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SFIO Report Concludes Management’s Guilt In IL&FS Fraud

Cheating, fraud, criminal conspiracy...The crimes SFIO considers IL&FS Financial Services, its management and directors liable for

Three-wheeled auto-rickshaws are parked near the IL&FS building, one of India’s leading infrastructure-development and finance companies, in Mumbai. (Photographer: Abhijit Bhatlekar/Bloomberg News)
Three-wheeled auto-rickshaws are parked near the IL&FS building, one of India’s leading infrastructure-development and finance companies, in Mumbai. (Photographer: Abhijit Bhatlekar/Bloomberg News)

Influencing employees, credit decisions and taking hefty payouts from the company — these are just some of the conclusions Serious Fraud Investigation Office reported in its 800-page investigation report on IL&FS Ltd. and its subsidiaries. BloombergQuint has reviewed the report.

While dealing with the misdoings of the management, the report predominantly focuses on IL&FS Financial Services Ltd., a 100 percent subsidiary of IL&FS Ltd. and a holding company to various special purpose vehicles.

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IL&FS Financial Services Diluted Policies To Continue Lending To Group Companies, SFIO Says

The Incestious Working

The SFIO’s key concern stems from the management of IFIN and group companies.

Top management of IL&FS commanded the operations of IFIN, the report said. It said although on paper IFIN functioned as an independent entity, IL&FS and its key employees controlled the day to day affairs of IFIN as well. Ravi Parthasarathy, Hari Sankaran, Arun Saha, Vibhav Kapoor and a few others were in “top management” in both IL&FS and IFIN, the report said. BloombergQuint’s request for comment from these individuals received no response.

Influencing Employees

According to the SFIO’s investigation, IFIN employees — responsible for pointing out weaknesses in credit proposals — couldn’t do so as a result of management influence.

Processing/handling officials who were employees of IFIN could not record negative/critical remarks or express their opinions explicitly in company’s internal framework to pin point weaknesses in credit proposals in respect of sanctioning and permitting credit facilities to some errant borrowers on account of influence exercised by the top management.
SFIO Report

Since the top management was in charge of employees’ performance assessment and were the disciplinary authority, employees hesitated to raise concerns, the SFIO report said.

Influencing Client Relationships

According to the SFIO report, key employees of IL&FS were the sole decision makers when it came to deciding who to take on as clients and lend money to.

Ravi Parthasarathy, chairman of IL&FS, also necessarily approved credit proposals during 2011-2013 despite not being named as an approving authority under the policy document. During 2013-2017, Parthasarathy’s explicit approval was required for credit approval and disbursement of credit. This was contrary to the requirement under the company’s policy documents which merely required Parthasarathy to take note of the decisions and not approve them.

This led the SFIO to conclude that the codified policy and the actual practices adopted varied, as was been confirmed by the employees and approvers themselves, including by Vibhav Kapoor, Ramesh Bawa, Milind Patel and Deepak Pareek in their statements.

Hefty Payouts

The financial condition of IFIN deteriorated since 2013 on account of various loan accounts. IFIN was in violation of the RBI prudential norms at the behest of the top management of IL&FS who also controlled the day-to-day affairs of IFIN, the report said.

IL&FS took all the profits from IFIN in the form of dividends except for the cash that was statutorily required to be retained by the NBFC. IFIN continued to pay dividend of more than 50 percent from FY13 to FY17.

“Investigations revealed that in spite of precarious financial health of the company, IFIN resorted to declaration of the dividend year-on-year without keeping any additional reserves.”

According to the report, IFIN had virtually no independent decision making since the entire board and affairs of the company was controlled by IL&FS, its board members and employees nominated on behalf of it. The dividend from IFIN helped IL&FS show profits on its books, which enabled it to declare performance-related pay and incentives to directors of IL&FS and managing director of IFIN. For instance, Parthasarathy made Rs 14.20 crore in CTC for FY18 with Rs 6.24 crore additional as performance-related pay. This was significantly higher than the FY17 CTC of Rs 5.12 crore and performance-related pay of Rs 5.67 crore.

“It was in the interest of this clique to bloat the revenues of IL&FS for their personal gains,” the SFIO report said.

The SFIO concluded that with their overwhelming position of predominance, Parthasarathy, Hari Sankaran, Arun Saha, and Vibhav Kapoor and a few others, collectively referred to as the “coterie”, ran the affairs of the company at their whims and fancies, resulting in IFIN defaulting in its debt servicing obligations.

Directors – Coterie, Conflicts and Abuses

Based on the email the SFIO reviewed, it concluded that the “coterie” joined hands to systematically conceal any adverse information relating to performance of IFIN.

The specific instances the report highlights include:

  • Ramesh Bawa’s interest in AAA Info Systems Pvt. Ltd. and AAAB Infrastructure Pvt. Ltd. was not disclosed in corporate filings, which are also presented to the board of directors. The SFIO found that these entities had invested into landholding entities of the groups which also borrowed from IFIN. “During investigations it is revealed that these borrower groups had not been able to repay the outstanding loans to IFIN and their loans have been systematically evergreened to keep the borrower groups financially afloat.” Bawa had also leased his properties in Mumbai and Delhi to IFIN, while he continued to occupy them. This transaction depicts gross abuse of power he exercised as MD of that company, the report said. BloombergQuint was unable to reach Ramesh Bawa for a comment.
  • Parthasarthy’s emails to C Sivasankaran of Siva group were also red flagged. Siva entity is a financially stressed borrower to whom Parthasarathy approved funds. One of the emails between Parthasarathy and Siva details a discussion for grant of loan to Unitech. The email spells out how it was agreed between the parties that the funds extended to Unitech by IFIN would be used to pay off Siva Ventures loans, in order for IFIN to recover its fees and old dues.

Coterie Held Criminally Liable

The SFIO has filed a criminal complaint against 30 entities in the IL&FS case after its nine-month long investigation. It has stated that the members of the “coterie” had abused their position at IFIN, flouted regulatory stipulations for an NBFC while lending to external parties and group companies. They also presented false, deceptive and misleading financial statements to obtain credit facilities. And so, their conduct amounts to fraud under company law and criminal conspiracy under the Indian Penal Code, the SFIO has said.