Farouk Merwan Irani was a name to reckon with in the world of financial services for nearly four decades. He founded, in the company of Dr AC Muthiah, the first company in the domain of asset leasing in the country which was aptly christened ‘The First Leasing Company of India Ltd’ (FLC).
Its advent, in 1973, marked a new chapter in the country’s financial services arena. The practices that were subsequently adopted by this industry from documentation, accounting and contracting terms to even the management practices, were the creation of this company.
The taxation issues around leasing that came before the courts essentially originated out of FLC.
Leasing is now out of fashion and Mr Irani himself fell on bad times and is indicted for fraud and hounded by the agencies. He was arrested by the enforcement directorate (ED) in June 2016 and nothing further is known from the public sources on the current status of the prosecution.
To what purpose is this moribund tale, to soak the valuable time of the readers who are striving hard to clock their 90 hours for the current week in keeping with the clownish clamour of some corporate chieftains?
There is some context to get nostalgic about this case, especially for the older generation, with a recent judgement surfacing some spicy content.
But before diving into the judgement, a bit of the history would be in order on what transpired in FLC that put it on a slippery slope and brought it in to disrepute, triggering a plethora of criminal cases.
In the period between 1973, when FLC started, till about the close of 1990s, the leasing industry itself went through a period of rapid growth and a quick decline.
In the 1980s, it became a fashion for any person who could spell ‘leasing’ with not more than two mistakes to start a company! To raise money and get a listing became a child’s play and required no great credentials and history.

The industry grew in the shadows of dodgy accounting that allowed front ending of income and keeping the debits to the minimum. A beneficial tax regime helped boost the earnings to get a juicy market valuation.
The assets that constituted the universe of leasing often included such oddities like beer and soda bottles, crates to carry those, scaffolding rods, centering sheets, rolls for steel mills and film reels to record motion pictures!

The industry busied itself in questionable transactions which did not have any underlying asset (totally fictitious transaction), or revaluing an old and previously used asset with supportive certification by professionals like the chartered engineers and the chartered accountants which would be first sold to the leasing company by the original owner, and then taken back on lease in a separate transaction! Even reputed companies knowingly or unwittingly were party to such arrangements and looked to improve their after-tax profits.
Some of the companies were caught in the act of tax avoidance and slapped with penalties. A few companies accessed the settlement commission to wash off their sins!
The interesting irony was that FLC itself did not come under fire for any malpractices (public sources) and managed to keep its record outwardly clean, till FY12-13.

Its directors’ report and the annual chairman’s speech often were noted for the gravitas and an insightful analysis of the industry’ performance and prospects. Of course, in hindsight, they sound queer and squeamish!
A touch of sardonic humor can be noticed in the language of the directors’ report for FY12-13, the last one produced by the company, some select parts of which are extracted here for reference.
The hypocritical statement of growing cautiously in a difficult economic environment and not succumbing to over-ambition when actually the company was cooking its books is no different than a Bollywood villain promising safe company to the heroine in a lonely suburban villa!
And the statement that the company had an exemplary credit management with a zero net non-performing asset (NPA), is actually an affirmation that the auditors saw little of the books!
Though the quantum may be lower, FLC would feature in the scoundrel showcase along with IL&FS, DHFL, Reliance Capital, LVB, PMC Bank and a plethora of other non-banking finance companies (NBFCs) where the audit miserably failed to detect blatant frauds and the boards were fully complicit in the crime.
The meeting held on 27 May 2013 to approve the accounts also approved the reappointment of Mr Irani for a further period of five years as the managing director. The AGM was fixed for 18 September 2013.
Meanwhile, the Reserve Bank of India (RBI) had completed the inspection of the books of the company for a period of four years from 2010 to 2013 and had found serious irregularities.
After some delay, the company, on 16 September 2013, informed the stock exchanges that RBI, under Sections 45JA and 45L of the Reserve Bank of India Act, 1934, directed that "until further orders, the company shall not, (a) sell, transfer, create charge or mortgage or deal in any manner with its property and assets without prior written permission of the Reserve Bank of India; (b) declare or distribute any dividend; (c) transact any business; or (d) incur any further liabilities."
On 10 October 2013, Mr Irani had, in a communication to the stock exchanges, shared some updates of a board meeting purportedly held on that day.
