How IL&FS Used a Subsidiary for Suspicious Fund Transfers
More evidence piles up every day about how the cash-strapped Infrastructure Leasing & Financial Services (IL&FS) was misusing many of its 347 group entities, which formed an opaque and complex web, to move money around and put off the inevitable for nearly two years before the eventual default. 
 
The Uday Kotak-led board needs to commission a forensic and compliance audit of shady entities of the IL&FS group to get a full picture of its dubious activities. Until then, we will keep finding individual examples of egregious wrongdoing. The manipulation, exploitation and eventual acquisition of Kanak Resource Management Limited (KRML) has unearthed a raft of shady lending and borrowing operations that expose how IL&FS was moving money around in group companies, to ward off a default for at least two years, before founder-chairman Ravi Parthasarathy stepped down in July 2018.
 
KRML was set up in 2007 as a joint venture (JV) between IL&FS Environmental Infrastructure and Services Limited (IEISL, which was formerly known as IL&FS Waste Management & Urban Services Limited) and Centre for Development Communication (CDC)—a registered trust run by Dr Vivek Agrawal for the purpose of collecting, segregating, trading and transporting municipal solid waste. IEISL controlled 94.71% of the equity and CDC held 5.29% stake.
 
CDC claims to run waste management projects in Nagpur, Jaipur and Gwalior. Of these, the Nagpur project has been mired in controversy since 2014. Allegations against it range from having collected Rs30 crore more than was due to it from the municipal corporation through a nexus with key municipal employees.  
 
A fact-finding committee “found gross violation of the terms and conditions and huge misappropriation.” KRML has denied these charges and even gone to court to fight the recovery action by the municipal corporation. Its 10-year contract with the municipality is, finally, set to end in early 2019. There is very little publicly available information about its work in Nagpur or elsewhere.
 
KRML’s website boasts of how it was “the first and only business arrangement of its kind” of a corporate entity and trust to join hands to align “the business interest of the corporate with that of the development initiatives of the Trust.” It didn’t work that way. Although Dr Agrawal, a physician and waste management expert, was appointed managing director (MD) and chief executive officer (CEO) in 2007, they fell out in 2015. This was mainly over the misuse of funds borrowed in KRML’s name and over the manner in which KRML was billing Nagpur Municipal Corporation, says Dr Agrawal.
 
On the face of it, the obvious answer to the situation would be for IEISL, the 94% partner, to amicably buy out CDC that held 5.9% of the equity. But typical of the way IL&FS functioned, it preferred to harass Dr Agrawal and deny him even his consultancy fees. But this time around, David seems to have scored over Goliath. 
 
Dr Agrawal dragged KRML to the National Company Law Tribunal (NCLT) and obtained an interim order in his favour on 25 September 2017. Once this happened, it was forced to follow a resolution process laid down by the Insolvency and Bankruptcy Code (IBC), which involved dubious manipulation to game the process. This is what has exposed how KRML was used as a conduit for moving money around within the group. 
 
KRML’s main occupation in the past few years was to borrow and to repay large sums of money to IL&FS group entities in the form of short-term loans. Page after page of related-party transactions conducted by the group were emailed to me anonymously. 
 
 
This frenetic borrowing and repayment activity happened mainly in FY15-16 and FY16-17. In FY15-16, over Rs350 crore was borrowed in multiple short- term transactions and also repaid; in FY16-17, the amount was over Rs90 crore.
 
Curiously, while KRML was furiously borrowing and repaying money to various IL&FS group entities, it also borrowed from Tata Motors Finance Ltd, Yes Bank and ORIX Leasing and Financial Services India Ltd (Orix has a 23.5% stake in the IL&FS holding company). The due diligence done by these lenders before extending loans is also questionable, as is their quick support for the machinations by the resolution professional (RP) appointed under the bankruptcy process. 
 
Rajendra Ganatra, a former banker and now a resolution expert, helped us analyse how the IBC process was manipulated and vitiated to acquire control of KRML. 
 
