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Exclusive | IL&FS unit colluded with Mumbai contractor on infra projects, finds forensic audit

IL&FS Transportation Networks India Limited passed lucrative contracts to GHV India Private Limited through suspicious transactions and rigged bidding, says report by Grant Thornton.

May 28, 2020 / 08:52 PM IST

Note to readers: This is the first instalment of a two-part series on events that transpired at IL&FS Transportation Networks India Limited (ITNL), a subsidiary of the infrastructure conglomerate that needed a government rescue to stay aloft and whose financial troubles triggered concerns of a larger bad loan crisis in India’s shadow banking system, based on a forensic report by Grant Thornton.

Top executives of a subsidiary of debt-laden Infrastructure Leasing and Financial Services (IL&FS) colluded with a Mumbai-based contractor to hand out lucrative tenders through suspicious transactions and rigged bidding, according to a forensic audit reviewed by Moneycontrol.

The findings of the forensic audit by consultancy Grant Thornton of IL&FS Transportation Networks India Limited (ITNL) shed new light on events that led to the financial ruin of IL&FS, which committed a number of defaults and roiled India’s shadow banking sector due to consequent concerns of a larger bad debt crisis. The government was finally forced in 2018 to replace the IL&FS management with a team led by banker Uday Kotak.

The new IL&FS board hired Grant Thornton to launch a special audit of all high-value transactions undertaken by IL&FS Ltd and some of its group companies for the period between April 2013 and September 2018. The audit was aimed at identifying siphoning or misuse of funds, fraudulent transactions and quantum of financial loss in major subsidiaries of the group such as IL&FS Transportation Networks Ltd (ITNL), IL&FS Financial Services Ltd (IFIN) and IL&FS Ltd.

ITNL is the largest build, operate and transfer (BOT) road asset owner in India and has roughly 13,100 km of such assets. The company is the market leader in the transport infrastructure sector, present in a host of services such as metro rail, city bus services and border check posts, among others.

Big Infra Player

ITNL’s business model is simple on paper — it procures government contracts of marquee projects and subcontracts to eligible firms.  BOT operators typically choose sub-contractors that are financially strong, have efficient execution capabilities and are at arm’s length.

The audit by Grant Thornton concluded that few of these parameters were followed in the awarding of contracts to a company named GHV India Private Limited. The contracts worth Rs 2,827 crore GHV won constitute 11.66 percent of the total contracts of Rs 24,258-crore awarded by ITNL, but the Grant Thorton audit found that GHV has been facing a liquidity crunch since 2014 and the company was patronised by ITNL with contracts despite its weak financial conditions.

ITNL’s financial position was weakening since its initial public offering in 2010. The company’s debt-to-equity ratio had been rising sharply from 2.01 in FY2009 to 7.92 percent in 2018, just before the new board took over.

IL&FS and ITNL did not comment for this article.

When contacted, GHV denied doing any wrong and said there was no question of any preferential treatment by ITNL, adding that there were no irregularities in the contracts awarded by IL&FS. “All of these contracts were awarded through an open and transparent competitive bidding process, wherein other bidders also participated and competed with GHV. IL&FS scrutinised all bids and considered qualifications/credentials of all bidders on parameters set out in respective NITs/bidding documents,” it said in a detailed statement.

The company said it earned the contracts from IL&FS over 10 years. “Some of these contracts have been abandoned. For the same period, GHV has earned contracts worth more than Rs 3,000 crore from NHAI and other state entities. We lost many bids and we succeeded in some bids. This is no wrong,” it said.

The forensic audit asserts GHV’s weak financial condition citing a mail correspondence between Ajay Menon, who works in the treasury department of ITNL, and MB Bajulge, former vice-president of ITNL.

In a mail dated July 4, 2014, Menon told Bajulge that Ratnakar Bank, a private lender now known as RBL Bank, was not willing to consider a loan because GHV defaulted to one of their consortium banks, according to Grant Thorton. In the same mail, Menon proposed financial support for GHV, said the forensic report.

In its response to Moneycontrol, GHV said this was a false allegation.

What Happens To The Report

The IL&FS board has submitted the forensic report with the Serious Fraud Investigation Office, which is expected to file a criminal complaint in a month against ITNL, and Enforcement Directorate, said people familiar with the matter. The report will help in the ongoing investigations against IL&FS, they said, asking not to be named.

The government approached the National Company Law Appellate Tribunal in February seeking more time to complete the debt obligations of IL&FS group companies.

