IL&FS Forensic Audit Exposes Web of Corruption, Shady Loans: Moneycontrol
The final forensic audit report of Infrastructure Leasing & Financial Services (IL&FS), prepared by Grant Thornton, exposes ever-greening of loans, loans given without proper collateral and other malpractices, says a report from Moneycontrol
 
The final forensic audit report from Grant Thornton confirms what Moneylife had written two months ago. "The 166-page interim report of Project Icarus, as the investigation was named by the audit firm, exposes 10 different kinds of fraud, which are succinctly tabulated with names, numbers and detailed proof, provided in the annexures. According to GT, the 10 types of possible fraud identified by it in IL&FS Financial Services Ltd (IFIN) alone involves a massive Rs13,299 crore.
 
"The report also points out that IL&FS had adopted a ‘unified approval framework’ to facilitate intra-group synergy and to provide IL&FS group visibility for all transactions. This further pinpoints responsibility, primarily, on the committee of directors (CoD) of four persons, comprising—founder and former chairman Ravi Parthasarathy, former vice-chairman Hari Shankaran, director Arun Saha and IFIN’s former managing director, Ramesh C Bawa," the Moneylife report published on 6 March 2019 says. (Read: Why the Delay in Action When GT Report Pins Responsibility on Cabal of Four at IL&FS)
 
Coming back to the final audit report of Grant Thornton submitted to IL&FS, as per Moneycontrol, it mentions names of several prominent companies like Essar, DB Realty, SKIL Infrastructure, Gayatri Group, Shiva Shelters and Construction Pvt Ltd (Siva Group), Srei Infrastructure Finance Ltd (SIFL), Kohinoor, Parsvanath Developers and Housing Development Infrastructure Ltd (HDIL), with regards to the ever-greening process by IL&FS.
 
Moneycontrol, which has a copy of the final forensic audit report, says the auditor has found 107 instances of loan ever-greening, loans given without proper collateral and management links with borrowers companies.
 
"Grant Thornton found indirect links of Mr Bawa, former managing director (MD) of IFIN with Silverglades Group and Ansal Group, which were provided loans to the tune of Rs487 crore. The auditor found that Silverglades was given loans by the company's former director without seeking any securities. Overall loans worth Rs3,768 crore were sanctioned without security. Mr Bawa did not disclose his investments in AAA Infosystem and AAAB Infrastructure," the report says.
 
Grant Thornton was engaged by the new government-appointed board of directors (BoD) of IL&FS to conduct a special audit for all high-value transactions undertaken by IL&FS Ltd and few of its group companies for the period commencing from 1 April 2013 to 30 September 2018.
 
In 73 instances, many prominent companies were given loans despite a negative assessment after taking approval from the company directors. "During the audit, Grant Thornton found that 14 external companies had borrowed money and transferred to IL&FS group companies. SREI borrowed capital thrice and transferred it IL&FS group companies, and Sangam Group borrowed twice and transferred the money to IL&FS."
 
"Moreover, Grant Thornton found 20 instances where loans were given to companies totally worth Rs1,827 crore without any security from borrowers. It also found 17 instances of loan disbursements worth Rs1,941 crore, where securities fell short in comparison to the sanctioned amount," the report from Moneycontrol says.
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Essar Steel: An Intense Battle for Control that May Not End in the Indian Supreme Court
On 7th May, Prashant Ruia, director of Essar Steel, moved the bankruptcy court, yet again, in an attempt to derail Arcelor Mittal’s Rs42,000-crore bid for the family’s flagship company. Mr Ruia has attempted to link Arcelor Mittal’s promoter, Lakshmi Niwas Mittal (LNM), to his defaulter brothers Pramod and Vinod Mittal, because LNM had settled a massive outstanding payment on their behalf with State Trading Corporation (STC). 
 
Prashant Ruia’s petition, through Essar Steel Asia Holdings, argues that the Mittal brothers continued to have business links and, as defaulters, are ineligible to bid for Essar Steel under Section 29A of the Insolvency and Bankruptcy Code (IBC). 
 