1. Through an EGM (extraordinary general body meeting) on 30 November 2015, KRML’s borrowing capacity was raised from Rs50 crore to Rs250 crore. KRML’s paid-up capital is only Rs12.86 crore and there is no justification in the EGM minutes for the five-fold increase in borrowing power.
 
2. Immediately thereafter, KRML got a loan of Rs183-crore from ILFS Financial Services (IFIN) which is 13 times its paid-up capital. And, yet, the repayment period is just 11 months (later extended by six months). Clearly, the intention was to use KRML for some shady manipulation. 
 
3. This is just one of many such transactions. The sheer number of borrowing and lending transactions with related entities in FY15-16 merits a full and separate investigation. But the independent auditor has submitted a clean audit report for the year ended 31 March 2017. In just one year, KRML had borrowed from, or borrowed as well as repaid money from, IL&FS Transportation Networks Ltd (ITNL), IL&FS Renewable Energy Ltd (IREL), Sabarmati Capital One Ltd, IFIN, IREL, SCOL, Hill County Properties, IL&FS Environmental and IL&FS Maritime Infrastructure Co Ltd, etc.
 
4. Dr Agrawal was not paid his consultancy fees of Rs4.5 lakh per month after May 2016. This assumes that the company had cash flow problems since then. Dr Agrawal filed for resolution under IBC in May 2017 in which he proposed Deepak Arora as interim resolution professional (IRP) which was accepted. By November 2017, the committee of creditors (COC) wanted Mr Arora replaced and appointed Sanjeev Ahuja, this was done in November 2017. 
 
5. The creditors stopped Mr Arora from appointing valuers and delayed valuation for 105 days (from 25 September 2017 to 8 January 2018), although bankruptcy guidelines require this to be done in 30 days. Clearly, the creditors were not really working in the best interest of KRML. 
 
6. KRML’s board was suspended on 25 September 2017. Yet, the company pushed through an illegal annual general meeting (AGM) on 27 September 2017, without notifying its minority partner CDC. In fact, KRML has held AGMs without informing CDC for three years, alleges Dr Agrawal. 
 
7. KRML received expression of interest from three companies—Ramky Group, Health Care Energy Pvt Ltd and IEISL. The first two, who are also ‘operational creditors’, were not provided all the information they sought, in order to stymie their bids. They were also given just eight days to submit their bids. 
 
8. Mr Ganatra says, “The RP has erred in allowing IEISL, which holds 94.71% in the company, to submit Resolution Plan u/s 29 of the IBC. The COC minutes do not carry any affirmative statement that IFISL meets the criteria set out u/s 29A of the IBC and Corporate Insolvency Resolution Process (CIRP) Regulations 38(3). IEISL, obviously, fails the Section 29A criteria, after the November 2017 amendment to the IBC, which bars connected persons to bid for a company. 
 
9. Mr Ganatra points out that the resolution plan of Rs479.09 lakh comprised CIRP cost of Rs60 lakh, payment to operational creditors & related entities of Rs220.09 lakh, and acquisition of shares of corporate debtor for Rs217 lakh. The plan, he says, does not provide a clear picture of the means of finance, or how the secured debt will be serviced or money distributed to various claimants. 
 
10. It also rejected claims by Dr Agrawal and ‘his related parties’ to the tune of Rs12 crore as being ‘contentions/contentious’.  This has been challenged by them and the matter is expected to come up for hearing on 16 November 2018.
 
11. The committee of creditors unanimously approved the bid of IEISL. The three creditors include Orix Leasing, which is hardly an unrelated financial creditor, given its large stake in IL&FS. All this only smacks of a manipulated resolution to benefit IL&FS.
 
12. These operational creditors have challenged the rejection of their claims and a hearing had been scheduled for 13 September 2018. Now that IL&FS itself has a new board, it will be interesting to see how the KRML dues are serviced. 
 
Will SFIO (serious fraud investigation office) or the Mr Kotak-led board of directors investigate what IL&FS was doing with the money?
 
Like this story? Get our top stories by email.

