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
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).”