IL&FS Mess: Did LIC Violate IRDAI Guidelines while Increasing its Stake? 
Life Insurance Corporation of India (LIC) increased its investment in Infrastructure Leasing and Financial Services Ltd (IL&FS) way beyond the stipulated 15% without seeking any permission or approval from the Insurance Regulatory and Development Authority (IRDAI). In fact, LIC completely ignored IRDAI guidelines and gave itself the powers to increase its investment in IL&FS, reveals a reply received under Right to Information (RTI) Act.
 
Responding to the RTI application filed by Kirtikumar Bhatt, IRDAI clearly stated that LIC has not filed any application or sought permission for raising its equity or debt investment in IL&FS. "LIC has not made any application to IRDA. LIC issued letters on 10 November 2005 and 10 February 2006 to IRDAI, that vide: Govt statutory resolution (GSR) 734 dated 23 August 1958, indicating that it is empowered to buy equity shares up to 30% of share capital in any entity, and thus LIC is proceeding on its own to acquire further shares making the holding to 27% of IL&FS, from Specified Undertaking of Unit Trust of India (SUUTI)," the RTI reply says.
 
At the same time, IRDAI has not passed any order against LIC. The RTI reply says, "IRDA has not passed any order for LIC to invest in equity shares and debt instruments of IL&FS Ltd in excess of regulatory limits."
 
 
In 2013, the insurance regulator revised its investment regulations for insurance companies, linking it to the fund size. Insurance companies can increase their exposure in equity in a given company from 10% to 12% and 15%, depending on the size of their controlled fund.
 
(Source: Gazette Notification on IRDAI (Investment) Regulations, 2016)
 
However, if LIC wants to own more than the prescribed limit of 15%, it has to get approval from its board and IRDAI. It can own as much as 30% in some companies under a special dispensation from the government. 
 
However, in the case of IL&FS as per the RTI reply, LIC did not ask for any permission from the insurance regulator and citing a GSR from 1958 proceeded to increase its stake in the debt-ridden group. 
 
As per IRDAI (Investment) Regulations, 2016 there are certain prudential norms for exposure of insurer in an investment. 
 
While the stake of LIC in IL&FS is quite substantial, the insurer cannot claim to be a promoter. The reason is as per IRDAI Investment Regulations, exposure limit to companies belonging to promoter group is capped at 5%. 
 
As per note 7, under Regulation 9, an insurer should not have investments of more than 5% in aggregate of its investment assets in all companies belonging to the promoters’ group. Investment made in all companies belonging to the promoters’ group should not be made by way of private placement or in unlisted instruments like equity, debt, certificate of deposits and fixed deposits held in a scheduled commercial bank, except for companies formed by insurers under Note 12 to Regulation 9, the note says.
 
As on 31 March 2018, LIC and ORIX Corporation of Japan were the largest shareholders in IL&FS with their stakeholding at 25.34% and 23.54%, respectively, while Abu Dhabi Investment Authority (ADIA), HDFC, Central Bank of India (CBI) and State Bank of India (SBI) stake holding are at 12.56%, 9.02%, 7.67% and 6.42%, respectively.
 
IL&FS was incorporated in 1987 with the objective of promoting infrastructure projects in the country. IL&FS was promoted by the Central Bank of India (CBI), Housing Development Finance Corp Ltd (HDFC) and Unit Trust of India (now SUUTI). While SUUTI has largely exited (stake of 0.82% as on 31 March 2018), the shareholding has broadened over the years with the participation of many institutional shareholders. 
 
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COMMENTS

Sita Ram Mandal

2 weeks ago

No

IL&FS Trust Co Accepted Rs280 crore Mortgage for a Property bought for Rs272 crore on the Same Day
Every passing day, there is some new revelations coming out from the mess of Infrastructure Leasing and Financial Services (IL&FS) and its 348 group companies. IL&FS Trust Co Ltd, a subsidiary of IL&FS group, accepted a value of Rs280 crore as mortgage for a property bought on same day for Rs272 crore. On the same day, IL&FS Trust Co subscribed to privately placed debentures of VGN Developers Pvt Ltd, worth Rs280 crore, reveals a report. 
 
