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EXCLUSIVE: IL&FS used every trick in the book to mislead regulators, round-trip loans: Forensic audit

The report highlights the then management’s admission of the near-bankruptcy situation of ITNL and instead of reporting the same to the regulators, it tried to use its contacts to influence the RBI to adopt a restructuring plan outside IBC and NCLT.

June 02, 2020 / 08:23 AM IST

Note to readers: This is the second 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. Read the first part here.

The previous management of debt-laden Infrastructure Leasing and Financial Services (IL&FS) surreptitiously attempted to hide the dire financial condition of the company, conceal cash flow stress and mislead regulators into adopting a restructuring plan, according to a forensic report reviewed by Moneycontrol.

The audit findings by consultancy Grant Thornton (GT) reveal that the management knew about the financial challenges that the group was facing since 2016 and it had also discussed with the Reserve Bank of India (RBI) to make necessary regulatory amendments to facilitate fundraising at the holding company level.

The steps taken by the management eventually led to the financial ruin of IL&FS and it wasn’t until two years after these events in 2018 that the government finally acted to replace the IL&FS management with a team led by banker Uday Kotak.

The report also highlights the then management’s admission of the near-bankruptcy situation of its subsidiary, IL&FS Transportation Networks Limited (ITNL), in May 2018 and instead of reporting the same to the regulators, it tried to use its contacts to influence the RBI to adopt a restructuring plan outside Insolvency and Bankruptcy Code (IBC) and the National Company Law Tribunal (NCLT).

The forensic report has indicated that ITNL continued to use every trick in the book of corporate violations – circular transactions, insider trading by key management personnel (KMP), gross irregularities and anomalies, power nexus, circumvention of rules and compromised tendering process — to mislead regulators, investors and policymakers.

Influencing RBI and hiding cash flow stress

In a communication on March 19, 2016, Ravi Parthasarathy, the then chairman of IL&FS, details his meeting with the then RBI Deputy Governor R Gandhi on the agenda of formulating new legislation to facilitate fundraising by holding companies as they were facing difficulties raising funds for ITNL post-March 2016.

“We have raised resources for ITNL under adverse circumstances over the past six months. Going forward we need to face the reality that the current architecture (of ITNL) may not remain viable,” said Parthasarthy in a March 2016 email.

The report points out an email correspondence from Parthasarty to the top management of IL&FS in May 2018 in which the chairman admits that ITNL cash flows are unsustainable. However, management has been advised against approaching NCLT or IBC by a law firm and the top brass was advised to work with the RBI to develop a scheme of its own. “Based on the discussion with Udayan Sen (of Deloitte), the best way forward is to formulate a (restructuring) scheme of our own”, as per the mail sent by Parthasarathy to IL&FS top brass.

An email query sent by Moneycontrol to the RBI did not elicit any response so far.

The Serious Fraud of Investigation Office (SFIO), in its report on IFIN, had also pointed out the RBI’s lapses in regulating IL&FS despite being aware of the financial stress in the company.

Anomalies in acquisition and sale of Spanish firm

The GT report lists out alleged anomalies in ITNL's acquisition of Elsamex SA, a near-bankrupt Spanish company, for 12.15 million euros in December 2007. Elsamex was engaged in the operations and maintenance of road infrastructure in Europe, Latin America, and various Asian countries including India. Importantly, the Spanish firm was on the verge of insolvency at the time of the acquisition, as was pointed out in the due diligence report in December 2007.

In FY2017, ITNL sold its entire stake in Elsamex SA to its subsidiary IIPL in Singapore for Rs 413.16 crore. However, IIPL settled the sum to be given against the sale of investment in Elsamex SA through the issue of equity shares to ITNL.

The GT report points that with this transaction, ITNL received additional shares in its already existing wholly-owned subsidiary.

“Based on the review of the profit and loss statement for the quarter ended September 30, 2016, it was noted that ITNL had recorded profit before tax of Rs 78.86 crore which consisted of a profit on the sale of investments of Rs 140.93 crore. Thus, it appears that ITNL might have recorded a potential loss before tax of Rs 62.14 crore, in case if they had not recorded the gain on the sale of the investment in Elsamex,SA,” the report reads.

