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IL&FS 'Secret Society' connived at fraud, to face prosecution (IANS Special)

Prosecution is recommended under Section 447 of Companies Act, 2013 and Section 417 and 420 read with Section 120B of the Indian Penal Code

IANS  |  New Delhi 

The dubious and highly contentious role played by independent directors in IL&FS has been thrown into stark relief by the latest SFIO charge sheet in the matter. IANS had also highlighted this last week.

The SFIO recommended that prosecution be sanctioned against directors and independent directors of the company on account of collective responsibility of the board - Shahzad Dalal, S.S. Kohli, Manu Kochhar, Renu Challa, Uday Ved, Neera Sagi and CFO Deepak Pareek - since the board was aware of irregularities.

Prosecution is recommended under Section 447 of Companies Act, 2013 and Section 417 and 420 read with Section 120B of the Indian Penal Code.

When this bubble burst, the board failed to see it as an inexorable event and like King Canute, could not reverse the incoming tide which brought the IL&FS 'sand castle' crashing down.


The report says it was revealed that in order to continue funding its group companies, prevent them from defaulting, and at the same time, not to breach the RBI's credit concentration norms, the coterie (Accused 2-Accused 9) - Ravi Parthasarthi, Hari Sankaran, Vibhav Kapoor, K. Ramchand, Ramesh Bawa, Milind Patel and Rajesh Katina - in connivance with the Independent Directors, Directors, and the CFO of IFIN (Lts) Group CFO (A17 & A19-A23) abused their positions and used various modus operandi to continue lending from IFIN to group entities.

This caused a wrongful loss to IFIN & its stakeholders, such as investors and creditors whose money it was misusing for fraudulent lending, which ultimately resulted in an ultimate loss to the company, and its creditors.


The investigation further revealed that the Audit Committee members (A15, 16, 4) - S.S. Kohli, Subhalakshmi Panse and Arun Saha - and the Independent Directors, Director, the CFO of IFIN and the group CFO of IL&FS (A17 & A19-A23) were aware of the stressed asset portfolio and the modus operandi used for granting loans to group companies of existing defaulting borrowers in order to prevent their being classified as NPAs.

They, however, did not ensure adequate disclosure or reporting of the facts brought out in these reports based on explanations given by management. They connived with the management (A2-A9) - being part of the board, they were aware of the various RBI reports - and stood as mute spectators of the management decisions and overlooked the numerous impairment indicators in contravention of accounting standards and principles of prudence by agreeing with the decision of the management to defer the provision of diminution in the accounts books.


The extent of the malaise doesn't end there - the probe also revealed that IFIN, being an NBFC, was in the business of lending. As part of its lending to external parties (other than its group companies), IFIN extended loans to companies of C. Sivasankaran, ABG, A2Z, Parsvnath Group and other corporate groups. A number of these borrowers were not servicing their debt obligation in time.

The management of IFIN (A2-A9) were aware of the potential problematic accounts which were getting stressed in the succeeding months of the reports generated through the Management Information System (MIS). The aforesaid stressed accounts would have adversely impacted the financial statements of IFIN, therefore, the management (A2-A9), in connivance with other accused, adopted fraudulent practices in order not to let aforesaid loan/credit facility classified as non-performing asset (NPAs) and further to avoid provisioning for such NPAs/defaulting loan facilities, which was otherwise required to be done so under the RBI directions.

In this regard, they fraudulently lent to other companies belonging to the same/aforesaid borrowers for repaying the principal and/or interest of the aforesaid defaulting borrower. This process was repeated multiple times with the earlier loan facility getting closed and a new facility being created, which was again funded, on its default, through another cycle of funding through the same or another group company.

Such debt servicing led to ballooning up of the outstanding liabilities against a group, which were funded from the borrowings from market. Ultimately, the final loan facility was declared an NPA or written-off or is still outstanding in most of these cases, resulting in delayed recognition of NPAs, ballooning of debt and ultimate higher loss to IFIN and its stakeholders.

The above acts of the coterie were known to the independent Directors (A-19 to A-23) and other Directors, including accused A-17 who was the CFO of IFIN and one of the persons who processed the loan applications.

Finally, the investigation provides inputs on another modus operandi used by the A2-A9, whereby they decided to support group entities by lending through vendors/third parties. In order to so do, the books of accounts of 14 existing borrowers or contractors of IFIN or ITNL such as Beigh Construction, GHV Group, New India Structures Private Ltd, Avance Technologies Ltd., and Empower India Ltd., were used for onward lending to ITNL or its subsidiaries/SPVs.

Investigation revealed that all the loans to these entities had been given on the basis of letter of comfort of ITNL and no security has been taken from these borrowing entities/intermediaries. The purpose of the loans was very vague and general. Most of these entities were transferring the funds on the same day to the destined ITNL/ITNLSPVs.

It has been further revealed that officials of IFIN and group companies approached the contractors/borrowers for taking up the loan from IFIN and thereafter doing onward lending to the ITNL.


Investigation revealed that such fraudulent transactions were taken up to bypass the RBI directions on group lending. The RBI had, in its annual inspection reports, pointed out at the adverse impact of these on the Net Owned Funds (NOF) and capital to risk-weighted assets ratio (CRAR), which are critical parameters for an NBFC's continuation as a going concern.

This clearly brings out the intent of the coterie (A2-A9) to disregard legal directions for prudential functioning of NBFCs. The intent to hoodwink the regulator, and thereby conceal critical financial parameters, also clearly comes out in the false assertion made by Ramesh Bawa (A7) in his letter dated July 20, 2018 to the RBI stating that the company has not made any fresh exposure to group companies post November 2017.


In extending fresh loans to other group companies of the defaulting borrowers, the intent of the coterie was to postpone/avoid recognition of the asset as NPAs and thereby, avoiding consequent provisioning, as mandated by the RBI. This modus operandi led IFIN to project high asset quality and recognition of revenues.

Suppression of NPAs and non-provisioning for NPAs was used to show a rosy picture in the financial statements of IFIN. The fraudulent/fabricated financial statements were used for the purpose of accessing the funds of public.


The charge sheet also says that by maintaining spruced-up financials and concealing the parameters of the NPA and the CRAR, IFIN was borrowing funds in the form of loans, non-convertible debentures and commercial papers, etc. and prolong its existence as a going concern. The company advanced the borrowed funds to borrowers to pay outstanding interest to IFIN. It resulted in overstatement of profits of the company.

These profits were the basis for payment of higher dividend to the holding company i.e. IL&FS Ltd. These fictitious profits were the basis for payment of higher remuneration and PRP to the management of IFIN & indirectly to the directors drawing their salary from IL&FS. The directors of IL&FS who were also on the board of IFIN drew a commission and sitting fees on the basis of these fictitious profits.

Members of the coterie, abusing their position, connived and through the fraudulent modus operandi of delaying the date for classifying the defaulting borrowers as NPA and making provision for them with a view to keep IFIN and other its group companies afloat.



(Only the headline and picture of this report may have been reworked by the Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)

First Published: Mon, June 03 2019. 17:24 IST