Transactions of debt-ridden Educomp Solutions come under SFIO scanner

Suspect transactions of debt-ridden Educomp Solutions have come under the lens of Serious Fraud Investigation Office (SFIO), which is probing the company for alleged fund-diversion and inflated land deals, people in the know of the development said. 

SFIO has identified at least two land transactions done by Educomp by allegedly using proxies at over-inflated prices, it is learnt.

Founded by Shantanu Prakash, Educomp filed for bankruptcy in 2017 after debt piled up to Rs 3,000 crore. 

Statutory auditor Haribhakti & Co had raised concerns about the company’s financials on several counts, finally giving an adverse opinion. In its report, the auditor had said the company does not give a “true and fair view in conformity with the accounting principles generally accepted in India”. 

Auditor BDO, too, found that the company made payments to related parties ahead of secured creditors, deviating from standard accounting practices. 

Educomp did not reply to the queries sent by Business Standard.

The company’s land parcels in Rajasthan’s Alwar and Hanumangarh, which are under SFIO’s scanner, could spell trouble for Prakash, an Indian Institute of Management-Ahmedabad alumnus and once hailed as a star businessman in the education sector. 

Sale deeds reviewed by Business Standard revealed that a 17.3-acre land was purchased for Rs 39 crore in Hanumangarh by a director of Educomp Infrastructure and School Management (EISML), a subsidiary of Educomp. According to the information memorandum of the company, the land was reflected in the books of the company at more than double the price — at Rs 86 crore. 

Authorities suspect the modus operandi was used by Prakash to divert loans raised from public sector banks to Educomp’s subsidiary and other shell companies. 

An oversight committee of investigation under the ministry of corporate affairs had ordered a “public interest” probe into the company under Section 212 (c) of the Companies Act last year, documents reviewed showed. The probe was delayed due to lack of leads and material evidence. 

“We are looking into the matter. The case will be fast-tracked now,” a senior government official said. 

Experts said Educomp made a series of poor decisions, leading to the downfall. Its product, Smartclass, for digitally equipping classrooms could not keep up with the competition as more firms entered the business with cheaper products, experts said.

“They became irrelevant and then took more loans to supply hardware to schools and later to set up their own infrastructure. There was no cash flow to service these rising loans,” said Manoj Kumar, partner, Corporate Professionals. 

Meanwhile, Axis Bank, IDBI Bank and YES Bank have each approached the Debt Recovery Tribunal (DRT) against Prakash. In one of the cases, the promoter has been restrained from selling his assets in Gurugram. 

Educomp and EISML are both undergoing voluntary insolvency proceedings in Delhi and Chandigarh, respectively. 

Educomp has received adverse reports from external auditors. 

In spite this, the insolvency proceedings continued undeterred with only two companies submitting final bids. Nasdaq-listed Ebix emerged the highest bidder, offering Rs 325 crore — at nearly 90 per cent discount on the loans to the banks. However, with financial creditors calling for an investigative audit, Ebix’s acquisition of Educomp has been held up.

Alarm bells by auditors

•  No provision against outstanding trade receivables of Rs 700 cr
• No provision for impairment of Rs 1,400-cr worth investments in ESL’s subsidiaries
• Managed two bank accounts not mentioned in financial statements
• Understatement of financial liability as of March 2017
• Preferential transactions flagged showing deficiency in accounting
• Auditor BDO flagged sales that were reversed