Strangely, he revoked his communication the next day. Subsequently, the board had passed an unusual resolution on 17th October as extracted here!

On the same day, Mr Irani submitted his resignation, which was formalised only on 25th October by the board, with a rider that the resignation did not absolve him of the consequences of his actions, omissions and commissions since the inception!
The auditors had resigned meanwhile on 7 October 2013 and had revoked the audit certificate issued for the year ending 31 March 2013. This fact was recorded by the board on 14th November and informed to the stock exchanges. S Mohan, Retd SC judge, was inducted into the board. Justice Mohan resigned within a few weeks.
In another dubious first, the AGM (held belatedly on 4 April 2014) passed a resolution as under!
The stock exchanges delisted the company on 28 February 2018 for failure to prepare and file its accounts and hold the necessary meetings.
As per the information contained in the accounts for the year-ended 31 March 2013, the company had outstanding bank loans of approximately Rs1,400 crore. On the asset side, the lease and other receivables was Rs1,800 crore (approximately).
RBI’s inspection report in June 2103 was followed by a special audit done by Sundaram and Srinivasan, chartered accountants, and a forensic investigation by RK Raghavan, former CBI director. Cases came to be filed by the CBI and the ED on the complaints filed by the lenders.
Based on one such case of CBI, it is noticed that the following persons had been named as the accused-
AC Muthiah (A1), Farouk M Irani (A2), Dilli Raj (A3), L Sivaramakrishnan (A4), FLCIL (A5) represented by the deputy official liquidator, High Court of Madras, V Balasubramanyan(A6), NR Sridharan (A7), Sabapathy Neelakantan (A8), Kishor J Dandekar (A9), TN Seshadri (A10), B Rajesh (A11), R Srinivasan (A12), Ashwin C Muthiah (A13), Darnolly Investments Ltd (A14), represented by Ashwin C Muthiah, Ranford Investments Ltd (A15), represented by Ashwin C Muthiah, Sicagen India Ltd (A16), represented by Ashwin C Muthiah, ACM Educational Foundation (A17), represented by Ashwin C Muthiah, ACM Medical Foundation (A18), represented by Ashwin C Muthiah, South India House Estates Properties Ltd (A19), represented by Mariappa Nadar Rajamani, director of South India Travels (A20), represented by Kuppuswamy Gopalakrishnan, Sherna F Irani (A21), Farah Bakshay (A22), Lia Gagrat (A23) and MAC Public Charitable Trust (A24).
The recent court decision which triggered this article concerns two of the named accused in the above list, Ms Bakshay and Ms Gagrat. The said two were named as accused in nine of the cases investigated by CBI and they approached the trial court for a discharge which failed.
The order dated 6 January 2025 of the single judge of the Madras High Court, arising on an appeal by the two accused, surfaces some interesting details about the nature of the fraud committed in FLC.
The said two petitioners are the daughters of Mr Irani. The modus operandi of Mr Irani in the alleged swindling of money from FLC is narrated in some detail which is summarised here as it is quite innovative.
As per the court’s order, the regulator, RBI, had inspected the company many times between 2 April 2008 and 4 July 2013. Only their report in July 2013 unearthed the lapses but not any time before.
Mr Irani allegedly masterminded the modus operandi that involved setting up multiple entities, referred to as ‘satellite companies’ with some of the employees of FLC as directors.
These satellite companies were lent money by FLC which was used to buy the shares of FLC which aggregated to about 26%. The said companies also purchased accounts receivables of FLC with the funds provided by FLC so as to remove the NPAs from the books of FLC.
Besides the above transactions, the satellite companies lent money to Mr Irani and his family at concessional interest rates of 3%. This money was pumped into FLC by Mr Irani and his family members as advances for carrying out factoring transactions.
These factoring transactions yielded a significantly higher interest of 15% to the family members and resulted in sizeable gains to them at the expense of FLC.
The satellite companies also bought cars and properties for the use of Mr Irani and his wife.
The amounts that accrued to the account of Mr Irani, his wife, Sherna Irani, and his two daughters, Ms Bakshay and Ms Gagrat, were withdrawn sometime between 2011 and 2013, more later, and kept in their individual names as fixed deposits.
