L&T Clarifies On Suspension By World Bank

One of India's largest companies, Larsen & Toubro (L&T), which usually makes it to the news on all positive counts, surprisingly appeared in the media in a negative light today. A leading financial news daily reported that the World Bank has suspended the company from bidding for World Bank funded contracts from March 7 2013 till September 6, 2013. This was after the lender found that a company employee had forged documents to win a supply deal five years ago.

The full version of the story suggests that World Bank anti-graft investigators found that the company had failed to prevent the said employee from falsifying documents to help secure a contract to supply ultrasound scanners for a health project funded by the lender in Tamil Nadu in 2008. The employee fabricated 13 positive testimonials about the scanners, purportedly from hospitals and clinics, to help win the contract.

The report mentioned that L&T executives acknowledged the fraud and clarified that the employee who had falsified the certificates without company sanction had resigned after being confronted by the management. Further, the management has also confirmed that the company has since sold its medical equipment unit and the World Bank suspension will not make much of an impact on its overall business.Overall, any potential impact will be more on the perception about the company rather than the actual business. L&T holds a high place in the minds of its associates and investors, especially with regard to the integrity of the management. While the smaller picture is of the company losing business from the World Bank funded projects, it may also impact L&T’s group companies’ image. Consider here, for example, that L&T Finance Holdings is eyeing a banking license going forward. Such credibility issues may hamper these plans.

We had given a ‘buy’ call on the company following its December 2013 quarter results. We do not expect to see any major impact of this development on L&T, and hence, maintain our positive call on the counter.