Having initiated a crackdown on a suspected coterie of fraudsters in the IL&FS case, the government's financial fraud probe agency SFIO has recommended necessary action against the guilty auditors and also a detailed internal investigation by the RBI to identify reasons for the delay in detecting the lapses.
The Serious Fraud Investigation Office (SFIO) has also recommended a necessary action as per the Companies Act by the current management of IL&FS Financial Services (IFIN) for recovery of the losses suffered by the company due to the fraudulent conduct of the coterie, officials said.
In its first chargesheet, the SFIO has identified a nine-member coterie behind the huge financial fraud at IFIN, which it alleged connived with the statutory auditors and some independent directors to defraud the company while running it as a personal fiefdom.
The chargesheet has been filed after an extensive probe into the affairs of IFIN, a subsidiary of Infrastructure Leasing and Financial Services (IL&FS), while similar probes are underway for other group entities including the parent firm that ran into deep financial trouble last year after it was found to have amassed huge stressed loans totalling over Rs 90,000 crore.
In its three key recommendations, the SFIO has said that it was observed that RBI in its inspection reports 2015 onwards had repeatedly pointed out non-compliance to group exposure norms at IFIN, an NBFC regulated by the central bank, and also the wrong calculation of Net Owned Funds.
However, no penalties were imposed on IFIN during the period and IFIN was allowed to continue its operations without any corrective action, the probe found.
Further, only in its letter dated November 1, 2017, was the issue on classification of group companies in order to arrive at the NOF and CRAR as per RBI Act, strongly conveyed to IFIN, the investigation report pointed out, while adding that action at the right time may have prevented the ballooning of the matter.
It has recommended that the RBI should conduct an internal investigation to find the reasons for the delay and also take appropriate action. The central bank has also been asked to take necessary policy measures to prevent such fraudulent activities in future.
In its recommendation regarding the auditors, the investigation report has said that the National Financial Reporting Authority (NFRA) and the Institute of Chartered Accountants of India (ICAI) should take action against the auditors as per the applicable provisions.
This has been suggested against the backdrop of the recommendation for "removal of existing statutory auditors (BSR & Associates LLP) and action against Deloitte, Haskins & Sells (DHS), who were auditors till 2017-18, when they were changed on account of mandatory rotation, for their fraudulent conduct during their period as statutory auditor.
The huge scam came to light last year after IL&FS and its subsidiaries defaulted on several debt repayments due to a severe liquidity crisis. As of March 2018, it owed over Rs 90,000 crore to banks and other creditors. The government in October last year superseded the board of IL&FS and appointed a new board, with eminent banker Uday Kotak as its executive chairman.
In its chargesheet filed before a special court in Mumbai last Friday, the SFIO has accused 30 entities/individuals of various violations and offences, including of financial fraud. Some of the accused persons are already in judicial custody.
The former top-management members of IFIN have been charged with committing fraud with intent to injure the interest of the company, its shareholders and creditors, resulting in wrongful loss to the company.
They have been accused of forming a "coterie to control day-to-day affairs of the company and of colluding with others" in using illegal methods on multiple occasions in violation of the RBI directions.
The 'coterie' identified by SFIO included Ravi Parthasarthy, Hari Sankaran, Arun Saha, Ramesh Bawa, Vibhav Kapoor and K Ramchand, who were in the top management of various IL&FS firms.