GT report also questions the financial stability of Elsamex that did not reflect any indicator of financial stress or liquidity constraints till December 2017 but there was a need to write off a significant Rs 1,037.3 crore in the profit and loss for December 2018 on account of projects in Botswana, Ethiopia and Haiti.

IL&FS and ITNL refused to comment on this story.

Circular transactions and round-tripping of loans

In a separate transaction, ITNL and Punj Lloyd jointly bid for the prestigious Hazaribaug Ranchi Expressway Limited (HREL) project.  ITNL put in Rs 96.94 crore as equity and Punj Lloyd invested Rs 34.06 crore. In the audit report, it was identified (in an email dated January 21, 2014) sent by Vijay Kini, Vice President, ITNL, to Manhar Kapoor, VP, Corporate Legal and Secretarial at Punj Lloyd that ITNL would transfer  Rs 34.04 crore to Punj Lloyd which would further be invested in HREL. Subsequently, according to ITNL FY15 annual report, ITNL had acquired an additional equity stake in HREL from Punj Lloyd Limited for a total consideration of Rs 38 crore, increasing its stake from 74 percent to 99.99 percent.

Punj Lloyd, once a feted construction company, is going through a longwinded insolvency process.

Importantly, the consideration payable by ITNL for the acquisition of HREL was settled by adjustment of the loans given to Punj Lloyd amounting to Rs 38 crore during the acquisition of HREL. Thus, there was no actual outflow of funds and the loans given were converted into equity investments.

Punj Lloyd did not respond to an email sent by Moneycontrol.

Favours, preferences and funds routing

Another contractor, APCO Infratech Private Limited, accounted for nearly 13 percent of total projects worth Rs 25,000 crore awarded by ITNL.

The GT report said ITL offered preferential treatment to APCO Infratech over other vendors and potential assistance in the bidding process. The contractor allegedly assisted IFIN in circumventing the RBI regulations. The report also found potential donations to institutions of KMPs, potential conflict of interest or close nexus and potential gifts given to the then KMPs of IL&FS to get these contracts from ITNL.

In various emails between ITNL officials and APCO, the GT report points out instances of APCO agreeing to equal the price ITNL had budgeted for construction works, and potentially there was no bidding process carried out for the project.

In an email dated April 2017 from Biju Rajan, senior manager at ITNL, it appears that a loan from APCO was proposed to be routed from MBEL indicating that APCO was one of the contractors that used to assist ITNL in routing the funds.

In another email dated November 17, 2017, from Ajay Menon, who works in the treasury department of ITNL, it appears that APCO had been provided a loan from IFIN equivalent to the amount due from ITNL. It also mentioned that ITNL will pay APCO, and subsequently loan of IFIN will be repaid by APCO. Thus, it appears that potential funds were being routed through contractor APCO.

There are other instances where the contractor got projects without competitive bidding. The GT audit report reads: “As per standard operating procedure followed by ITNL, in case of sub-contracting construction works, quotations are invited from various sub-contractors at the cost estimation stage and after competitive analysis, the sub-contractors with the lowest quote are selected.”

However, in APCO’s case, this procedure was not followed by the company. An email dated November 29, 2010, which was sent by S Narasimhan, an employee of APCO, to Ravi Sreehari, Managing Director at ITNL International JLT, wherein it was noted that based on the communication with Mukund Sapre, S Narasimhan was interested in working with ITNL for implementing various EPC works in the state of Bihar. Further, he had also suggested various ways of partnership through which projects can be undertaken by APCO.

The GT report also identified an email dated December 17, 2010, which was sent by Sreehari to Narasimhan indicating that while ITNL was in a process to bid for a project of NHAI, APCO was to be appointed to undertake 50 percent of the project work of NHAI’s Design, Build, Finance, Operate, Transfer (DBFOT) road packages.

In an e-mail response, APCO said the company’s agreements and transactions with the IL&FS group comply with rules and regulations. “Being a responsible corporate citizen and law-abiding company, at this juncture when the matter related to ITNL and/or IL&FS Group entities are already subjudice and investigations are on, it will NOT (be) appropriate for APCO Infratech to offer any comment on any documents/mails or selective quoting/abstracts which are in your possession or access of which you may have got through any route/person. Our only submission is that our agreements or transactions with IL&FS group entity were/ are in strict compliance with law of land and purely based on merit also not carrying any conflict of interest,” the company stated.