By way of comparison, this is like Prashant Ruia arguing that Reliance Industries be disallowed from bidding for any stressed assets because Mukesh Ambani ‘continued to have business relations’ with Anil Ambani, as evident from the Ericsson bailout that helped keep the younger brother out of jail. It is absurd, but serves his purpose of delaying the handover of Essar Steel until the bankruptcy court and, probably, the Supreme Court decides the case as well. This is exactly how the resolution that is supposed to be completed in 270 days has dragged on for over 600 days with no sign of ending.
 
Remember, LNM has paid over Rs7,500 crore, under pressure from banks, to clear the dues of Uttam Galva and other companies he had invested in, to be eligible to bid for Essar Steel. Meanwhile, the Ruias found a way to delay matters and foment litigation with a gimmicky offer to pay over Rs54,000 crore to secured and unsecured creditors. The proposal was made after Arcelor Mittal won the bid and the source of their sudden access to such large funds remains hazy. 
 
Indian banks, especially public sector banks (PSBs), are the biggest losers in this long delay. Other group companies also owe thousands of crores of rupees to PSBs with little hope of full recovery. Why then are banks such passive spectators in this litigation? Do they have no role in convincing courts that the Ruias are not fit to retain control? 
 
For instance, Essar Steel and Arcelor Mittal are locked in legal battles in the US and UK, where Mr Mittal is able to get quick and clear orders overseas. A few days ago, Arcelor Mittal obtained an interesting order from a UK High Court in connection with a $1.5 billion US arbitration award against Essar Steel in 2017. Essar Steel had failed to honour the claim. This was originally against Essar Steel Minnesota and Essar Steel Ltd. 
 
Arcelor Mittal has now turned on the heat globally leading to several disclosures that ought to be of interest to Indian lenders and investigation agencies as well. Areclor Mittal’s recovery action exposes the reckless lending by Indian banks, who accepted personal guarantees from the Ruias, far in excess of their ability to pay. Here are a few revelations from the legal proceedings in London and in India.
 
Personal Guarantees: A clutch of banks, led by State Bank of India (SBI), has approached the debt recovery tribunal (DRT), Ahmedabad (652 of 2018), to invoke personal guarantees of a massive Rs13,000 crore plus interest by Prashant Ruia and Ravi Ruia. These guarantees were obtained against loans to Essar Investments, a company whose borrowings are rarely reported. Notice how large the amount is—it would have kept Kingfisher Airlines (which owes Rs9,000 crore with interest to banks) as well as Jet Airways (Rs8,500 crore) afloat and saved over 30,000 jobs. 
 
This is probably the largest personal guarantee extended to individuals by the banking sector. Although the DRT, Ahmedabad, has accepted the banks’ plea, they have almost no real hope of recovering any money, because the affidavits filed by Ravi Ruia and Prashant Ruia show that they have hardly any individual assets to cover this guarantee. Prashant Ruia’s entire family lives overseas. His father, group founder Shashi Ruia, and his wife Manju, live in Dubai and his children study in the US.
 
Prashant has only one entity—Bamboo International Holdings Ltd—which is 100% owned by him. Ravi Ruia, the second defendant, shows just two entities in which he has a 100% holding—Briar Gardens Ltd and Euro Global Investments FZE. Ravi Ruia’s son, Rewant Ruia, also lives in Dubai. 
 
Lenders, who are part of this DRT action, are: SBI (on behalf of affiliate banks since merged with it), Bank of India, Canara Bank, Edelweiss Asset Reconstruction, ICICI Bank, IDBI Bank, Punjab National Bank and Union Bank of India. Again, it is PSBs who have maximum exposure and have probably written off these loans, leaving the exchequer and investors to take the hit. 
 
At a time when the ministry of corporate affairs (MCA) wants to disgorge money from independent directors of IL&FS (Infrastructure Leasing and Financial Services), shouldn’t the Reserve Bank of India (RBI) or government investigation agencies bring to book the bankers who accepted such dubious guarantees? 
 
Misleading RBI: Indian Express has a report on how Chanda Kochhar, of ICICI Bank, had ‘misled’ RBI in 2014 on a $365-million loan disbursed to Essar Steel Minnesota LLC. The report said that she responded to RBI’s query regarding ever-greening of Essar loans saying no additional funding had been provided to the Minnesota company. In fact, ICICI Bank extended a $365-million foreign currency term loan to Essar Steel Ltd, Mauritius, for infusion into Essar Minnesota. Such active collusion by Indian bankers is evident in almost all lending to the group. 
 
