IL&FS scam: IFIN fraudulently lent to group firms to avoid declaring NPAs

Mumbai | Published: June 20, 2019 2:07:02 AM

The Serious Fraud Investigation Office (SFIO), in its probe into IL&FS Financial Services (IFIN), has found that the company fraudulently sanctioned loans to IL&FS group entities to avoid declaring stressed assets, sources told FE.

In FY16 alone, the SFIO found circuitous transactions between IFIN and ITNL worth of over Rs 600 crore, sources said.

By Anwesha Ganguly

The Serious Fraud Investigation Office (SFIO), in its probe into IL&FS Financial Services (IFIN), has found that the company fraudulently sanctioned loans to IL&FS group entities to avoid declaring stressed assets, sources told FE.

In several instances, IFIN received the same loan amount within a few days as debt repayments from the same or other group entities, the sources said.

The SFIO found instances of such circuitous transactions in case of group companies, including IL&FS Transport Networks (ITNL), IL&FS Energy Development (IEDCL), IL&FS Maritime Infrastructure and IL&FS Employee Welfare Trust.

In one such instance, the SFIO found that IFIN disbursed Rs 156 crore to Jharkhand Road Projects Implementation Company, a group company under the ITNL vertical, on September 26, 2015. The amount was repaid by Jharkhand Road Projects to IFIN in two tranches of Rs 106 crore and Rs 50 crore on the same day. In another case, Rs 50 crore was disbursed to Jharkhand Road projects on October 29, 2015, then the same amount was received as outstanding debt payment from IL&FS Rail, another ITNL subsidiary.

In FY16 alone, the SFIO found circuitous transactions between IFIN and ITNL worth of over Rs 600 crore, sources said. In the same period, SFIO unearthed circuitous transactions worth Rs 348 crore between IFIN and IEDCL.

“The company’s lending to its group companies increased from Rs 1,325.40 crore in 2012-13 (15% of total lending) to Rs 5,319.80 crore in 2015-16 (46% of total lending),” a person with knowledge of the matter said.

In financial year 2018, loans and advances to group companies stood at Rs 5,523 crore. The SFIO estimates that around Rs 2,230 crore were also advanced to group companies using third-party firms. “If the third-party loans are included, the group lending is more than Rs 7,800 crore,” the person said.

The agency, which investigates white-collar crime, also found that IFIN may have used bank borrowings for onward lending to group companies, a practice that is prohibited as per Reserve Bank of India’s norms for non-banking financial companies, sources said.

“As per data submitted by the company, IFIN had advanced approximately Rs 4,783 crore cumulatively from 2012-2017 to ITNL and its associates from cash credit. These cash credits were repaid by using the proceeds of issues of NCDs (non-convertible debentures) and term loans obtained from the banks,” a person with knowledge of the matter said. Several of these loans were unsecured.

SFIO discovered that the practice went unnoticed because IFIN got “tutored end use certificates” cleared by its chartered accountants, AP Shah & Associates, and “misrepresented actual end use of loans”, sources said.

Auditors use end-use certificates to verify that loans are used for the purpose for which they were taken. The chartered accountants issued the certificates in “good faith” without doubting the integrity of documents, they added. These certificates formed the basis of checks done by the auditors, who did not always independently verify the end use of term loans.

According to RBI norms, a non-banking financial company cannot use any type of bank credit, including cash credit, to give loans to its subsidiaries, nor can bank loans be used to advance unsecured loans. RBI norms also state that an NBFC can issue debentures for “deployment of funds to its own balance sheet and not to facilitate resource request of group entities/parent company/associates”.

Additionally, RBI’s inspection of IFIN’s affairs in 2015-16 also found that IFIN defined “group companies” differently from the central bank’s interpretation. As a result, net owned fund (NOF) and credit adequacy ratio calculations for the company differed greatly from RBI’s standard computations.

Since IFIN avoided having to declare certain accounts as stressed assets and did not present NOF and credit adequacy ratio as per RBI’s guidelines, the company’s financial statements did not accurately represent its finances. These statements, along with audit reports, formed the basis of credit ratings which allowed IFIN to access funds from public markets, SFIO said in its charge sheet filed on May 30.

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