According to the report from Savukkuonline (https://www.savukkuonline.com/14806/), VGN Developers Pvt Ltd paid Rs272 crore for 11.021 acre property in Guindy belonging to Chennai-based Hindustan Teleprinters Ltd (HTL). In the bidding process with bankers led by State Bank of India (SBI), the report says, VGN Developers was the sole bidder who made an offer of Rs272 crore for the property.
 
"On the same day the deal was finalised, VGN Developers mortgaged the property to IL&FS Trust Co for Rs280 crore. While it is the normal banking standard to pay 80% of the mortgaged property value as loan, VGN Developers purchased this property for Rs272 crore and mortgaged the same for Rs280 crore," the report says.
 
 
(Image Courtesy: savukkuonline.com)
 
From the agreement, it appears that on the day of the deal itself, IL&FS Trust subscribed to VGN Developer’s privately placed debentures valued at Rs280 crore. 
 
Questioning the motive behind this, Rajendra M Ganatra, an insolvency resolution professional and restructuring consultant, says, “For any such funding, there has to be due diligence of the sponsor, the title search, the valuation and a host of other things. Here VGN Developer got the funding with negative contribution of Rs8 crore. On day of shady Rs272 crore land deal of VGN Developers, IL&FS gave Rs280 crore of VGN’s rated, listed debentures. Who rated the debentures, and where was it listed? (This) smacks of criminal nexus. No prudent lender can do this. That is how a preferred group has been destroyed. There is a need for comprehensive investigative audit of IL&FS group.”  
 
The consortium of banks headed by SBI had fixed the reserve price for the HTL property at Rs250 crore and finalised the deal on 19 June 2013 for Rs272 crore with VGN Developers. 
 
"As per registration department records, the guideline value of the said land comes to Rs376.26 crore as on 19 June 2013, when the sale was finalised. VGN Developers paid a stamp duty for a value of Rs376.26 crore and not for the actual sale price of Rs272 crore," the report says.
 
 
(Image Courtesy: savukkuonline.com)
 
Savukkuonline says the HTL land is a high value property. “The land has a permissible built-up space of 2.5 times of the land area. Since the land has been reclassified from ‘industrial’ to ‘residential’, its market value would be more than the guideline value fixed by the government. Further, the land is situated in Guindy, which has locational advantage, nearby airport, and metro connectivity. As per the advertisement placed in newspapers at that time for a realty project just near to the land bought by VGN Developers, the asking price was Rs12,000 per square feet. However, the sale price was finalised far below the market or guideline value.”
 
Main question here is why would a subsidiary of IL&FS group would accept a higher value for mortgage when the property was bought for less?  
 
According to the data compiled by REDD Intelligence, the debt-ridden IL&FS group holds assets of around Rs1,65,000 crore. Its corresponding total liabilities is around Rs1,32,000 crore. The reported consolidated liabilities at IL&FS (holding company), is around Rs1,06,500 crore and inter-group liabilities is around Rs25,500 crore. Similarly, inter-group assets comes around Rs49,000 crore, indicating an equity of Rs23,500 among the group companies.
 
The IL&FS story started unravelling after Moneylife first wrote about its default to SIDBI. (Read: IL&FS defaults on Rs1,000 Crore Short-term Loan from SIDBI?)
 
Despite running scores of different projects and businesses, IL&FS has reported a loss or meagre profit over the past three years for which data is available.
 
Over the past 10 days, many of these victims have begun to speak out, especially after the gold-plating of the GIFT City project was exposed by Moneylife.
 