US Award: While the Ruias continue to game the Indian judicial system, Arcelor Mittal has stepped up the heat on them in international courts with significantly faster results. The US arbitration relates to Arcelor Mittal USA’s (AMUSA) agreement in 2014 to purchase iron ore pellets produced by Essar’s Minnesota plant for 10 years, but it failed to deliver them. Although the Minnesota company filed for bankruptcy in the US, AMUSA could continue its claim against Essar Steel Ltd. An arbitration order on 19 December 2017 by the International Chamber of Commerce (ICC), Paris, said that AMUSA was entitled to recover $1.38 billion plus interest and costs in damages from Essar Steel Ltd. Essar failed to pay up. 
 
UK High Court Order: After attempting to recover its dues in the US, Arcelor Mittal has filed legal proceedings in the UK in 2019. This led to a March 2019 order, hotly contested by Essar Steel, allowing Arcelor Mittal to search electronic data and documents at Essar’s London headquarters. It also includes a freeze on Essar Steel’s assets. Interestingly, this is based on Arcelor Mittal showing how Essar Steel had transferred assets to group companies. It also presented in court a show-cause notice by India’s directorate of revenue intelligence (DRI) on fraudulent invoicing or customs documents by group entities. 
 
The UK High Court noted how Essar Steel had presented ‘deliberately false information’ during the ICC arbitration with regard to the ‘dissipation of $1.5 billion’ to benefit the Ruia family. Essar has been ordered by the Court to pay the arbitration award of $1.5 billion plus interest and costs. 
 
Arcelor Mittal continues to pursue action against the group in UK, Cayman Islands (against Essar Global Fund Limited) and Mauritius where various Essar group companies are registered. 
 
Surprisingly, Indian bankers (not surprisingly PSBs) are making no attempt to present a holistic picture of the true extent of dues by the Ruias, across group companies and the world. Shouldn’t our lenders present some of these facts to the Indian courts, when they have so much more money to recover from the Ruias? If Essar is unable to pay $1.5 billion ordered by the UK and US courts, how serious is their claim to bring in Rs54,000 crore to save their control over Essar Steel? 
 
It is Indian PSBs that have allowed Essar to delay the sale of Essar Steel by repeated filings before the bankruptcy courts or the Supreme Court. This will continue, until the government holds bankers accountable for their acts of commission and omission while colluding with wilful defaulters. 
 
Moneylife had sought a response from the Essar group to the UK order. Here is the response from the company: 
 
“Essar is aware of a ruling issued by the courts of England on 25 March 2019 in respect of certain Orders that were obtained by ArcelorMittal USA (“AMUSA”) on an ex parte basis on 14 January 2019 (the “Orders”). Essar does not agree with many of the factual findings in the ruling, however it recognizes that the Orders remain in place and will continue to ensure that it adheres to their terms.
 
The origins of the Orders (and AMUSA’s underlying claim) arise from an arbitration award made against Essar Steel Limited (“ESL”) in December 2017. That award related to a guarantee provided by ESL to AMUSA in 2014 regarding a pellet off take agreement that was executed in respect of its project in Minnesota. AMUSA has had the arbitration award recognized in Minnesota and England and tried previously to bring a claim in Minnesota running the same arguments that it is now running in England but that claim was thrown out by the Minnesota court.  ESL is a Mauritius company and AMUSA has applied to recognise the award in Mauritius. ESL is resisting that application.
 
Essar Global completed a sizeable de-leveraging exercise in December 2018, settling amounts due to its legacy secured creditors as well as other legacy claims arising from its project in Minnesota. Essar Global has paid down US$ 21 billion of debt during this recent initiative.
 
Essar Global is not (and never has been) liable to AMUSA in respect of the arbitration award, which it is claiming against ESL.”

 

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COMMENTS

Prakash Bhate

4 weeks ago

Masood Azhar and his cohorts are bumbling amateurs when compared to the Ruias of Essar Steel whose financial terrorism has done more harm to the country than that brought about by Azhar. The Government who left no stone unturned to label Azhar as a global terrorist invites the in-house financial terrorists to the swearing-in ceremony. Andheri Nagari chaupat Raja.

