IPO-bound Bharat FIH facing headwinds

Hidden violations

- Apple placed the Sriperumbudar factory of Foxconn on probation after it found worker dormitories and dining rooms did not meet the required standards

- 2,500 women staff were tested for food poisoning and more than 150 were hospitalized

- It was raided by the anti-smuggling agency- Directorate of Revenue Intelligence on December 22, the very day it filed its DRHP

- Investigations have unearthed unaccounted income and massive indulgence in tax evasion

- Xiaomi and Oppo paid over Rs 5,500 crores as royalty to their group cos overseas and did not comply with disclosures in India

Mumbai: Bharat FIH's DRHP makes an interesting read. The company has filed its offer document to raise Rs5,000 crore from the Indian markets through an offer for sale (OFS) and a fresh issue. Bharat FIH is the now new Indianised name of Foxconn India (the subsidiary of Foxconn - The global manufacturer for Apple iPhones among others) to take benefit of the Atmanirbhar Bharat Abhiyaan, which provides a revenue subsidy - PLI (Performance Linked Incentive) of 4-6 per cent by the Government of India.

The Taiwanese manufacturer is facing challenges in India unlike in China where local governments generally side with the management over labour issues. But that is unlikely to happen in India. Bharat FIH has three campuses in the States of Andhra Pradesh and Tamil Nadu.

Apple placed the Sriperumbudar factory of Foxconn on probation after it found worker dormitories and dining rooms did not meet the required standards. The facility employs 17,000 women.

This action follows protests after more than 2,500 women who work at the plant and live in one of the dormitories were tested for food poisoning and more than 150 were hospitalized. The plant was closed on December 18. This does not find any mention in the DRHP filed by Bharat FIH on December 22.

What was the hurry to push through the filing of the document when such a large material fact which impacts the company is not disclosed? The factory was to restart its operations from January 12, 2022, with 500 of the 17,000 workers. Over 2,000 women had taken their protests to the streets over miserable living conditions, food safety, and inadequate drinking water, lack of facilities, unhealthy environment and human right violations. The women workers even courted arrest.

Bharat FIH's single largest customer in India is the Chinese mobile brand Xiaomi, which is a leader in the Indian smart phone market. Bharat FIH was raided by the anti-smuggling agency- Directorate of Revenue Intelligence (DRI) on December 22, 2021, the very day it filed its DRHP.

The raids were based on 'actionable intelligence inputs' and 'several violations' by Chinese firms. Investigations have unearthed unaccounted income and massive indulgence in tax evasion by Chinese companies like Xiaomi and Oppo.

The Income-Tax (I-T) department claimed that Xiaomi and Oppo have violated tax laws and can be fined over Rs1,000 crore. They found several documents revealing violation of the Income Tax Act. Both the companies have paid over Rs5,500 crores as royalty to their group companies overseas and did not comply with disclosures in India.

Bharat FIH also has over Rs403 crores of taxation matters under litigation as mentioned on Page 36 of their DRHP. These have been shown as contingent liabilities and may adversely impact their cash flows if they materialize. This does not include the recent action by the Department of Revenue Intelligence.

The DRHP on Page 41 also lists out a series of non-compliances by the company under FEMA as well as the Companies Act 2013. With a compliance record such as mentioned in the DRHP, prospective investors have raised concerns over corporate governance and the management of the company.

Besides, Bharat FIH will be a 'foreign owned and controlled' company in accordance with the FDI policy and FEMA rules and if political tensions between India and China intensify, it may adversely impact its business.

Talking to Bizz Buzz, IPO market observer Mumbai-based BN Kumar says: "Bharat FIH Limited, a subsidiary of FIH Mobile, a Hong Kong Stock Exchange listed company, and part of the Foxconn Technology Group, appears to be heavily dependent on business with China as derives most of its revenue from Chinese mobile maker Xiaomi".

The offer document says "We provide manufacturing and assembly services for Xiaomi's mobile phones in India, and in financial years 2019, 2020 and 2021 and the six months ended September 30, Xiaomi accounted for revenues of Rs300,946.54 million, Rs 235,014.92 million, Rs 149,086.77 million and Rs 97,530.63 million, representing 87.81 per cent, 89.05 per cent, 94.24 per cent and 96.13 per cent of our revenue from operations for these periods."

Stating that in view of this admitted fact, investors need to exercise caution, Kumar highlights that the Draft Red Herring Prospectus itself goes on to say: "Among the components and inputs sourced internationally, an average of 95 per cent of our components and inputs were imported from China in Financial Year 2021 and the six months ended September 30."

This is a big issue of concern since the world is looking for business alternatives to China and India can't afford remain aloof. Added to this is the anti-China sentiment sweeping across India in the wake of the recent border disputes in Ladakh, Northeast and Sikkim, Kumar says and that the investors should think twice before putting their hard-earned money in such companies.

DRI investigation on

The company's Chief Financial Officer, Company Secretary and Compliance Officer on behalf of company, received summons from the Senior Intelligence Officer, Directorate of Revenue Intelligence, Zonal Unit, New Delhi, on August 22, 2019, September 18, 2019, July 18, 2020 and August 16, 2020 in relation to the alleged non-inclusion of amount of royalty and licence fee paid by one of our customers into the assessable value of goods imported by our company, as required under the Indian Customs Act, 1962.

"Officials of our company had appeared before the Senior Intelligence Officer and submitted the documents which were listed in the summons dated 22 August 2019 and 18 September 2019. Further, our officials had requested exemption from personal appearance in lieu of the summons dated 18 July 2020 and 16 August 2020 owing to the Covid-19 pandemic. The company has received no further communication from the Senior Intelligence Officer. The recent raids do not figure in the offer document," says the company.