ED questioning senior IL&FS officers over deals with HDFC and LIC

The Enforcement Directorate (ED) has started questioning senior officials of IL&FS and grilled the acting Chief Executive Officer of IL&FS Transportation Network Limited (ITNL) Dilip Bhatia for over eight hours on February 26.
Numerous deals, including transactions between IL&FS, LIC and HDFC Limited are under the ED scanner. The economic intelligence agency will next call consultants who worked with IL&FS groups to understand the structure of deals.

A source close to the development told Moneycontrol, “We have started calling officials to understand the business of IL&FS since the structure of the company is quite complex. On Tuesday [February 26] ED officials questioned ITNL CEO Dilip Bhatia, while on Wednesday [February 27] Group Chief Financial Officer Maharudra Wagle was grilled.”

Another source added, “Some deals of IL&FS raise doubts including shares purchased from HDFC and those sold to Life Insurance Corporation of India by IL&FS Group Employees Trust (IGET). Officials from these companies could be called for their statements.”

These transactions were already under the scanner of the Serious Fraud Investigation Office (SFIO) and were mentioned in its interim report. As per SFIO, "IGET is similar to the IL&FS Employee Welfare Trust (EWT). In this case, no permission of the board of directors of IL&FS Ltd was obtained to create an entity with the same acronym.

"In this trust, shares/warrants were distributed to employees with a restriction on further transfer by employees without the permission of IL&FS Employee Welfare Trust. Moreover, IGET had aggregated all shares held by the employees and sold to Life Insurance Corporation (LIC) at Rs 1,100 per share. All the employees were paid by IGET at the same price at which it sold shares to LIC. However, in the past, these shares were distributed by EWT to employees at Rs 84 per share and Rs 132 per share. The transaction resulted in a windfall gain for employees."

A source familiar with the matter said that the amount borrowed from the company was not siphoned off, but was "used to buy shares from HDFC".

The SFIO report also mentioned, "In FY14, EWT acquired 8 lakh shares of IL&FS Ltd from HDFC at Rs 1,184.5 per share. The acquisition of shares at such a high price was made without any valuation being done. This was done at a time when the trust was not able to generate cash flow to service its own debt. The shares acquired by the trust was through a loan advanced by HDFC Ltd."

"Part of the loan continues to exist on the trust’s book and interest continues to be paid on it. Further, the collateral against the loan were shares that HDFC itself had sold to EWT. An HDFC report later said the value of the collateral stood at Rs 80 crore – meaning the asset coverage ratio was lower than 100 percent. After the loan was repaid in 2015, HDFC issued a fresh loan of Rs 95 crore within a month against the same collateral without a fresh valuation."

Nonetheless, in certain cases, loans were extended to group companies of defaulters. For example, Shiva Group had been mentioned as a defaulter as it failed to repay loans in 2011 itself. However, IFIN extended Rs 175 crore in loans to Shiva Shelters and Construction Private Limited and an amount of Rs 50 crore in February 2018.