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Hudaf Shaikh

2 weeks ago

It is shocking that the ITL land was sold to VGN Developers way below guidance value - SFIO should investigate how and why this was done

A2Z of How IL&FS Employee Welfare Trust Ripped off Shareholders of IL&FS
As recently as in July 2018, through a disclosure to the stock exchanges, IL&FS Employee Welfare Trust (EWT) brazenly ripped off the beleaguered parent organisation—Infrastructure Leasing and Financial Services (IL&FS). The scam was fully disclosed in an announcement to the stock exchanges on 27th July in the form of a debt settlement announcement
 
My attention was first drawn to this rip-off by G D Agarwal of REDD Intelligence, whose deep analysis of IL&FS has been reported extensively by Moneylife
 
Here’s what happened.  On 27 July 2018, A2Z Infra Engineering (A2Z Infra) reported a one-time settlement with lenders of A2Z Green Waste Management Limited (A2Z Green, previously known as A2Z Infrastructure Ltd), a subsidiary of A2Z Infra Engineering Ltd, to settle a debt of Rs 275.94 crore for a consideration of just Rs70 crore. 
 
This was part of a cumulative debt reduction from Rs1,001.14 crore to Rs271.80 crore. It included settlements with SICOM, Edelweiss Asset Reconstruction, Standard Chartered Bank, HSBC Group, A2Z Green and Earth Environment Management Services Pvt Ltd (EEMSPL). The last two entities belong to A2Z Infra and we will focus on the machinations there. 
 
While Standard Chartered Bank (Rs62.41 crore loan reduced to Rs21 crore), Yes Bank (Rs36.05 crore to Rs12 crore); Axis Bank (Rs54.65 crore to Rs17.25 crore), Barclays Bank(Rs33.95 crore to Rs4.75 crore) and IDBI Bank (Rs69.05 crore to Rs15 crore) took a deep haircut, the ILFS Financial Services Ltd (IFIN) outstanding went from Rs19.83 crore to zero. And this was only a part of what A2Z Infra owed IFIN. As the disclosure shows, there was a more dubious deal that was being worked out. 
 
Remember, this announcement was just before IL&FS, with a mammoth debt of over Rs1.2 lakh crore, began to default on its payment obligations. And it was three days after founder chairman Ravi Parthasarathy suddenly stepped down after 31 years at the head of the organisation. As I highlighted in my previous article, IL&FS EWT appears to have functioned solely to enrich a close group of 10 persons who were part of Ravi Parthasarthy’s close crony circle—while IL&FS’s marquee board, including major investors, were sleeping, even as they were being ripped off. 
 
 
 
This is what IL&FS worked out with A2Z as a one-time settlement.
  • A2Z Green agreed to transfer its Kanpur project of 1,500TPD of pick up & delivery unit along with 15MW power plant to EEMSPL for Rs203.75 crore as a slump sale along with all assets and liabilities (including loans from Axis Bank, Barclays Bank and Yes Bank). No details on how this value was arrived at. 
  • A2Z Green’s outstanding liability of Rs19.83 crore, by way of fully convertible debentures (FCD) issued to IFIN, would be written off which is at a loss to the parent company.
  • EEMSPL itself shall also be transferred to Energy Development Corporation Ltd, IL&FS EWT and IIDC Fund and eventually the outstanding liability of Rs188.02 crore of IFIN shall also be extinguished in the books of EEMPSL.
  • IFIN invoked a pledge of one crore equity shares of A2Z Green, held by A2Z Infra towards the loan/interest payable by EEMSPL to IFIN. Again, no mention of valuation. But, as part of the deal, it will give back A2Z Green’s shares at a paltry Rs1 lakh to A2Z Infra. This would almost double the stake of A2Z Infra in A2Z Green from 47.89% to 91.98%. 
 
In this manner, three entities controlled by a small cabal, cornered a valuable asset at the cost of other IL&FS’s shareholders and IFIN, a direct, unlisted subsidiary and one of its most powerful fundraiser, with Ramesh Bawa heading it until his quiet exit before the main board was sacked. The value of this asset would be at least Rs203 crore or higher. 
 
Who or what are these entities? 
 
IL&FS EWT: As I have written earlier, this employee trust, probably, has only 10 major beneficiaries. From time to time, these employees seem to have extracted value out of EWT through bonuses which lends itself to a clear case of disgorgement. Outrageously enough, EWT part owns a power plant, which the Uday Kotak-led board needs to claw back into the parent company so that whatever value it can extract goes into paying those loans.
 
