Like Scam 1992, IL & FS resolution, criminal investigations and litigation looks like it will drag on for decades


The saga of a Siddhapurus / Himalayan Yogi the guiding decisions of the Managing Director (MD) of the National Stock Exchange (NSE) have drowned out new findings in another equally huge scam whose investigation drags on exactly like the roommate scam (Colo). The forensic audit of IL&FS Transportation Networks Ltd (ITNL), the largest declining subsidiary of Infrastructure Leasing & Financial Services (IL&FS) which imploded in September 2018, was released just two days before the Securities order and Exchange Board of India (SEBI) on NSE, but barely got any media coverage or detailed analysis.

ITNL had submitted the Grant Thornton (GT) forensic audit of ITNL which has nearly 900 tedious pages of repetitive narration and, thus, ends up mitigating the enormity of lawlessness at IL&FS, ITNL and its 347 entities of the group. In many ways, IL&FS was just like NSE. An ostensibly “professionally” run company, created by recognized institutions and banks with a glowing board of directors that abdicated its fiduciary duties by delegating absolute power to the president/vice president/CEO, while collecting very high session fees and huge benefits. There was a big difference. IL&FS owned several declining holding companies that were publicly traded and should have been better scrutinized by institutional investors, investment analysts and mutual funds, but preferred to rely on questionable ratings.

ITNL, India’s largest build-own-transfer (BOT) road asset owner, with around 13,100 kilometers of track in its portfolio, has claimed to lead major infrastructure projects from conceptualization to commissioning. service through to operation and maintenance within the framework of public-private partnerships. IL&FS, the main holding company, had a 72% stake in ITNL and almost 27% of the shares were held by the public. ITNL was the largest declining holding company and was publicly traded.
Detailed GT documentation, in a nutshell, shows that ITNL (IL&FS Transportation Forensic Audit Report Shows Gross Irregularities and Manipulation) was essentially a Ponzi scheme that carried out “circular transactions” to trick statutory auditors, regulators and rating agencies, allowing it to continue raising fresh money to hide its losses. The whole group, especially ITNL, has been in serious financial difficulties since the 2012-2013 financial year and managed to hide its losses through questionable financial transactions until September 2018, when Moneylife first announced the news (IL&FS defaults on SIDBI’s Rs1,000 Crore short-term loan?) that he had defaulted on a loan of Rs1,000 crore to SIDBI (Small Industries Development Bank of India).

ITNL, like other entities, hid its losses by brazenly transferring funds between hundreds of special purpose vehicles (SPVs) it had created, often on the same day. GT recreates several detailed money trails to establish that the “fund provider is also the ultimate recipient”. Analysis of emails from key officials revealed that such financial trickery was regularly practiced by the group with the acquiescence, and often under the instructions, of senior management.

GT says the road projects suffered a cost overrun of a whopping Rs 8,077 crore because funds were withdrawn from the undertaking. That an interest overrun in excess of Rs3,433.42 crore had often increased project costs. Short-term borrowings were blithely used for long-term financing and he also borrowed funds which were “routed through mutual funds, time deposits etc. and then ultimately invested in group companies (via loans or investments)…” The report details many of the specific cases of circular deals, including a major over Rs 547 crore with IndusInd Bank involving IL&FS, ITNL and several SPVs. Excessive billing, awarding contracts to parties without proper bidding process, misrepresenting SPV project lenders by submitting inflated toll revenue estimates, compromised bidding process, a capricious selection of consultants, etc., were meticulously documented in the report.

What do all of these findings mean for a quick resolution to the great IL&FS debacle? Very little. The action is also slow along the twin tracks. The resolution and recovery process is overseen by the government-appointed board of directors, headed by banker Uday Kotak, who is not involved in reviewing fraud and wrongdoing. In an affidavit before the National Company Law Appellate Tribunal (NCLAT), the council had said that it would settle a debt of Rs 55,000 crore out of the total outstanding debt of Rs 99,355 crore as of October 8, 2018. It also hoped to reduce the number of group entities to less than 100.