The Grant Thornton report also puts the spotlight on financial incongruities that dogged GVH. The report highlights an email dated June 18, 2014, sent by S Krishna, a chartered accountant, to ITNL employees about discrepancies in the returns filed by GHV with indirect tax department and the sales turnover shared with ITNL.

The email established that the top management of ITNL was aware about the potential implications on the company due to understatement of turnover by GHV with indirect tax authorities, according to the forensic report. Yet, ITNL offered GHV contracts and support, it said.

In its response to Moneycontrol, GHV said the mismatch has been settled and rectified in income-tax records.

ITNL was audited by Deloitte from the financial year (FY) 2013 to FY2016. In FY2016-17, Deloitte and SRBC & Co, which is a subsidiary of EY, jointly conducted the audit. SRBC was the sole auditor the next year.

Deloitte declined to give comment on this story. The firm is battling criminal complaints and a proposed ban for its alleged failure in highlighting the financial misdemeanours in IL&FS. In an independent statement on the allegations regarding IL&FS, the firm has attempted to deflect its responsibilities as an auditor.

In its response, SRBC said it audited only two of ITNL’s 58 subsidiaries as of March 31, 2018. “The remaining 56 subsidiaries with assets of Rs 41,108 crore and revenues of Rs 7,812 crore were audited by other auditors,” it said.

SRBC said it performed its duties “in accordance with SA 600 ‘Using the Work of Another Auditor’ and the Guidance Note on Audit of Consolidated Financial Statements issued by the Institute of Chartered Accountants of India (ICAI)”. “Our limited review report for the June 2018 quarter for ITNL included an emphasis of matter on the ability of the Company to continue as a going concern.”

Financial Assistance To Each Other

The Grant Thornton report also found at least one instance of financial support offered to GVH by ITNL and a sister entity named IL&FS Financial Services Ltd (IFIN).

Lokesh Chebium, the asset and structured finance head of western region of IFIN, emailed Dilip Bhatia, CEO of ITNL, on December 21, 2017, that the financial assistance of Rs 360 crore that IFIN provided to GHV is required to be rolled over because it was long overdue in the books of account of IFIN. Chebium also said ITNL must fund the interest overdue by GHV because a default will lead to IFIN classifying GHV as non-performing asset (NPA), or bad debt.

In its response to Moneycontrol, GHV said financial assistance was given to GHV Hotel India Pvt Ltd and not GHV. “Further, the amount of such loan by IFIN is Rs 130 crore and not Rs 360 crore.”

GHV was also used to provide financial aid to ITNL, said the report. Jignesh Shah, CEO of IL&FS Infrastructure debt fund, mailed Ramesh Bawa, former ITNL MD, and Mukund Sapre, former executive director of ITNL, on March 26, 2018, asking them to provide short-term financial assistance of Rs 100 crore to ITNL by routing it through GHV and its group companies, said the forensic report.

The email appears to suggest that the transaction was potentially structured to route funds from IL&FS Infrastructure debt fund to ITNL via GHV and its group companies such as GHV Hospitality and GHV Hotels Private Limited.

Grant Thornton also found GHV always bid lower than competitors and even lower that the own estimate of ITNL. “Based on the various email reviews and the trend in the bidding process, it appears unusual that GHV’s estimate was always lower than the cost estimated/budget prepared by ITNL. It is pertinent to note that GHV is one of the vendors in which major cost overruns have transpired,’ it said.

The Grant Thronton report offered examples. It cited work at the Jalgaon-Maharashtra/Gujarat border section of NH-6 where all other contractors quoted a higher price while GHV quoted Rs 1786.68 crore, which happened to be less than the budget prepared by ITNL at Rs 1,790.86 crore.

In its response to Moneycontrol, GHV said “it is absolutely a business call for any bidder to bid below the ITNL rates”, adding that bidding below the estimated cost is a general practice across the industry.

ITNL officials also assured GHV of bagging a contract even before the former received a formal confirmation on a contract from say, National Highways Authority of India (NHAI). On March 2012, an email by Anil Nikam, an assistant vice-president of ITNL, assured Rs 250 crore of sub-contracts in the Amravati-Jalgaon project even before ITNL formally received the bid, said Grant Thornton.

GHV told Moneycontrol though ITNL had invited rates from GHV, no work was allotted to GHV. This was despite the awarding of the project to ITNL by NHAI, it said.

Tarun Sharma
first published: May 28, 2020 05:03 pm