.
Significantly, the second tranche of investment of Rs 70 crore was done by Ezeego on March 30, 2019, after it had defaulted on its loan payment obligation to Yes Bank. The bank that has an exposure of Rs 945 crore to Ezeego reported the company account as fraud to the RBI in February 2020.
TFCI, a listed non-banking financial company (NBFC), was set up in 1988 by IFCI Ltd as an All India Financial Institution for funding tourism projects…Apart from Redkite Capital, the other shareholders of TFCI include IFCI (0.67%), LIC (3.73%), Oriental Insurance Co Ltd (1.07%), Tamaka Capital (Mauritius) Ltd (3%) and Koppara Sajeeve Thomas (5%). General public holds around 30.74 per cent of TFCI.
Significantly, TFCI is also one of the lenders of Cox and Kings.The bankrupt travel firm owes about Rs 100 crore to TFCI, according to data obtained from the Registrar of Companies (RoC).
This loan was given to Cox and Kings before Redkite Capital became the majority shareholder of TFCI. Records show that Redkite, immediately after acquiring the majority stake in TFCI, pledged shares of TFCI (as collateral) to raise Rs 85 crore from lenders.”

The underlining above is ours as we seek to understand what looks like a triangular flow of funds i.e. Ezeego (a firm promoted by Cox & Kings) to Redkite to TFCI to Cox and Kings. Understanding these triangular flows should become a staple of financial analysis in India.
All of that being said, the Cox & Kings story does have many familiar elements which are standard in accounting blowups in India eg. revenues from customers who seem to have vanished into thin air and cash in bank accounts which cannot be found. (Remember Satyam every time you feel good about seeing a company post solid revenue growth and show healthy cash in bank.)
What accounting blow-ups in India are highlighting is that however clever we might be with our forensic toolkit, ultimately if a determined promoter and a skilful CFO join hands, they can make a fool out of all of us. That sobering thought should keep us from feeling smug about our investment returns.

If you want to read our other published material, please visit

Note: the above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India as a provider of Portfolio Management Services. Marcellus Investment Managers is also regulated in the United States as an Investment Advisor.

Copyright © 2022 Marcellus Investment Managers Pvt Ltd, All rights reserved.

2024 © | All rights reserved.

Privacy Policy | Terms and Conditions