Parimal Shah

2 months ago

Indian banks will not do anything in this case because they know what their staff did was improper and if they now lose money they have themselves to blame.
Ideally, the corrupt &/or contact with soft corner for Ruias from the banks should be identified from the records and taken to task and put in the dock as to against which personal asset/s of Ruias the money was lent?

Subhash Chand Garg

2 months ago

Loot machi hai bhai loot.

sundararaman gopalakrishnan

2 months ago

Good article..Our legal system is being taken for a long ride by unscrupulous and wealthy promoters ..Time for a massive overhaul and end to endless appeals and postponements...

Suketu Shah

2 months ago

Inspite of knowing their history of defaults,Ruia's were invited for NaMo swearing in ceremony.No surprise how they get away with almost anything under Namo govt.

Ravindra Shetye

2 months ago

It is high time that the Government of India freezes all Assets of RUIAS, if not done already, at least in India so that they are not disposed off.

B. KRISHNAN

2 months ago

Thank you Moneylife for bringing out these sordid details into the open. How sad that our system has allowed one corporate fraudster family to create such a trail of monetary exploitation and fraud not only in India but even globally! This global fraudster should be put behind bars, but that is not going to happen as he has already fled with his loot. The least our govt can and must do is to send the colluding bankers to jail!

Sonica Agarwal

2 months ago

One needs to think why the delaying strategies by Ruias? Is it for personal gain by wiping off the company assets or a personal vendetta against the Mittals. I believe its the former.

S K Nataraj

2 months ago

Laws in our country are a farce. IBC is going the way of other acts like Sarfaesi. Borrowers end up with huge liabilities, leaving Bank\'s saddled with huge NPAs on their books. United Bank of India is asking borrowers to settle through negotiation and compromise, as the IBC process involved labyrinthine processes getting locked in court battles, and the 270-day resolution norm, remaining merely on paper.
When SEBI passes orders against certain officials(NSE), the SAT immediately comes to their rescue.
Does our legal system really mean that wrong-doers should be hauled up, and borrower\'s forced to cough up their dues? If our legal systems continue to favour the defaulters, then the safety of depositors\'money is surely at very great risk. if loan waivers promised to various sections is also carried out, it will leave Bank\'s in a calamitous position. Many Bank\'s have already posted Q-1 losses. The position will get worse confounded.

REPLY

anil

In Reply to S K Nataraj 2 months ago

Are bhai yahan courto me logo ko apni jan bachane me hi puri takat lagani pad rahi hai aur aap ye ummid kar rahe ho. Yahi to hamare desh ka durbhagya raha hai sadiyo se.

Ramesh Poapt

2 months ago

excellent!

Harish Kohli

2 months ago

I don't understand the complex situation created by Ruias. Let's assume that Ruias had put in all their intelligence, energy, abilities, shrewdness towards building an empire honestly. Wouldn't they have done a great service for the country, held their head high and been talked about with respect in the same way as we talk about JRD Tata and others. I also fail to understand what will they do with the kind of money they have made. Do they ever feel anything for the people they have deprived the money from? Will they ever be able to spend it? Or it's just a satisfaction! Perhaps buy an island in Maldives. More likely there will be a fissures in the extended family and it will breakup.
Coming back to reality of Bharat, had they been honest, would they have been able to build such an empire.

REPLY

Harish

In Reply to Harish Kohli 2 months ago

One more Harish would like to appreciate what you have written.

Harish Khattar

In Reply to Harish Kohli 2 months ago

Valid opinion.

IL&FS Scam: Former Directors May Have To Pay Up; also Face SFIO Probe, Say Reports
The new board of scam-hit Infrastructure Leasing & Financial Services (IL&FS) is evaluating the option of calling back all bonuses and benefits paid to former directors of three group companies for the past five financial years. In addition, the Serious Fraud Investigation Office (SFIO) to likely to question IL&FS' former chairman Sunil B Mathur and independent director RC Bhargava, besides a few officials from State Bank of India (SBI), say media reports.
 