User

COMMENTS

Deepak Asthana

4 weeks ago

The Rapid metro would have better ridership provided it was extended to Udyog Vihar. Everyone except the Haryana government knew that the project was going to fail as people in DLF areas rarely use public transport. 2ndly, it is just another example of the loot of public money.

Dayananda Kamath

4 weeks ago

It is not only misuse of funds it is manipulation of every authority that matters and abuse of legal provisions. Every one involved, IBC officials, bankers, executives of IL &FS and its subsidiaries, etc should be brought to book then only the governance can be improved. Why ROC did not raise doubts when representative of other shareholder is not there in the filing of board meetings and decisions.

Mahesh S Bhatt

4 weeks ago

Golmaal Mahesh Bhatt

Rajendra Ganatra

1 month ago

Very serious and wilful misuse of bank loans, and compromising insolvency and bankruptcy code. The kingpin in IL&FS Financial Services whose whole time directors must go to jail.

IL&FS Board Goes for Open Bidding for IL&FS Securities and IL&FS Settlement & Transaction Services
Debt-ridden Infrastructure Leasing & Financial Services Ltd (IL&FS) has decided to sell its stake in IL&FS Securities Services (ISSL) and in ISSL Settlement & Transaction Services (ISTSL). IL&FS said its new board of directors has decided to solicit expressions of interest (EOIs) to assess the interest for the sale.
 
Separately, IndusInd Bank, which has earlier agreed to buy ISSL decided to terminate the agreement citing non-fulfilment of conditions.  
 
The previous board of IL&FS had decided to sell ISSL to IndusInd Bank which had acquired all necessary clearances as well. However, citing non-fulfilment of certain conditions, IndusInd Bank on Tuesday decided to terminate its agreement signed in June 2018. In a regulatory filing, the lender says, "The share purchase agreement (SPA) stands terminated as all the conditions precedent were not satisfied within the stipulated time period. We understand that the newly constituted board of directors of IL&FS has decided to initiate a new process for the sale of its equity interests in ISSL." 
 
IL&FS Securities Services is a clearing member in equity and other derivatives along with ISSL Settlement & Transaction Services which provides clearing services in commodities derivatives segment. 
 
In a statement, IL&FS says, "The Board is cognizant that these steps are required to advance the process for putting together resolution plans for the IL&FS group, based on market interest and price discovery for various assets. Any binding transaction for the sale of assets, as well as the resulting resolution plans, will be subject to requisite approvals, including the national company law tribunal (NCLT) before the transactions are implemented."
 
Set up in July 2006, IL&FS Securities Services, is a capital markets intermediary for professional clearing, depository and custodial services. It services, retail and institutional clients, include over 1,000 brokers, foreign portfolio investors (FPIs) and foreign institutional investors (FIIs).
 
 
 
Like this story? Get our top stories by email.

User

When IL&FS Put Its Joint-venture Partner behind Bars for Six Months on Trumped-up Charges: The RAHI Story
Umesh Baveja, founder-chairman of RAHI (Regional Aviation Holdings International), will never forget his milestone 50th birthday. Life, as he knew it ended that day, as he lay on the floor at Arthur Road jail (Mumbai), among rows of under-trials with space of less than 3x7 feet per person. He, and his chartered accountant, remained there for 180 days from 22 September 2014 until 21 March 2015.  
 
Mr Baveja was a victim of the vicious machinations of Infrastructure Leasing & Financial Services (IL&FS) to gain control of his company, by converting a civil dispute into a criminal matter. 
 
This is probably the worst of the horror stories about IL&FS’s misuse of State machinery and another case study of how the legal system can be exploited by powerful corporates with malevolent intent. 
 
So, who was Umesh Baveja and how did he get embroiled in IL&FS’s machinations? A former vice-chairman of Cairn Energy, he is a lawyer, management graduate and alumnus of IIT-Delhi and counts RBI governor Raghuram Rajan and civil aviation minister Jayant Sinha among his college-mates.
 
