Investigations by the Serious Fraud Investigation Office (SFIO) have revealed that the Securities and Exchange Board of India, and auditor Deloitte, failed to check the end use of Non- Convertible Debentures (NCDs) raised by IL&FS Financial Services (IFIN).
According to documents filed by the SFIO, IL&FS has outstanding NCDs of over Rs 25,000 crore. This includes NCDs of Rs 5,334 crore of 30 investors that had put in at least Rs 50 crore each.
These NCD holders include Postal Life Insurance Fund, and provident fund trusts of Hindustan Zinc, Infosys and Tata Power.
As per Reserve Bank of India circular "An NBFC shall only issue debentures for deployment of funds on its own balance sheet and not to facilitate resource requests of group entities/ parent company / associates."
The aforesaid circular is issued for NBFCs for compliance. The issuance of NCDs by NBFCs is also governed by SEBI (Issue and listing of Debt Securities) Regulations, 2008 and SEBI (Listing and Disclosure requirement) Regulations for its listed securities. However, neither SEBI nor auditor checked end use of NCD deployment.
As per audited financial statements FY 2017-18, IFIN had borrowed to the extent of Rs 5109.75 crore in the form of secured/unsecured NCDs from the banks, financial institutions, provident funds, gratuity funds, etc. Approximately 60 percent of the NCDs issued by the company were unsecured. Also, funds raised through NCD increased from 1.34 percent to 29 percent of total borrowings in the past ten years.
The major investors in the NCDs issued by IFIN were provident funds, pension funds, gratuity funds, mutual funds, public and private sector banks, public and private sector insurance companies (life and general insurance), NPS trust funds and stock exchanges.
The details of the investors of NCDs of IFIN, who had invested more than Rs 50 crore and outstanding as on 30th Sept 2018 is given in the table below:
The SFIO investigation revealed that the auditor did not check end use of NCD. As per the report of SFIO,"the e-mail dated Aug 21, 2015, sent by Ravi Sikeria, another dated Aug 19, 2015, sent by Peter Vaz of Finance Department of IFIN reveal the knowledge of company auditor of prohibition on end use of NCD borrowings for Group company. It has further been noted that Udayan Sen, despite being the engagement partner, had not verified the compliance on the prohibition on end use of debentures. On examination of work papers submitted by Deloitte, it is also revealed that there is no audit procedure adopted to find out whether the proceeds of the NCDs were deployed as loans/investments to group companies or not".
SFIO has also noted that it is clear that the auditor had relied on management representation on utilisation of NCDs and had not done any independent examination.
SFIO has further highlighted that IFIN had advanced approximately Rs 4,783 crore cumulatively from 2012-2017 to IL&FS Transportation Networks limited and its associates from cash credit. Several loans given to group companies were unsecured. These cash credits were repaid by using the proceeds of issues of NCDs and term-loans obtained from the banks. A similar pattern was observed in lending to IL&FS Airports, IL&FS Maritime Infrastructure Company Ltd. (IMICL) and IL&FS EWT.