According to sources, IL&FS’ new management may attempt to clawback fees to independent directors; however, they can argue that they relied on the ‘fixed’ audit reports from Deloitte. In fact, independent directors do have to rely on internal audit and statutory audit reports; so the primary action has to be against the auditor. 
 
As reported by Moneylife, an anonymous whistleblower has alleged Deloitte has helped IL&FS fudge its accounts year after year. The whistleblower, who claims to be part of the “senior management team at Deloitte, Haskins and Sells LLP (Deloitte)” and has been “privy to several internal irregularities in providing professional services to the IL&FS group” outlined how the audit firm benefited by helping the failed group fudge its accounts year after year. (Read: Whistleblower Alleges Deloitte Has Helped IL&FS Fudge Its Accounts Year after Year
 
Deloitte has audited IL&FS Financial Services Ltd (IFIN) for 10 years and remained the auditor until it completed 10 years in 2018. The audit report had absolutely no adverse findings even in 2017-18. On 3rd April, the new IL&FS management headed by banker Uday Kotak said that 90% of the loans advanced by IFIN, the lending arm of IL&FS, had turned bad.  
 
Coming back to clawback, which is invoked under Section 199 of the Companies Act, allows a company that is required to restate its financial statements due to fraud or non-compliance with the law to recall any excess remuneration, including stock options, given to directors for the period reviewed.
 
The clawback option is being evaluated for IL&FS, IL&FS Transportation Networks India Ltd (ITNL) and IL&FS Financial Service Ltd (IFIN) and would include all directors, including nominees and independent directors. 
 
A report from Economic Times says that IL&FS expects to recover more than Rs10 crore from each director and as much as Rs2 crore per year from each independent director of the troubled group. 
 
Earlier, the National Company Law Tribunal (NCLT) had approved re-opening of books of IL&FS and its group units for the five year period from 2012-13 to 2017-18 under Section 130 of the Companies Act. However, the Supreme Court while hearing a petition filed by Hari Sankaran, former vice chairman and managing director (MD) of IL&FS, had stayed the re-opening and re-casting of the books ex parte. IL&FS has approached the vacation bench of the apex court for the order to be vacated. 
 
Separately, after questioning three auditors of fraud-hit IL&FS, a senior official from SFIO, told New Indian Express that “The agency has not given a clean chit to anyone at present. We are looking for all the possible connections and the involvement of stakeholders. In this regard, we need to question some independent directors and the former chairman of LIC. Last week we questioned some of them, and this week we will continue with the questioning."
 
Following the exit of Ravi Parthsarathy in September 2018, SB Mathur, who is former chairman of Life Insurance Corp of India (LIC), was made IL&FS' group chairman. LIC is the largest shareholder in IL&FS, with a 25% stake, and had its representatives on the board. 
 
Last week, according to the newspaper, the SFIO formally recorded statements of executives from Central Bank of India and is likely to begin questioning officials from SBI.
 
In April this year, the SFIO arrested Ramesh C Bawa, former chief executive (CEO) of IFIN.
 
The SFIO, which is probing the IL&FS fraud, had issued summons to several former senior executives of IL&FS, including Mr Bawa. As much as 90% of the loans advanced by IFIN, the lending arm of the infrastructure conglomerate IL&FS have turned bad. Interpol notices have been issued against all the key members of the management cabal that worked closely with Mr Ravi Parthasarathy, founder of IL&FS, who ruled the 346-company conglomerate with unfettered powers and pliant boards for over 25 years. 
 
IL&FS vice chairman, Mr Sankaran, is already in SFIO custody. However, its founder and past chairman Ravi Parthasarathy has not been touched on humanitarian grounds since he is undergoing treatment. However, red corner notices have been issued against him too and he is no longer allowed to go to London for treatment. 
 
As reported by Moneylife, almost 90% of the loans advanced by IFIN have turned bad underlining the deep corruption and culpability of the previous management. Of its loan book of Rs18,805 crore, Rs10,656 crore was lent to third-party borrowers and nearly Rs7,000 crore to group companies, N Sivaraman, chief operating officer at IL&FS group, has revealed.  
 
According to Kaushik Modak, who now heads IFIN, the company has recovered Rs931 crore since the new board led by banker Uday Kotak took over the IL&FS group.
 
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