Auditors flag IL&FS Engineering's loans to subsidiaries, customer dues

Says there is uncertainty over recovery of advances/dues from subsidiaries, customers

The auditor of IL&FS Engineering Services has raised the red flag over the company’s investments and advances to its subsidiaries, saying that there was an uncertainty on recovery of some of these investments.

In the annual report for the year ended March 2018, the company said it had an accumulated loss of Rs 4.61 billion on a consolidated basis and its net worth had been fully eroded. Besides, the company said its current liabilities exceeded its current assets by a Rs 13.48 billion as on the balance sheet date. It also said there were uncertainties on the recovery of its investments, inter-corporate deposits (ICDs), dues from customers, etc.

The auditor drew the attention of shareholders to the standalone Indian Accounting Standards (IndAS) financial statement regarding the company’s Rs 2.60-billion investment in pass-through certificates issued by the Maytas Investment Trust and receivables, loans and advances and investments totalled Rs 1.46 billion. These were dependent on the recovery of capacity charges and supplies/availability of natural gas to a gas-based power generating plant, and increase in traffic on road investments.

“Based on internal assessment, legal advice and fair valuation, management does not currently envisage any diminution in the carrying value of aforesaid assets,” it said.

On dues from customers, the auditor said the company had recognised claims in case of various projects, of which balance as on March 31, aggregated to Rs 4.05 billion and interest of Rs 3.93 billion for non-payment of project dues, delays due to handing over of the land, drawings, etc, for project execution which were in various stages of arbitration appeal with high court of New Delhi/advanced stages of negotiations with customers.

Net worth fully eroded

• In the annual report, the firm said that its net worth had been fully eroded 

• Its current liabilities exceed current assets by Rs 13.48 bn as on the balance sheet date

• It also said there were uncertainties on the recovery of its investments, inter-corporate deposits (ICDs), dues from customers, etc

• On dues from customers, the auditor said the company had recognised claims in various projects aggregating to Rs 4.05 bn, and the interest was Rs 3.93 bn

Besides, the auditor said there were ICDs worth Rs 3.62 billion at the consolidated level which was currently under litigation. Based on internal evaluation and legal opinion, the management was of the opinion that the company has the ability to ultimately recover the aforesaid ICDs, the report said.

The auditor’s report is dated May 30, much before IL&FS group firms started defaulting on their loans to banks. The new board of IL&FS has initiated a special audit of the company.

During the 2018 financial year, the auditor said a project was terminated due to a dispute with customer against which the company had initiated legal proceedings. The company has a net carrying value of project assets pertaining to this project amounting to Rs 1 billion under arbitration.

“Based on legal opinion and internal assessment, management is of the view that the aforesaid assets are fully recoverable, thus no provision considered necessary for the same,” the report said.

On loans from its promoter group, the annual report said IL&FS and IL&FS Financial Services (IFIN) had advanced loans worth Rs 13.48 billion to support the liquidity position of the company up to March 31, 2018. 

Further, the promoter has advanced loans to the extent of Rs 2.11 billion through its group companies.  

It said parent IL&FS had provided a letter of comfort to the consortium of bankers stating that it would use its best efforts to ensure that the company would not default on any of its obligations to the bankers. Management is confident that the promoter group will continue the financial support to the company to meet its obligation as they arise.