Audit alarm rings for Oppo, Realme as Indian units struggle with missing records, negative net worth

Auditors of the India units of Chinese smartphone manufacturers Oppo and Realme have flagged multiple concerns regarding their bookkeeping, processes, and incomplete records, according to Registrar of Companies (RoC) filings earlier this month.
Analysts said auditor reports and observations have significant implications for stakeholders, including investors, creditors, and regulators. This comes at a time when the Chinese brands have been under intense regulatory scrutiny in India for the past four-five years, with the government alleging several irregularities such as customs duty and income tax evasion as well as money laundering.

Turned a Profit in FY24

Investigations and court cases are ongoing. Oppo Mobiles India and Realme Mobile Telecommunications India, wholly owned by their Chinese parents through entities based in Hong Kong, didn’t respond to queries.
The auditor of the Oppo unit, India’s third-largest smartphone brand, said in the RoC report that the company incurred substantial accumulated business losses in earlier years, resulting in negative net worth. It said the debt-equity ratio is adverse, raising significant concerns about financial stability and the ability to meet obligations. Oppo India’s net worth is a negative ₹3,551 crore as of FY24, according to the filing.

“The company is involved in material litigations and is subject to ongoing regulatory inquiries, outcomes of which are uncertain and could have a material impact on its financial position and operations,” the auditor said in the filing. “These events and conditions indicate the existence of material uncertainties that may cast significant doubt on the company’s ability to continue as a going concern.”
Oppo India’s non-current borrowings stood at ₹2,082 crore in FY24, including external commercial borrowings from its parent of ₹1,668 crore and working capital loans from HSBC Bank of ₹414 crore, according to the RoC data. Current borrowings were at ₹2,085 crore.

Despite the negative net worth, equity funding from the parent may be a challenge for Oppo since it will require Press Note 3 clearance from the government, a long-drawn process that may not succeed. This refers to the rule that foreign direct investment (FDI) from countries sharing a land border with India will need government approval, which came into play amid a rise in tensions with China in 2020.However, Oppo India said in the filing that the company was profitable in FY24 and assured it will be able to generate sufficient profits and cash flows to operate as a going concern. It said the management is confident about bridging any “cashflow mismatches” through working capital management and short-term funds from banks or its parent.
The company paid ₹1,336 crore in FY24 as customs duty under protest over the disputed classification of goods and valuation issues, all of which is under litigation.

In the case of the Realme unit, India’s fifth-largest mobile phone brand, the auditor flagged lapses in procedures and record maintenance. The auditor was also not sure about the accuracy of accounts under certain heads and the completeness of the company’s FY24 profit and loss accounts.