The government presented a proposal for pro rata distribution of around Rs16,200 crore almost two years ago and it was even approved by NCLAT. Unfortunately, the hybrid resolution process under the Bankruptcy Act has led to endless, often legitimate litigation, and no money has been distributed. More than Rs 7,099 crore of provident funds remain tied up and a pro rata plan clearly suggests that there will be significant write-off.

Last March, the Parliamentary Standing Committee on Finance called for systemic change, noting that “…delays in the resolution process not only lead to a severe erosion of value for bankers and other creditors, but above all leave understanding the shortcomings of the evasive system.” This is cold comfort for individuals, banks, funds and businesses who have lost money to fraud and are stuck with a stifling resolution process, instead of the speed promised by law. on bankruptcy.

The criminal investigation is just as slow. the Serious Fraud Investigation Office (SFIO) got off to a flying start but the action is almost at a standstill. A series of high-profile arrests, including those of former Vice President Hari Sankaran, Arun Saha, Ramesh C Bawa, K Ramchand and Mukund Sapre, came to nothing. It only shows India in a bad light when arrests are not followed by timely indictments and litigation. More embarrassingly, there was no action against Ravi Parthasarathy, who controlled IL&FS with a close cabal of executives for over 25 years; he was eventually arrested by the Tamil Nadu Police based on a complaint from a private entity.

Meanwhile, new IL&FS frauds continue to break out. Just yesterday (15th March), Punjab National Bank reported fraud of Rs 2,060 in IL&FS Tamil Nadu Power Company Ltd (ITPCL) which is already a bad loan following reporting by Punjab & Sind Bank of his loan of Rs 149 crore to the same company. like a fraud. This is better known as the controversial Cuddalore Power Project in Tamil Nadu.

There are more complications and probable disputes in water projects from Tamil Nadu to Tirupur. Moneylife reported earlier how the Mauritian company AIDQUA Holdings, a 27% shareholder in the New Tirupur Area Development Corporation (NTADCL), was among the first to denounce the questionable actions of IL&FS. NTADCL and its key shareholder AIDQUA Holdings remain deeply unhappy with the new board of directors as well as with Grant Thornton, the claims management adviser. NTADCL filed an intervention request with NCLAT in Mumbai (Exclusive: NTADCL, subsidiary of IL&FS, dragged before the appeal court; AIDQUA Steps Up Pressure Over Tirupur Water Project Issues) as well as Chennai. AIDQUA Holdings also has ongoing litigation against IL&FS in the Supreme Court (SC) which never appears to be heard and finally determined.

Unless the government crafts a cohesive process that pulls IL&FS resolution out of the quagmire of endless multilevel litigation, it could drag on for decades. As for the criminal fraud and wrongdoing investigation, the SFIO can simply bury the cases after the initial action, because a thorough analysis of the IL&FS and its approximately 340 subsidiaries would reveal the corrupt and collusive role of the Indian Administrative Service (IAS) bureaucrats who protected, nurtured and benefited from the lawless IL&FS.

Even with a Himalayan yogi stirring things up, the NSE investigation carefully avoided exposing the role of bureaucrats and finance ministry appointees. In IL&FS, the number of complicit bureaucrats is so large and spread across so many states that they have been sarcastically referred to as “IL&FS executives” by those who refused to be co-opted.

Last year, the Joint Parliamentary Committee on Finance asked the Reserve Bank of India (RBI) for a systemic review to prevent future IL&FS type disasters. What he should have done in the first place was to suggest a faster, time-limited investigation and resolution process for major financial scams, including personal liability for those responsible for wrongdoing or breaches of fiduciary duties. It is important to remember that the special court in Mumbai, which was set up to investigate the 1992 securities scam (Harshad Mehta scam), is still hearing these cases 30 years later! The IL&FS scam will be no different unless the government does something about it.


Comments are closed.