The livery of an aircraft operated by Jet Airways India Ltd. is seen on the tail fin as the plane prepares to land at Chhatrapati Shivaji International Airport in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

‘Narrow’ Forensic Audit Allows Lenders To Proceed With Jet Airways’ Restructuring Plan

Lenders to Jet Airways Ltd. are hoping to approve a restructuring plan for the air carrier on Wednesday after a forensic audit did not throw up any adverse findings, two people in the know told BloombergQuint on condition of anonymity. However, the audit itself was conducted within a narrow scope that limited the extent of investigation, these people said.

State Bank of India Ltd., as the lead lender in the case, had appointed consultancy firm EY to conduct the forensic audit.

According to the first person quoted above, SBI asked that the audit focus on three key areas: revenue billings, costs (except sales and distribution) and related party transactions identified in the books of the company. Typically, a full forensic audit would look at items included in a statutory audit but also go beyond that. In particular, in the case of large stressed cases, lenders have sought to identify any diversion of bank funds. Some of the items that forensic audits commonly look at include end use of funds and related party transactions that are not not disclosed in the books, said a person familiar with the process of forensic audits.

Jet Airways’ statutory auditors include BSR & Co and DTS & Associates.

The ‘narrow’ scope of the forensic audit will ensure that lenders can move ahead with finalising a resolution plan for Jet Airways quickly, the two people quoted above said. According to the first person quoted above, SBI’s intent behind ordering such an audit was not to hide anything, but to ensure that the process moves forward without difficulty. The forensic audit will allow lenders to move forward with a restructuring plan quickly, the people quoted above said.

Lenders to Jet Airways will meet on Wednesday to discuss a plan which could see promoter Naresh Goyal’s shareholding come down from the current 51 percent to about 22 percent. Goyal could also lose his board seat. Etihad Airways, which currently owns 24 percent equity in Jet Airways, is open to infusing more equity into the company, said the people quoted above. Following the stake purchase, banks will approve necessary credit to keep the operations of the air carrier afloat.

Banks are keen to finalise a resolution plan before the account turns overdue by more than 30-days and gets classified as a special mention account. As per the RBI’s rules, banks have 180 days to finalise and implement a resolution plan before they are required to refer it for insolvency.

But a full forensic audit could take up to three months, which is not ideal in a situation where banks are trying to resolve the case within a deadline. It is possible that the lead bank decided on a narrow audit to save time and focus on important areas, one of the bankers quoted above said.

Arijit Basu, managing director, SBI said that the bank will not comment on any company specific information. A spokesperson for Etihad Airways said that the company will not comment on rumours or speculation. A Jet Airways spokesperson declined to comment on speculation. EY did not respond to any queries by BloombergQuint.

The Reserve Bank of India’s (RBI) February 2018 circular on debt restructuring requires lenders to move criminal proceedings against defaulting promoters who are found to have indulged in diversion of funds. While the guidelines do not mandate any forensic audit of the company, bankers usually call for forensic audits to cover their exposure and ensure that the restructuring plan is not called into question later.

Jet Airways defaulted on its debt repayments on December 31, 2018, which the company reported to the stock exchanges. Following this, lenders forced promoter Goyal to flesh out a restructuring plan within three weeks. In the interim, Jet Airways sought Rs 1,500 crore in working capital loans from the lending consortium to repay vendors and employees. However, lenders rejected the proposal saying they wont lend any further till a plan for additional equity infusion is finalised.

India’s second largest air carrier has been delaying payments to employees and vendors for a few months now, owing to considerable cash flow issues.