Long after the last of the IPL matches has been played, K Suryakanth Shenoy, a Chennai-based chartered accountant, has his head still buzzing with numbers. Not of wickets taken or runs scored, but of revenues and profits.

For instance, after studying the cash flow pattern of franchisees, he notes that IPL is not a case of positive cash flows during at least IPL-1 and IPL-2. “The aggregate cash brought in for subscription towards share capital by promoter of IPL franchisees (per audited annual report FY March 2009) is Rs 723 million, sums infused as share application money pending allotment Rs 516 million, sums borrowed for infusion (by promoters or their holding companies) as loan funds Rs 281 million.”

In aggregate, adds Shenoy, funds either committed by promoters or guaranteed by promoters for infusion into IPL stand at Rs 1520 million, in sharp contrast to the public perception of free flow of funds into the IPL stream.

Franchisees had to make up the deficit either by additional revenue (limited) or fund infusion to cover the cash flow deficit, he reasons, during a recent interaction with Business Line. “Barring one team all others had to resort to either borrowing or equity infusion to make up the deficit in cash flows.”

Excerpts from the interview.

Are there widely divergent accounting practices among IPL teams, owing to interpretation difficulties posed by standards? Any global norms that may be relevant for the purposes?

Yes, materially significant variance in accounting practice can be observed in critical items of cost, revenue, fixed assets accounting and reporting. For instance, on amortisation of aggregate franchisee fee (IP rights), the period of write off by RCB is 50 years, DC 25 years while all other franchisees have rationally adopted 10 years.

As a corollary CSK, DC, KXIP, RCB, and RR amortised the same as intangible rights; while DD, MI and KKR directly charged the same to operating cost as franchisee fee. Correspondingly, the sums due to BCCI have been reflected as ‘unsecured loans’ by RR, long-term liability by DC, current liability by RCB and KXIP, and none by DD, MI, and KKR. This explains the inconsistency in accounting practices rendering analysis or comparison difficult.

As all franchisees barring CSK are unlisted, closely-held private entities, global accounting and reporting norms such as GAAP, IFRS, and IAS are not applicable. Uniformity and consistency in accounting practices is a prerequisite for interpretation, analysis, and fair valuation of IPL teams. Thus, considering EBIT, PBT, PAT, and EPS (without factoring appropriate adjustments to reported financials) will lead to grossly incorrect interpretation of figures.

What are the taxation issues that come to the fore, in the wake of the IPL controversy? And how do we resolve them?

First, instances of alleged shareholding through tax havens are a subject for regulatory review and debate. But the allegation of tax evasion may be based on hearsay and mere speculation, considering that the tax authorities have maintained and continue to maintain a hawk’s eye on the revenues of IPL franchisees. It has been the single largest revenue grosser for the Department in a short span of three years.

Two, even to a layman, a cursory analysis and study of the revenue and expenditure model of IPL franchisee would suggest that any materially significant tax evasion is simply next to impossible except with the collusion of all constituents.

Three, as transactions of IPL participants are of very large values between transnational corporates, all receipts and payments (as applicable) are subject to TDS, withholding tax, services tax, FBT, ET at source, all subject to periodic returns and scrutiny by the tax authorities. (A few IPL franchisees have been granted, under Section 197 of IT Act, a certificate for deduction of tax at source at lower rates given the eventual potential losses posted by most IPL franchisees during the past two financial years, viz. seasons 1 and 2.)

What is your view on the valuation of IPL teams reported in public domain? What are the factors one needs to consider in valuations?

For the record, clause 10.2 (a) of the standard franchise agreement (April 2008) provides that no franchisee shall have a right to sell during the first three years. At current estimates, 50 per cent of the income of franchisees is derived from the central rights (media rights and sponsorship), which is evenly distributed amongst the franchisees.

An estimate of future income is a complex task as income from central rights is subject to the team ranking in the IPL, which is based on performance. First three rankings entitle teams to participate in the T20 Champions League, in which participation and prize money is almost double that of the IPL T20. Further, about 14 per cent of the central rights income is distributed on the basis of the team ranking in the IPL.

In addition to above, there is bound to be a significant change in player fees, as contracts of current players end with IPL season-3. A new round of player bidding and swaps is expected and analysts keenly await the resultant changes.

Change in the number of franchisees from 8 to 10, and the number of matches from 60 to about 94, has completely altered the projections and estimates of revenue and resultant valuations. Season-3 estimates are still awaited.

It is pertinent to note that the industry as such is yet to identify acceptable parameters or basis for valuation, viz., the discounting rates, accounting policies, CAGR, EBITA multiple, potential ranking of the teams in the IPL standing, host of other factors which influence valuation. These factors render estimation of future revenues by extrapolation of current incomes extremely risky and speculative.

Does IPL hold the potential to be a viable investment option for a retail investor? What are the risks attached with it?

IPL is at the incubation stage and is intended for bodies corporate with very high net worth and sustaining capacity (in financial parlance). Mere break-even in the strict financial sense for all IPL teams is plausible only after a couple of years. It is far-fetched to compare IPL with English Football League (28 yrs, 20 teams, valuation $4 billion) or the NBA (60 yrs, 30 teams, valuation $7 billion) or NFL (90 yrs, 32 teams, valuation $33 billion) with just a 3-year track record of a mere 10 teams.

Sports in India are yet to attain the levels of professionalism achieved by overseas sporting teams. Given this, listing of IPL teams cannot be achieved at least in the next couple of years for any informed retail stakeholders to participate.

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Keywords: IPL 2010

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