APCO said it and its subsidiaries are not engaged by ITNL or any IL&FS group company for the execution of any project in Bihar.

Alleged favours to Beigh Construction Company

According to the audit report, Beigh Construction Company (BCC), another contractor, managed to borrow large sums without having adequate financial capabilities. The firm did not have the required financial strength right from its inception to carry out the projects allocated. ‘Based on the circular transactions between ITNL and BCC, it appears that BCC was aware about the potential issues in ITNL and they were assisting the IL&FS Group in circumventing regulations for extra benefits,” the audit report observed.

In the financial year 2016-17 and 2017-18, the net worth of BCC was Rs 5.52 crore and Rs 8.87 crore, respectively. However, the total borrowings in the financial year 2017-18 were Rs 243.76 crore, of which Rs 200 crore was borrowed from IFIN, based on a letter of comfort issued by ITNL. Also, the said amount of Rs 200 crore was later transferred by BCC to ITNL.

The GT audit identified an email dated February 28, 2018 sent by Jyotsna Matondkar, an employee of ITNL, to Karunakaran Ramchand, MD of ITNL, requesting his approval for availing a loan of Rs 200 crore from BCC.

“Upon further review, it was noted that ITNL had issued a letter of comfort to IFIN for the loan provided to BCC. The amount received by BCC from IFIN was further transferred to ITNL. Also, we noted that BCC had earned a margin of 0.60 percent of the loan amount for the potential routing of funds of Rs 200 crore,” the forensic audit observed.

What BCC says

Replying to Moneycontrol’s queries, BCC Managing Director Imran Beigh blamed the ITNL top brass. “During the period from November 2017 till mid-2018, ITNL started demanding favours from us knowing our vulnerable position. It knew that huge amounts of monies were payable to us and that, given our weak bargaining position, we would agree to whatever demands they made,” Beigh wrote.

Beigh said in November 2017, ITNL asked his company to borrow Rs 23 crore from its sister concern, IFIN, and use that money to pay the dues owed by ITNL to a third-party vendor. "ITNL assured us that even though the loan would be availed by us, it would be ITNL which would be servicing the loan. In fact, ITNL also paid the first instalment towards this loan. Needless to say, it never bothered paying the remaining instalments, as a result of which this loan still stands in our books,” he said.

Beigh said ITNL again approached his company in February 2018 to borrow Rs 200 crore from IFIN and use that money to pump it back into ITNL.

“We were told that our assistance was being called as ITNL needed funds from IFIN which IFIN could not release directly to ITNL. We were also told that other contractors were also being asked to cooperate with ITNL, and they had also agreed to do it. To show that this transaction was in lieu of a valid consideration, the rate of interest payable by ITNL to us was shown as 0.6 percent higher than the rate of interest that we had to pay IFIN. However, this was only meant to be a paper formality, as we were specifically told by the then executive director of ITNL (in writing) that the transaction would be a cash-neutral transaction for us,” he said.

“In other words, we were never expected to, nor did we ever, derive any financial benefit from this transaction. Even otherwise, this 0.6 percent would have translated to only Rs 1.2 crore which was pittance as compared to the huge financial liabilities that ITNL had owed towards us,” the MD added.

Compromised bidding process

The forensic audit report highlights potential bidding issues in relation to the operation and maintenance contract for Pune Sholapur Road Development Company Limited.

The bidding process involved three companies - Vinati Infratech Private Limited, Elsamex Maintenance Services Limited and Premavati Infrastructures.

Vinati Infratech, with a paid-up share capital of Rs 1 lakh, placed a bid of Rs 21.42 crore. Also, the name of Vinati was struck off as per a Ministry of Corporate Affairs (MCA) letter dated May 5, 2017. The letter states that this company has not conducted any business in the two preceding years. But the company potentially placed a bid on August 22, 2017. The company was also not on the empanelled list of vendors of IL&FS, a violation of process.

Similarly, in the case of West Gujarat Expressway Limited, SGMS Maintenance Services was a potential bidder for toll collection. It is observed that SGMS is involved in the business of providing housekeeping and related services and does not have any experience in toll collection, said the forensic report.

Tarun Sharma
first published: Jun 1, 2020 08:12 pm