CASESTUDY - 4 Welcome Industries Limited (WIL) is a two decade old company engaged in various businesses like Yarn manufacturing, petrochemicals,…

CASESTUDY - 4 Welcome Industries Limited (WIL) is a two decade old company engaged in various businesses like Yarn manufacturing, petrochemicals, telecommunications and general insurance. Company is headed by Ms. Singhania. She is respected in the business world as sharp business women and is a firm believer in core business fundamentals and strong ethical values. WIL has its headquarters in Mumbai. Melody Inc. (a U.S. based company) which runs retail chain stores worldwide is trying to setup its operations and enter in Indian market since last two years but could not frame proper entry policy. Its investments outside the U.S. have seen mixed results. Its operations and subsidiaries in Canada, the United Kingdom, Central America, South America and China are successful. Considering WIL's pan India offices and operations, Melody Inc. decided to start a partially owned subsidiary company with WIL. Accordingly, a new company, Welcome Melody Private Limited (WMPL) is formed by Melody Inc. as its largest shareholder holding 75% of the paid up share capital. WMPL will have its head office and registered office in Mumbai (Maharashtra). WMPL will be operating retail chain stores throughout India in the times to come. To start with, first store will be opened in Mumbai. All the arrangements are being made to ensure that first visit of the customer in its first store should be a memorable one. Operations team suggested that billing counter (POS) should be technology driven and accordingly, new software has been purchased with the following details: The cost for the software was - 15,00,000 out of which - 10,00,000 to be paid immediately and balance - 5,00,000 in one-year time. The other related expenditure incurred was : Legal fees :72,000Consultancy fees for implementation :1,50,000 Cost of capital of the company is 10%. The launch of the first store was successful and encouraging for the management. WMPL became a one-stop supermarket chain that offered its customers a wide range of basic home and personal products under one roof. Each WMPL store stocks of home utility products including food, toiletries, beauty products, garments, kitchenware, bed and bath linen, home appliances and more - available at competitive prices that its customers appreciate. With its mission to be the lowest priced retailer in the regions it operates, WMPL business continues to grow with new locations planned in more cities. As per plans, three new stores were opened in Nasik, Nagpur and Aurangabad. It was decided that WMPL will buy all the immovable properties and no rent expenditure will be incurred. Capital outlay of opening new stores was in Crores, so WMPL borrowed funds from its holding company Melody Inc. The details of the funds borrowed are as follows: Amount Borrowed :35 Crore at Rate of Interest : 8% p.a. MPL opened 25 stores throughout India and earned net profit (before tax) 6 Crore for F.Y. 2023-24. The EBITDA for the same period was 9 Crore and Interest paid to Melody Inc. was - 2.80 Crore. For the same period Profit after tax was - 4.50 Crore (Tax Rate 25%). WMPL has decided to open a new store in Pune in April 2024. Land was purchased and establishment work was completed. Separate GST registration for Pune was taken in April 2024 and stock purchase for new store has also been done. The following further details were available on the date of registration :- Entire Business Pune Value of Fixed Assets 400 22 Value of Current Assets 500 50 Value of Assets on which GST ITC has been taken (out of fixed assets and current assets reported above) 160 40 Unutilised GST 25 2 As per management projections, the new store at Pune will achieve good sales and accordingly it was decided to transfer some part of GST credit outstanding in electronic credit ledger of Mumbai to electronic credit ledger of separate Pune registration. Accounts department has drafted a letter stating that credit of 2.50 Crore (on the basis of ratio of current assets) can be transferred to Pune registration. Total current asset of WMPL as at 31.03.2023 were 500 Crore which included inventories amounting to 300 Crore. The carrying amount of inventories is after considering allowances for inventory shrinkages of 14.50 Crore. These inventories are held at the stores and distribution centres of the Company. Allowance for inventory shrinkage was an audit focus area since inventory counts were carried out at periodical intervals during the year and further judgmental factors are involved in identifying the amount of provision for shrinkages. Audit team of the company addressed the issue by obtaining an understanding, evaluating the design and testing the operating effectiveness of controls that the company has in relation to allowance for inventory shrinkage. In order to improve its profitability, WMPL is looking to buy securities of XYZ Limited which is near bankruptcy. When the proposal came up for discussion in the meeting of board of directors, they unanimously decided to seek professional consultancy on investment in such securities. The appointed consultant did agree that such transactions can be profitable provided the strategy of investment followed involves the proper allocation of amount to be invested between debt and equity securities. 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