Mr Baveja turned entrepreneur through a company called Comet Infra, which became RAHI in December 2009. RAHI had the vision of developing 99 regional airports by 2025 to serve industry clusters in smaller cities. Earlier that year, Ramalinga Raju of Satyam Computers had famously confessed to India’s biggest corporate fraud and, in the resolution that followed, IL&FS acquired its infrastructure company Maytas -- later renamed IL&FS Engineering and Construction Company Limited (IECCL). Since Maytas was already developing regional airports, such as Gulbarga and Shimoga in Karnataka, IL&FS noticed Mr Baveja’s ambitious aviation infrastructure company soon after. 
 
IL&FS sought collaboration with RAHI, and also agreed to a minority holding of 40%, even though it had its own plans to develop airport infrastructure as a portfolio. 
 
A joint venture (JV) between RAHI and IL&FS Transportation Networks Limited (ITNL) was signed in March 2010 and the company formed by the end of the year. But ITNL and RAHI began working together on the airport projects even earlier.
 
RAHI acquired the languishing Shimoga and Gulbarga projects from IECCL as its first two, privately developed, greenfield airports. Several payments were made to various entities for work done prior to the formal agreement. These included payments to IECCL (for the Gulbarga airport) and Comet group company (Rs4.5 crore for development expenses). RAHI was paid a project management fee for developing Gulbarga airport which was set up as a SPV (special purpose vehicle). These payments were made from the equity capital of Rs30 crore brought in by RAHI and Rs20 crore by ITNL. 
 
In line with IL&FS’s template, its financial arm, IL&FS Financial Services (IFIN), was to syndicate the debt, which it did through a consortium led by Bank of Baroda (BoB), for a hefty fee. 
 
According to Mr Baveja, the pace of development and its future potential enhanced RAHI’s value. A valuation report by SPA Capital had then valued RAHI at Rs600 crore.  While Mr Baveja was flying high and even planned a regional airline (in 2012), his success was souring things with IL&FS which now wanted majority control. 
 
In the past, IL&FS has used its enormous clout to unilaterally change equity holdings or cut partners out of projects (this has been documented earlier). Naturally, Mr Baveja resisted; but he didn’t realise how malicious IL&FS could get. Ramachand Karunakaran with Mukund Sapre managed the venture with RAHI. 
 
IL&FS’s strategy was to squeeze RAHI financially while harassing it from multiple directions. Mr Sapre, who was its nominee on the board, would not attend board meetings when the disputes began. His presence was necessary for approval of further capital injection. The financial squeeze naturally delayed projects and led to pressure from the government. 
 
Eventually, things reached a point where RAHI and ITNL decided to part ways. But it wasn’t so simple. IL&FS did not plan to let the project go. It used its influence with BoB to halt the disbursement of sanctioned payments to RAHI.  MD Mallya, who was the BoB chairman then, has not responded to my message seeking his comments. 
 
IL&FS blocked RAHI’s attempt to seek arbitration against IECCL which was stalling its capital raising plans. It also lobbied with the Karnataka government to take over the projects from RAHI (with a view to getting them back later). Having starved the Gulbarga project of funds, it got Corporation Bank to declare it a wilful defaulter. 
 
At the same time, IL&FS misused its vast resources to get IECCL to game the judicial system to block RAHI’s attempt to take the issue to arbitration, as per the contract. Its petition was dismissed by the Karnataka High Court on 23 July 2013; it approached the Supreme Court seeking a stay on the High Court’s order. The apex court dismissed it on 23 August 2013. 
 
Undeterred, IL&FS went back to the Karnataka High Court with a review petition which was also dismissed on 22 November 2013. Given the expense of legal proceedings in India, this strategy is aimed at coercing the capitulation of financially weaker entities. In this case, RAHI was nicely cornered by starving it of money. 
 
Even when an arbitrator was appointed, ITNL blocked payments to the arbitrator and went on to file a petition before the company law board. Another, now-discredited, bank chairman was used to threaten Mr Baveja to fall in line. I have perused an exchange of angry emails between Mr Baveja and Mukund Sapre, which corroborate much of this. 
 
