City watchdog launches probe into stricken NMC Health

City watchdog launches probe into stricken NMC Health amid claims founder kept board and shareholders in the dark about loans

The City watchdog has launched a full investigation into NMC Health as one of the biggest scandals to hit the London stock market in years intensified.

Shares in the private healthcare provider were suspended yesterday at just 938.4p, having lost two-thirds of their value since mid-December.

The Financial Conduct Authority (FCA) probe comes after a string of revelations about its murky finances, including allegations its billionaire founder kept board members and shareholders in the dark about £260million worth of loans.

Murky finances: NMC told investors that unnamed businesses controlled by its Indian founder BR Shetty and a senior associate used it to arrange loans without telling board members

Although NMC operates in the Middle East, its shares have traded in the UK since 2012. 

It became a stock market darling as shares rose nearly 20-fold to a peak of 4120p in August 2018, propelling it into the FTSE 100 index.

Its status as a blue-chip stock encouraged thousands of UK investors to buy its shares. Millions of other savers are also exposed to it through their pensions and investments that include assets linked to the FTSE 100.

EY audit gave the all-clear 

The scandal at NMC comes as a major embarrassment for its auditor, British accounting giant EY.

In NMC’s annual report last May, EY gave it a clean bill of health, saying it was happy with the way the firm recognised its revenue and accounted for acquisitions.

But Muddy Waters, the short-selling hedge fund which first attacked NMC last year, claims its then chairman, BR Shetty, artificially inflated the costs of construction work done for the company, which he hired his own contractors to complete.

In a further extraordinary announcement this week, NMC admitted that it could be on the hook to pay back £260million worth of loans which had never appeared as liabilities on its balance sheet.

These loans, borrowed by companies owned by Shetty, secretly named NMC as a guarantor, and appear to have slipped past the notice of everyone at the firm.

EY said: ‘It is not our policy to comment on companies we audit.’

The Big Four accounting firm is being investigated by the Financial Reporting Council for its audit of Thomas Cook, after the travel firm went bust last year.

Russ Mould, investment director at AJ Bell, said: ‘The FCA may need to look again at the listing rules and whether they are providing sufficient protection to investors when it comes to overseas companies becoming listed in the UK.’

He added that the Serious Fraud Office may step in. Mould said: ‘It may find grounds for getting involved in the worst-case scenario, where the company has been understating its debts or overstating assets. 

With the CEO sacked and shares suspended, we’re starting to lean towards the worst-case scenario rather than this looking like something more benign.’

The FCA launched its probe just hours after NMC made the latest bombshell revelations about its finances and sacked its chief executive, Prasanth Manghat.

NMC told investors on Wednesday that unnamed businesses controlled by its Indian founder BR Shetty and a senior associate used it to arrange loans without telling members of the board or disclosing them to investors – a breach of stock market rules. 

Under the arrangement, which was kept off the Abu Dhabi-based company’s balance sheet, suppliers to Shetty’s companies were paid using loans from third-party lenders. 

An internal investigation, led by former FBI director Louis Freeh, discovered that as well as being arranged in secret, NMC was on the hook for the loans if the firms owned by Shetty failed to pay up. 

It also identified ‘potential discrepancies and inconsistencies’ in the company’s bank statements and ledger entries.

Shetty, 77, was assisted in this alleged deception by Khaleefa Butti al-Muhairi, the former vice-president of NMC.

Both were evicted from the board last month for ‘incorrectly reporting’ their shareholdings.

NMC yesterday said the FCA has ‘commenced a formal enforcement investigation’. It added: ‘NMC will continue to co-operate with the FCA and any and all other relevant authorities.’

The FCA has the power to impose multi-million-pound fines on companies and individuals, and ban them from the City.

NMC has been engulfed in scandal since US hedge fund Muddy Waters published an explosive report in December which raised ‘serious doubts’ about its accounting and governance. It accused the firm of inflating its profits, assets and cash. The allegations have been fiercely denied.

NMC, which operates private hospitals in the Middle East, froze trading ‘to ensure the smooth operation of the market’. 

It said it was ‘focused on providing additional clarity to the market as to its financial position and to restoring its admission to trading’.

Finablr hurt by Shetty link 

Travelex owner Finablr, which was also set up by BR Shetty, took a beating as its links with NMC Health weighed on investors’ confidence.

Finablr has already admitted it was unsure how many shares in the company Shetty and other major shareholders owned. And as the crisis at NMC deepened yesterday, the payments company tumbled 18 per cent, or 12.55p, to 57.2p.

In January, Finablr said it had found out that Shetty had pledged 56 per cent of the company’s shares in 2016 as security for a loan taken out by his private firm, BRS Ventures & Holdings.

If he fails to repay this loan, the Finablr shares could then fall into the hands of the lender.

Finablr has promised to provide more clarity by the end of the month, but has complained that Shetty has yet to hand over any further information.

Since the NMC scandal began, Finablr’s shares have collapsed by 72.8 per cent. It is now worth £400million, compared to £1.5billion before Muddy Waters’ report in December.

 



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