IIDC Fund: A Google search throws up very little information about IL&FS IIDC Fund—which is the full name. IIDC Ltd (formerly IL&FS Infrastructure Development Corporation Ltd), set up in 1999, is a wholly-owned subsidiary of IL&FS. It claims to provide ‘assistance as a project developer’ to work out ‘bankable projects in PPP format’. But what is the IIDC Fund? It is unclear.
 
The 2013 annual report of IFIN, the notorious and beleaguered subsidiary of IL&FS, shows IL&FS IIDC Fund as a ‘fellow subsidiary’. Curiously, it also shows up under ‘Fellow subsidiaries’ in the 2017 annual report of IL&FS Investment Managers. How?
 
A search of IL&FS Investment Managers throws up IIDC, IIDCL and IIDC Fund at various points as related entities without any explanation on what is the difference between them—all having collected advisory fees. Only a forensic audit and an SFIO investigation will unravel the true role and beneficiaries of this strange group.
 
IIDC Fund appears to control Urban Mass Transit Company Limited (UMTC) through four of its directors: Ajai Mathur, Paritosh Gupta, Ajay Pande and RCM Reddy. UMTC’s website describes itself as an urban transport consultancy partnership between the ministry of housing and urban affairs, Andhra Pradesh government, Andhra Pradesh State Road Transport Corporation (APSRTC) and IL&FS. On 26 September 2018, Brickworks Ratings downgraded this company, although it gives some credit to the government presence in the company. 
 
Energy Development Corporation Ltd: If one goes by the exact name reported to the stock exchanges, this is a global entity based in the Philippines. Dig deeper and you realise it is a wrong and careless disclosure. The company is, in fact, IL&FS Energy Development Company Ltd (not corporation) yet another subsidiary of IL&FS under its energy segment. To add to the confusion, there is also another listed entity by that same name. Shouldn't the market regulator impose some penalty for such nonsensical, or deliberate, false disclosures? And who will pull up the registrar of companies (RoC) for permitting such confusion in names?
 
The energy company was set up in 2008 and has a bunch of controversial projects, including a power plant at Cuddalore, a transmission project at Nepal (we have a mountain of information on both of these which needs separate analysis) and others in the north-east. 
 
As for A2Z Infra Engineering (formerly A2Z Maintenance & Engineering Services Limited), which has struck this shady deal with IL&FS, it was once a high-profile company with marquee investors including Rakesh Jhunjhunwala and his wife. Mr Jhunjhunwala had even accepted a board position in the company and was invested in it since 2006, long before it went public in 2010. However, in 2013, he stepped off the board and also offloaded a part of his holding. As recently as in 2018, another controversial but high-profile market-player, Shankar Sharma, had reportedly recommended the stock at the famous Sohn Conference. 
 
Interestingly, publicly available information shows that the promoters have pledged over 94% of their shareholding and the company has delivered poor growth and negative returns over the past five years. 
 
Here is how a foreign institutional investor describes the shocking audacity of the IL&FS deal with A2Z Infra: “This is a deal for which those in charge of the IL&FS EWT should be going to jail. It is a criminal breach of fiduciary duty to IL&FS’s shareholders such as ADIA (Abu Dhabi Investment Trust), LIC (Life Insurance Corporation), ORIX, HDFC, State Bank and others. It is a good challenge for Mr Uday Kotak and his new board as well as the Serious Frauds Investigation Office (SFIO).”
 
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COMMENTS

Vasant Kulkarni

4 weeks ago

SEND ALL THESE INTELLIGENT PEOPLES OF THE COMPANY TO US TO HELP PRESIDENT OF USA.

REPLY

Carlos De Souza

In Reply to Vasant Kulkarni 3 weeks ago

Doncha think "these intelligent peoples" can better help the PM of India ??

Mahesh S Bhatt

4 weeks ago

Jai Ho ILFS Smarties Mutual Sahi Hai par class suite nahi hai Mahesh bhatt

Ramesh Poapt

4 weeks ago

Shocking! Next?

S SRINIVASA RAJAN

4 weeks ago

Wil be sad if these mafia gangsters are not imprisoned for a long time.

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