Arabian Business - NMC Health scandal: so who knew what and when?

The Middle East isn’t exactly renowned for its corporate governance, which is why when NMC Health was accused of fraudulent asset values and theft of company assets in December, investors were all too eager to drop the I-told-you-sos.

NMC had always been the low-hanging fruit for short-sellers, one UAE investor told us on condition of anonymity, meaning it came as no surprise when Carson Block, founder of Muddy Waters, published a 34-page report citing concerns over financial discrepancies in NMC and disclosing a short position in the company founded by Indian billionaire BR Shetty. Fast forward to March and NMC Health has had its shares suspended from trading on the London Stock Exchange after they dropped more than 60 per cent, leading the UK Financial Conduct Authority (FCA) to open a formal enforcement investigation into the company.

On March 12, NMC announced its debt levels have risen to nearly $5 billion, with over $2.7 billion in facilities that had previously not been disclosed to or approved by the board. How the company’s auditors Ernst & Young failed to flag the discrepancy is a mystery.

But more baffling is how the FCA had miraculously missed all the warning signs and then taken months to open an investigation.

It wasn’t too difficult for Block to write his 34-page report. He told us in January that the information was all available online to anyone who bothered to look.

So did the FCA just not bother to look? And more importantly, if the regulator is investing NMC, who is regulating and investing the regulators? Because if we’re going to hold the Middle East accountable for its so-called incompetent corporate governance practices, we should also hold the United Kingdom’s financial watchdog responsible for its actions – or in this case, lack thereof.  Two weeks ago sources familiar with the matter told us off the record that accountants had warned the FCA about financial discrepancies at NMC Health before it listed in 2012. The FCA did not respond to requests for comment.

Vijay Valecha, Chief Investment Officer at Dubai-based Century Financial told us the FCA “may need to revisit the listing rules as the NMC scandal clearly raises a question whether they are providing sufficient protection to the investors when it comes to overseas companies becoming listed in the UK. “Serious Fraud Office may step in to find reasons for getting engaged in the worst-case scenario, where the company has been overstating its assets or understating its debts,” he told us.

Room for abuse?

Muddy Waters’ own Carson Block told us in January there is more room for abuse in Middle East companies that are listed abroad compared to listed companies in developed markets.

“If you take companies in emerging markets that are listed in developed markets, there is a tremendous opportunity for abuse… whether it’s China or the emirates,” he said.

“The issue is that, in a developed market, it’s going to be much harder to find counterparties to assist you in your fraud and engage in a series of sham transactions with you and invoices that aren’t going to be paid. If you find somebody in the UK who is willing to do that, that person is running a risk of real prison time in the UK, but if you’re in an emerging market, you’ll say look we’re not ripping off anyone you care about, we’re listed overseas, we want to inflate our CapEx [capital expenditures] here.

“That is the fundamental problem. We’ve taken these listing standards and audit playbooks that were written for developed market companies that don’t exist in that environment and we’ve made some changes but these are only slight adaptations to these playbooks, leaving the door wide open for companies that are committing serious abuses to be listed,” he said.

Here’s looking at you, UAE Exchange

All eyes are now on UAE Exchange, a subsidiary of Finablr, the London-listed financial services holding company owned by NMC’s BR Shetty. Sources told us off the record they had speculated that Shetty was “propping up NMC financially with cash in UAE Exchange. If that’s what’s going on, it’d be a massive, massive problem,” they said. UAE Exchange did not respond to requests for comment.

The speculations came just two days after it confirmed it was experiencing delays in money transfers, particularly in the UK, blaming them on an alleged cyber-attack.

Source: Arabian Business