Revealed | SFIO interim report blows the lid off extent of fraud in IL&FS

Moneycontrol has reviewed the SFIO interim report the MCA submitted to the National Company Law Tribunal Mumbai.

The Serious Fraud Investigation Office (SFIO) has uncovered shocking details of wrongdoing in the embattled IL&FS Group, with instances of misreporting of income, dubious transactions, conflict of interest, ever-greening of loans and personal enrichment of key employees being shown as rampant. These have been revealed in SFIO's interim report, which the Ministry of Corporate Affairs (MCA) submitted to the National Company Law Tribunal (NCLT) Mumbai on December 3. Moneycontrol has reviewed a copy of the report.

Below are the key highlights from the report.

Over the past three years, IL&FS witnessed a sharp rise in fee-based income. Its revenues accruing from brand fee, consultancy fee, guarantee fee, project advisory fee and infrastructure advisory fee went up from Rs 64.6 crore in FY2015-16 to Rs 212.3 crore in FY18. However, the SFIO suggests that some of these revenues may have been "fabricated, inflated or not real", given the nature of the transactions from which they were derived.

For instance, for a particular project, IL&FS charged a brand fee and advisory fee, IL&FS Financial Services (IFIN) charged loan syndication fee, merchant banking fee and success fee while IL&FS Transportation Network Ltd (ITNL) changed project management fee and claim management fees. "It was easy for the IL&FS Group to impose these as the same individuals were present on different companies' decision-making positions including company’s directors," the SFIO report said.

IFIN had been used for evergreening of loans of companies. “SFIO found multiple instances where borrowers of IFIN, other than group companies were extended additional credit facility by IFIN so that they could service their outstanding, interest and principal repayments obligations and avoid defaulting or classifying the account as a non-performing asset.”

Such evergreening arrangement was observed in the case of loans provided to IL&FS group companies and others such as Ind-Bharath group, Gayatri Group and A2Z group.

IFIN also inflated its performance by ensuring that interest income is generated on the loans that have been regularised through this fresh funding. Fresh interest income was generated through the disbursement of the above-mentioned loans and provisioning for NPA was deflated to display a strong balance sheet and healthy asset quality on these loans. "The evergreening of the loans resulted in inflated profits, suppressed provisioning and non-disclosure of possible NPAs in the books of IFIN. To this extent, the financial statements were misstated to show a window-dressed view or a rosy picture of the financials," according to SFIO.

There were some instances where an account was written off in the books of IFIN as bad debt and fresh loans were advanced to the company despite the fact that company had written off previous debts of the same borrower group. "It is observed that Shiva group had been a defaulter in its loan commitments from 2011 itself. IFIN extended another loan facility of Rs 175 crores to Shiva Shelters and construction private limited and an amount of Rs 50 crores in February 2018," said the report, adding that these loans were sanctioned without clear purpose or against a specific project in hand.

The report also talks about wrongdoing in the way the IL&FS Group Employees Trust (IGET) was formed and run.

IGET is similar to the IL&FS Employee Welfare Trust (EWT). In this case, no permission of the board of directors of IL&FS Ltd was obtained to create an entity with the same acronym. In this trust, shares/warrants were distributed to the employees with a restriction on their further transfer by the employees without the permission of IL&FS Employee Welfare Trust.

Further, IGET had aggregated all the shares held by the employees and sold the same to Life Insurance Corporation (LIC) at Rs 1,100 per share. All the employee were paid by IGET at the same price at which it sold shares to LIC. However, in the past, these shares were distributed by EWT to employees at Rs 84 per share and Rs 132 per share. This transaction resulted in a windfall gain of approximately 10 times.

The report also talks about IL&FS’ attempted merger with Piramal Group in 2014, which fell through. Around the same time, the report says that EWT held about 1.5 crore shares in IL&FS Ltd. The trust itself was 90 percent held by select employees of the group, who had acquired those shares for as little as Rs 

The report further says EWT trustees met regularly till 2008 and resolutions were undertaken regularly. Since 2008, meetings became only informal and no documentation for events/decisions taken exist. “The books of accounts were never adopted and financial statements were never approved by the board after 2008.”

The report also talks about a transaction with HDFC. In FY14, EWT acquired 8 lakh shares of IL&FS Ltd from HDFC at a price of Rs 1,184.5 per share. “The acquisition of shares at such a high price was made without any valuation being done”. This was done around a time when the trust was not even able to generate cash flows to service its own debt.

The shares acquired by the trust was through a loan advanced to it by HDFC Ltd. Part of the loan continues to exist on the trust’s book and interest continues to be paid on it.

Further, the collateral against the loan were shares that HDFC itself had sold to EWT. An HDFC report later said the value of the collateral stood at Rs 80 crore – meaning the asset coverage ratio was lower than 100 percent.

After the loan was repaid in 2015, HDFC issued a fresh loan of Rs 95 crore within a month against the same collateral without doing a fresh valuation.

When contacted by Moneycontrol, a HDFC spokesperson did not comment on the nature of the first transaction but said, "the amount of Rs 95 crore has been fully provided for."

The SFIO report also details assets of key IL&FS executives:

Former Ravi Parthasarathy had declared Rs 98.98 crores movable properties besides four immovable properties. Ex-MD Hari Sankaran declared Rs 19.04 crore movable properties and three immovable properties. Ex-Joint MD Arun Saha declared Rs 59.49 crores movable properties besides nine immovable properties. Former CIO Vibhav Kapoor declared Rs 22.47 crore movable properties and two immovable properties. Former IFIN MD and CEO Ramesh Bawa declared Rs 32.72 crore movable properties and five immovable properties. Former ITNL MD K Ramchand declared four immovable properties.

Source: https://www. moneycontrol.com/news/business/companies/exclusive-sfio-interim-report-blows-the-lid-on-extent-of-fraud-in-ilfs-3253211.html

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