Finally, in March 2014, ITNL initiated criminal proceedings against Mr Baveja and others (including his chartered accountant who was also jailed) on the basis of a report commissioned by KPMG. 
 
The role of auditors and lawyers, and their many conflicts of interest, is a matter that requires strong action by our reluctant regulators. The report questioned several approved payments made by RAHI, helped buttress IL&FS’s charges and, according to Mr Baveja, left out several important facts. The scope and objective of the KPMG report was not told to him, or whether it was even an audit under accepted accounting principles. Mr Baveja says, a full audit of RAHI and the two project companies from inception to March 2013 has given them a clean chit; but that report was ignored. 
 
The Bandra-Kurla police station is conveniently located a stone’s throw from IL&FS’s grand corporate headquarters. On a complaint by IL&FS, the Mumbai police zipped off to Bengaluru to arrest Mr Baveja and his chartered accountant. Although the magistrate initially denied police custody on the grounds that it was a civil dispute, IL&FS piled on the pressure at every level (including at the sessions court) to ensure that bail was denied for four months. 
 
Stunningly, even after bail was granted, Mr Baveja was kept in jail for two more months by rejecting his sureties on technical grounds, such as the fact that assets secured against bail were not located in Mumbai! 
 
This, in a country where film-stars stashing arms for a serial bomb blast get furlough at will, and a security guard who murders the daughter (Pallavi Purkayastha case) of a high profile IAS couple, can vanish from jail.
 
What is outrageous, in the light of IL&FS’s subsequent financial collapse, is that its attempt to teach Mr Baveja a lesson was at a big financial cost to itself! When RAHI failed, the Karnataka government took over the projects, causing a loss of Rs45 crore. There was no internal inquiry. Ramanand Karunakaran, who was part of Ravi Parthasarathy’s close cabal, and Mr Sapre, who was made managing director of IECCL, resigned only recently.
 
I had sought Mr Sapre’s comments on the RAHI matter just a day before the IL&FS board was sacked and replaced by the one headed by Uday Kotak. He replied: “The matter referred in mail is sub-judice as it is pending in the Metropolitan Magistrate Court in Mumbai. Based on forensic audit reports and other evidences Courts have consistently found prima facie serious economic offences such as forgery of Government Stamp Paper. Therefore, we urge you to go through these public documents to get full picture and not rely only on selective information in the form of single email. Thanks for giving us opportunity to clarify.” 
 
Accordingly, I have asked for, and perused dozens of emails between Mr Sapre and Mr Baveja and others which tell a different story. All IL&FS related dealings have multiple payments to multiple related entities, favoured contractors; it makes no sense to get into the messy details, except to say that they probably need a full, independent audit. 
 
I also spoke to Mr Kotak to find out what he planned to do on various such allegations involving several IL&FS group entities. He said that the serious frauds investigation office (SFIO) would go into allegations of wrongdoing and worse, while the board headed by him is primarily mandated to find the best possible solution to the financial debacle caused by its massive outstanding debt. 
 
The tragedy is that the consequences of IL&FS’s machinations remain intact. These include the onerous bail conditions imposed on Mr Baveja, such as regular trips from Bengaluru to Mumbai, to report to the Bandra-Kurla police. His bank accounts also remain frozen for over four years. Is it any wonder that people are still unwilling to talk about the humiliations they faced on falling out with IL&FS? 
 
A senior IAS officer, who headed Tamil Nadu’s road development work, was blocked from his office by company security guards on the instructions of Ravi Parthasarathy. He is still reluctant to talk about it. So, what can one expect from those outside the powerful protective circle of the IAS?
 
Months after the systemic turmoil caused by the IL&FS scandal (banks and lenders are expected to lose over Rs30,000 crore) there is no action against the crony cabal, headed by Ravi Parthasarathy, who ran this company for 30 years. They have been allowed to resign and go away, while the Union government is busy with highly controversial actions with regard to the banking regulator as well as the Central Bureau of Investigation (CBI). 
 
Like this story? Get our top stories by email.