One of the charge-sheets arising in a PMLA (prevention of Money Laundering Act) case gives the details that fixed deposits to the tune of Rs51.27 crore were held in Lakshmi Vilas Bank and Karur Vysya Bank in the names of Mr Irani, Ms Irani, Ms Bakshay, Ms Gagrat and Irani Family Maintenance Trusts.
It could also be seen from the annual accounts of FLC for March 2013 that a sum of Rs80 crore which was lying under current liabilities with the nomenclature of deposits stood withdrawn during the year.
The case before the single judge was that the two daughters cannot be charged for the various offences (u/s 120B r/w. 201, 409, 420, 468, 471, 477A of IPC) as they did not participate in the management of FLC for committing the alleged frauds and their bank accounts were used by their father without their knowledge to transact the illicit money.
The way the funds moved around from FLC’s books to the benefit of the Irani family is picturesquely depicted in the order. Only a part of that is extracted to the extent the funds moved through the hands of the two petitioners who sought the quash order.
It is possible that the two daughters were ignorant of the actual fraud perpetrated by their father. It is also possible that the deposit of the illicit money in their current account could have happened without their knowledge and effected by their father.
However, the opening and closing of the FDs (fixed deposits) could not have happened without them signing the papers unless their father had a power of attorney (POA) and executed the same.
Therefore, the presumption of ignorance to discharge them is bound to baffle a layman who is ignorant of the loopholes of the penal code and flaws in the way the case was initially constructed by CBI to indict them.
The interesting irony of this judgement is that the court listed out the various steps involved in the loot and scored off each one of them as not referable to any offence committed by the two petitioners!
To list out the reasoning of the court will make this piece unduly long and also the purpose of the article is not to appraise the merits of the judgement, which only a criminal law expert can, but to use its contents to develop the story around the formidable fraud of Mr Irani!
The actual amount siphoned out is perhaps much more than the various references made in the court cases, as it has transpired that a very sizeable part of the receivables was fictitious and the banks received no money towards the loans outstanding. Unfortunately, no details are available of the liquidation of the company in the Madras High Court that would establish the scale of the loot.
There is a lot more to write, but the article has already gone out of hand! To round off the discussion, a brief reference is made to another order of the division bench of the Madras High Court that rejected the discharge petition under the PMLA,2002 by Ms Irani.
There the court held in para 21 of the order dated 4 February 2021 in CRL.O.P.No.26586 of 2016 & CRL.M.P.No.13326 of 2016 and CRL.O.P.No.23917 of 2018 & CRL.M.P.Nos.13534 & 13535 of 2018-
21. Lastly, A Ramesh contended that Ms Irani was only a housewife and she had no knowledge that the amounts standing in her name were generated by her husband via criminal activity relating to a schedule offence. Section 3 of the PML Act begins with the expression, 'whosoever' which means that any person, not necessarily the person who had generated the proceeds of crime via a criminal activity, will be liable under Section 4 if he, directly or indirectly, had projected the proceeds of a crime as untainted property. In the teeth of the reverse burden under Section 24 of the PML Act, it is too premature to hold that there are no prima facie materials against her.
In another PMLA proceedings of one of the employees, the same division bench in a different order dated 4 February 2021 (Crl.O.P. No.24888 of 2016 and Crl.M.P. Nos.12030 and 14058 of 2016) made an interesting observation about the ED not pursuing a case against Dr Muthiah -
When that being so, the statement of B Kumar, learned senior counsel appearing for the petitioners, that the act of the ED in prosecuting Dilliraj and his wife, leaving out Mr Muthiah and his family members, does show that they are adopting a pick and choose attitude, merits serious consideration. However, this Court can only raise its eyebrows and stop with that and cannot quash the prosecution against Dilliraj, on the ground of discrimination under Article 14 of the Constitution of India.
First leasing fraud and the story of Mr Irani should get more coverage and discussion than what it has so far. Maybe a Rs1,500-crore fraud is no longer news in this land!
(Ranganathan V is a CA and CS. He has over 44 years of experience in the corporate sector and in consultancy. For 17 years, he worked as Director and Partner in Ernst & Young LLP and three years as senior advisor post-retirement handling the task of building the Chennai and Hyderabad practice of E&Y in tax and regulatory space. Currently, he serves as an independent director on the board of four companies.)