EROS: Prem’s Dilemma

On May 28, 2015, EROS International Plc. [NYSE Trading Symbol: EROS, $18.16] abruptly announced that Andrew Heffernan, its Chief Financial Officer, was “taking a leave of absence.”  The length of his leave was undisclosed.  In the same announcement, EROS announced the appointment of Prem Parameswaran, a well-known investment banker, as its new CFO.

On August 7, 2015, Prem faced his first challenge. The SEC served notice on him that EROS had failed to have Heffernan and Deshpande file their personal certifications, failing to attest that EROS’s Annual Reports filed with the SEC on Form 20-F for 2014 and 2015 “did not contain any untrue statement of a material fact or omit to state a material fact.

Andrew Heffernan had served as an external auditor with Grant Thornton UK from 2001-2006.  Heffernan started working at EROS in 2006. Grant Thornton UK served as EROS’s auditor from 2011-2012. Thus, he was involved in EROS’s IPO on the London Stock Exchange in 2006, the IPO of its Indian subsidiary National Stock Exchange of India in 2010, and the US IPO in 2013.  He was responsible for the production of 2014 and 2015 annual reports that he failed to certify. His reasons for not signing remain unknown to the investor public due to his conveniently timed exit.

There is reason to suspect that Heffernan could have concerns about making a personal certification.  Heffernan’s departure may have been convenient. Not only was he previously employed by EROS’s former auditor, but according to an article published by Spotlight Research, he has been reported as having been involved in Rana Productions, an entity that conducted business with EROS and a number of UK Companies with ties to EROS.  In Prem, EROS found an individual with plausible deniability willing to provide the required certification.

Not surprisingly, the SEC instructed Prem to amend the filings, in order to comply with Sarbanes-Oakley Act of 2002. The SEC asks:

“In responding to our comments, please provide a written statement from the company acknowledging that:

  1. the company is responsible for the adequacy and accuracy of the disclosure in the filing;
  2. staff comments or changes to disclosure in response to staff comments do not foreclose the Commission from taking any action with respect to the filing; and
  3. the company may not assert staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States.”

Prem had only been CFO for 2 months and 11 days. Nonetheless, Prem responded with a letter to the SEC and filed two amended Form 20-F’s containing both his and Deshpande’s certifications. Either Prem was the wunderkind CFO he was touted to be or he was the rubber stamp that EROS needed after Heffernan’s failure. Again, Prem had been on the job for just 71 days when he signed his two certifications.   Did he truly conduct the necessary due diligence?  Is it prudent for investors to rely on Prem’s certifications covering a mostly intangible asset base totaling $1.1 billion? Do investors know enough about Prem’s process to make a judgment that his certifications are meaningful?  And because Prem’s made such sudden certifications in 2015, is he suddenly going to refuse to sign the 2016 certifications?

Using a straightforward comparison between industry information and EROS’s financial statements, Spotlight Research and published articles questioning the validity of Eros’s reported financial results and its management’s integrity. To this date EROS leaves 10 issues unexplained:

  1. Its undisclosed “Divided Responsibility Audit
  2. Its changed description in its internal review
  3. Its 1,550% sales increase in the United Arab Emirates while revenues in India decreased 3.6% and revenues for all customer locations excluding the UAE decreased 9.9%.
  4. Andrew Heffernan’s role in EROS’s “special purpose entities” and related party transactions
  5. Its EROSNow paid subscribers controversy
  6. Its disproportionately large “Film Content” and “Accounts Receivables” balances versus the syndication market for Indian films
  7. Its failure to file Andrew Heffernan’s required Compliance Certification
  8. Prem’s willingness to file an ill-informed Compliance Certification to the SEC
  9. Its market position versus competitors such as SONY Corporation [NYSE Trading Symbol: SNE, $30.20], VIACOM Inc. [NASDAQ Trading Symbol: VIAB, $44.84], STAR TV India, a subsidiary of Twenty-First Century Fox, Inc. [NASDAQ Trading Symbol: FOX, $28.72], and Zee Entertainment Enterprises Limited [NSE Trading Symbol: ZEEL, INR 462.45]
  10. The Company’s January 7, 2017 maturity date to repay $125 million in bank debt has repeatedly contacted Grant Thornton International, Grant Thornton India, EROS’s  investor relations executives, and their public relations agents and EROS’s legal counsel, Kasowitz, Benson, Torres & Friedman. They have refused to comment on any of these pressing issues. If Prem has the answers to EROS’s puzzling financial disclosures, he has kept them to himself.

Given the slew of questions about EROS’s financial disclosures, investors would be wise not to count on Prem’s certification one way or the other.