Ricoh: A Fraud's Story.

     Yes, you’re right. The title does seem similar to that of one of Richard Gere’s finer movies, Hachiko: A Dog’s Story (or the subsequently abbreviated Hachi: A Dog’s Tale). The similarities, however, between the Akita and the Japanese giant, Ricoh end there. For, while Hachiko was loyal to his master until his last dying breath, Ricoh’s Indian subsidiary didn’t exactly share that trait. In fact, as the past few years have evidenced, Ricoh India has lost no occasion to rip off its shareholders and leave them high and dry.

     When it comes to high standards of corporate governance and good management practices, Japanese companies have always been placed on a pedestal and managed to live up to their high standards. All that, however, has changed over the course of the past decade. Be it Toshiba’s overstated profits, Olympus’ fishy acquisitions to brush its investment losses under the carpet, Mitsubishi’s fuel economy scandal or even Takata’s widespread recalls following its faulty airbags, Japan Inc.’s name has been ruthlessly dragged through the mud. Ricoh India, on its part, did little to change that and only succeeded in sullying its reputation further.

     While Ricoh is a global giant in the office equipment and IT solutions spaces with sales exceeding $19 billion, its Indian presence is relatively small with sales of a little over $200 million. Ricoh India, promoted by the Japanese parent and the NRG Group, its subsidiary, has had a long listed presence in India but its scrip did next to nothing until 2012. Unfortunately, it was only when it chose to rear its ugly head, did it find itself at the centre of multiple controversies, which culminated in a massive financial and accounting scandal.

     In 2012, the delisting wave swept the Indian market and several MNCs chose to increase their holdings in their Indian subsidiaries to 100% and delist them, in lieu of reducing their shareholding to the 75% limit. Ricoh, which held around 74% in its Indian subsidiary, tried to do the same, not once but twice. In its first attempt, the company offered a floor price of Rs. 54, while the discovered price was Rs. 130 per share. It failed to garner enough bids to enable a successful delisting. In 2014, Ricoh attempted to delist its Indian subsidiary again by offering a floor price of Rs. 120 but the discovered price per share turned out to be Rs. 225. This time around, Ricoh itself rejected the discovered price, terming it to be excessive. While both its delisting attempts had succeeded in failing spectacularly, Ricoh India’s scrip tanked following the debacles. Yet, Ricoh India’s story had taken an interesting turn.

     Ever since fiscal 2011, Ricoh India’s once – stagnant revenues and profits had begun a steep climb and were growing at a healthy clip, leading up to its second delisting offer in 2014. The company’s topline had more than quintupled from Rs. 300 crores to nearly Rs. 1700 crores, while its profits had doubled to a level of Rs. 34 crores. While Ricoh India was debt – free in 2011, its debt had reached an alarming level of over Rs. 800 crores by the end of FY15. Strangely, while its delisting offer, had the company gone through with it, would have cost its parent around Rs. 240 crores, Ricoh subsequently pumped in close to Rs. 460 crores of debt into its Indian subsidiary, a mere few months after its delisting debacle.

    If that wasn’t a blatant red flag, Ricoh India claimed that its revenues were set for explosive growth growing forward. Ricoh India seemed bent on generating a lot of hype and the markets bought it – hook, line and sinker. Even though its stock price had collapsed following its failed delisting, it soon began an unstoppable rally and nearly multiplied eight – fold in a little over 12 months. However, in the second quarter of FY16, Ricoh India’s ball of yarn began to unravel. 

    The company announced a delay in filing its results and subsequently changed its auditors. Its new auditors, however, refused to sign off on its accounts, citing irregularities and multiple questionable transactions. After delaying its following quarters’ results as well, Ricoh India announced that accounting and financial irregularities at the company had caused it a loss of over Rs. 1100 crores, essentially wiping out its net worth. And that was when all hell broke loose.

     Ricoh India’s scrip, which had already begun its descent, following the delays in filing quarterly numbers, was soon locked in lower circuit and tanked by 5% on a daily basis. The company’s chairman and CEO both resigned, along with most of the top brass of the company. After its scrip had crashed by over 75%, SEBI did step in and suspend its trading on the exchange but it was almost akin to shutting the stable door after the horse had already bolted. 

    Ricoh India turned out to be a case of boosted revenues and shrunken expenses, related party transactions, product pricing mismatches, backdated transactions and even ghost customers, all concocted to boost an exuberant stock price and cash out at the top of the market. Retrospectively, looking back at its financials, Ricoh India would never have been capable of growing at over 50% annually when its peers were growing at only 15% and for a company that essentially happens to be a trading and import operation, its debt never ought to have run wild. After all, if its losses were to the tune of over Rs. 1100 crores, its financials filed for all those years leading up to the crisis were indeed questionable.

     In a classic case of too little and too late, Ricoh’s Japanese parent finally awoke to the happenings at its Indian arm and claimed that it had been blindsided by the financial fraud. In June 2016, it announced that it would recapitalize its Indian subsidiary to the extent of the losses without placing any liability on its minority shareholders or altering the current shareholding pattern. Ricoh also declared its unwavering faith in the Indian market and its continued focus on doing business as usual. Its scrip has been rising, following the recapitalization announcement but the markets surely aren’t going to attach the same premium to the company that it once commanded. Despite its attempts to euphemize the scandal, Ricoh India has turned out to be a financial and accounting fraud of a massive scale, probably the largest ever since Satyam hit Dalal Street. 

     With the recent spate of corporate scandals emanating from the Land of The Rising Sun, Japanese companies erring on the wrong side of corporate law have turned out to be the norm rather than the exception. And while Hachiko, which refers to good luck in Japanese, came into Professor Wilson’s life like a breath of fresh air, Ricoh India turned out to be nothing short of a nightmare for the shareholders who burnt their fingers with its scrip. 

     Incidentally, Ricoh’s values promise a commitment to the highest standards of ethics and integrity and its guiding principle is ‘Love your neighbour, Love your country, Love your work’, as stated by its founder, Kiyoshi Ichimura. The curious case of Ricoh India has only gone on to demonstrate that while its stated commitment is indeed questionable, ‘Love your shareholder’ is apparently not a part of what the Japanese ‘kabushiki kaisha’ stands for.