User

COMMENTS

Isha Aggarwal

4 weeks ago

The saga of IL&FS criminality : https://www.moneylife.in/economy-and-nation/ilfs-mess
https://tinyurl.com/ILFSFrauds

Isha Aggarwal

4 weeks ago

I urge the current and ex employees (those who did not join by influence of some govt servants) of IL&FS to start writing about their experience with IL&FS.

Isha Aggarwal

4 weeks ago

Govt has made another mistake of appointing IAS men to correct the problems of IL&FS.
Many IAS men and women have been part of IL&FS earlier, and have enjoyed the largesse, willingly contributing to the loot of IL&FS.

If these clerks were capable, our PSUs and govt run enterprises would not always be in the red.

IAS men and women are known to be incompetent, incapable and corrupt. They will try and save the skin of the board members and Ravi Parthasarthy by weaving stories and instituting 'reforms'.

Isha Aggarwal

4 weeks ago

IDFC is a complete duplicate of IL&FS and will go the same way.
Like IK&FS, its staffed with sons, daughters, wives, sister, brothers and other relatives of IAS (and other babus') men and women.

Its time that all IAS men/women who worked with IL&FS need to be punished along with the board.

Ralph Rau

1 month ago

Why is Ravi Parthsarathy not in jail or on bail ?

Is there someone connected to Government that he can expose as having shared in ILFS spoils ?

What happened to Na Khaoonga Na Khane Doonga

Dayananda Kamath

1 month ago

May be this case is used to cleanse the nexus of, banker, executive politician and judiciary harming public interest. Will the authorities give justice to the aggrieved and exemplary punishment to all involved.

Dr. Rakesh Goyal

1 month ago

IL&FS ex-management is curse on humanity and criminal of Indian economy and society. All of them should be punished by victims. Who will return the days spent by Baveja in jail for no crime? SC has no time for real victims of manipulated system.

TIHARwale

1 month ago

Ravi Parthasarathy knows how to manage people in authority with egg, peg and leg at his disposal, so no surprise in his power to destroy those who question him.

Harish

1 month ago

Sad. What were all those "eminent" directors doing on ILFS and group companies doing when these machinations were taking place?

REPLY

Isha Aggarwal

In Reply to Harish 4 weeks ago

They were all enjoying the loot. If you can manage to get CTCs of these people, along with non-billable perks, you will know how IL&FS has been a parking ground for these people, babus and their relatives.

Sudhir Jatar

1 month ago

Reads like a horror story. PMC and governments have been following the same strategy aimed at coercing the capitulation of financially weaker entities e.g. NGOs because of the expense of legal proceedings in India . This is my experience for the last two decades due to which cases remain pending for decades. And this is inspite of the fact that most lawyers are not charging us their full fees being in public interest. Even the other costs kill us. The new Board of IL&FS should apply itself to these issues to restore the faith of the public.

REPLY

A BANERJEE

In Reply to Sudhir Jatar 1 month ago

It is indeed a horror story.

Veeresh Malik

1 month ago

Where did the stolen money go, how does the Government hope to revive matters, especially for projects of strategic importance?

Mohan b Rao

1 month ago

"IL&FS which now wanted majority control...". Is there email correspondence on their desire to have majority control? If so, there is a prima facie motivation for such self-destructive harassment. Ravi Parthasarathy should not be spared if all this is true. At least through PIL

We are listening!

Solve the equation and enter in the Captcha field.
  Loading...
Close

To continue


Please
Sign Up or Sign In
with

Email
Close

To continue


Please
Sign Up or Sign In
with

Email

BUY NOW

online financial advisory
Pathbreakers
Pathbreakers 1 & Pathbreakers 2 contain deep insights, unknown facts and captivating events in the life of 51 top achievers, in their own words.
online financia advisory
The Scam
24 Year Of The Scam: The Perennial Bestseller, reads like a Thriller!
Moneylife Online Magazine
Fiercely independent and pro-consumer information on personal finance
financial magazines online
Stockletters in 3 Flavours
Outstanding research that beats mutual funds year after year
financial magazines in india
MAS: Complete Online Financial Advisory
(Includes Moneylife Online Magazine)