The Serious Frauds Investigation Office (SFIO) is meticulously trying to unravel the dubious loans granted and round-tripped by Infrastructure Leasing and Financial Services Ltd (IL&FS) by seeking information from all borrowers on their links with the 346 entities in the failed infrastructure and finance conglomerate.
This exercise itself is throwing up several interesting revelations, including the role of scores of Indian Administrative Services (IAS) officers and their relatives who seem to be embedded in the group, including directors and chief executives (CEOs) of several subsidiaries of IL&FS.
The failure to supervise IL&FS is, probably for the first time, not so much a political scam as that which was sanctioned and buried by the bureaucracy. That is probably why the investigation into what happened at IL&FS is proceeding at a very slow pace.
Sources inside IL&FS point out that CS Rajan, who has been appointed the managing director (MD) on 3 April 2019, was extremely close to the IL&FS top management and helped cement their equation with the Rajasthan government when he was chief secretary there.
Hence, despite the arrest of Hari Sankaran, former vice-chairman and MD of IL&FS, there is a general sense that the government is not serious about investigating why this sprawling institution with the massive outstanding debt of almost Rs99,000 crore is not being investigated and resolved with the same seriousness as relatively smaller defaulters such as Vijay Mallya and Nirav Modi.
IL&FS is being investigated by three entities—the SFIO, the enforcement directorate (ED) and the forensic audit team of Grant Thornton, working on Project Icarus. Project Icarus first exposed the nature of round-tripping and suspicious deal by IL&FS Financial Services Ltd (IFIN) with other entities within the group, joint venture partners, borrowers and others and the suspicious nature of many loans.
The SFIO seems to be taking this forward by sending out a list of questions to all borrowers of IFIN seeking following information.
a) List of loans taken by you in all your entities.
b) Reason for taking the loan.
c) Whether you approached IFIN for a loan or whether an official from IFIN approached you to offer a loan.
d) Whether your books/accounts were utilised for lending to you and then asking you to lend the money further to any other entities in the IL&FS group. If so provide details.
e) Copy of bank statement evidencing loan disbursal and its utilisation (with copies of utilisation certificate).
f) Whether you had any relationship, including financial relationship with any individual in IL&FS group entities. If so provide details.
g) Whether you had sold/disposed off any assets including real estate property, through any of your group entities or even third parties to any officials of the IL&FS entities.
h) Ledger accounts of all the loans taken/given by you from/to IFIN or any other IL&FS entities.
i) Any other issues / document relevant to the said transactions.
At least in one case reviewed by us, these questions have led to the disclosure of how the company has been defrauded by IL&FS. We are withholding its name to prevent a backlash against it.
The company has informed the SFIO about how IL&FS and entities related to it had allegedly defrauded the group and caused financial damage by delaying loan disbursements.
The borrower goes on the name a retired IAS officer who heads the lending entity, and remains a director on several joint ventures with the Tamil Nadu government.
Meanwhile, lakhs of investors are worried about the fate of their life savings invested through private pension funds and mutual funds. All these investment institutions were fooled by the AAA credit rating enjoyed by the group until the very day that Moneylife reported the first default to SIDBI.
We have also discovered that the government had issued sovereign guarantees to this company run by a small self-serving cabal and has been quietly paying up on its behalf without a word of disclosure in the public domain.
The Serious Fraud Investigation Office (SFIO) has arrested Hari Sankaran, former chairman of Infrastructure Leasing & Financial Services (IL&FS), in connection with the ongoing investigations into the affairs of IL&FS and its group entities. This is the first arrest in the fraud-hit IL&FS scam.
Hari Sankaran has been arrested on the grounds of abusing his powers in IL&FS Financial Services Ltd (IFIN), through his fraudulent conduct and in granting loans to entities which were not creditworthy or have been declared non-performing assets and caused wrongful loss to the company and its creditors.
It may be worth noting that IL&FS Financial Services had borrowings of more than Rs17,000 crore from debt instruments and bank loans. Provident funds, pension funds, gratuity funds, mutual funds, public and private sector banks, are among those who have invested in these debt instruments.
After the arrest, he has been granted SFIO custody till 4 April 2019.
Earlier in December 2018, the ministry of corporate affairs (MCA), in its submission before the National Company Law Tribunal (NCLT), had revealed details of its finding on several instances of misreporting of income, dubious transactions, conflict of interest, ever-greening of loans and rampant personal enrichment of key employees, including Ravi Parthasarathy, Hari Sankaran, and Arun Kumar Saha, besides others.
In the interim report, the SFIO had stated,"...it is evident that IL&FS procured funds from the market through short-term instruments and invested in its group companies by way of giving long-term loans and advances, which was prejudicial to the interest of IL&FS, in terms of financial solvency. During these distressed times, IL&FS and its key subsidiaries such as IFIN and IL&FS Transportation Network Ltd (ITNL) were contained to raise short-term market funding through commercial papers or inter corporate deposits based on its bogus and fictitious but good credit rating and these short-term loans were passed to its project special purpose vehicles (SPVs) or group companies, for helping them service their debt obligations, management fully aware, thereby hid and avoided possible defaults resulting into increasing indebtedness on a standalone basis."
"This is virtually an act of fraud causing indebtness of IL&FS to over Rs91,000 crore. This indebtness is deliberate, wilful, fraudulent act of directors who were the mind controlling the affairs of IL&FS with intention to defraud creditors, who too had failed in their due diligence. An increasing level of indebtness of IL&FS, year after year, was sufficient red flat for the creditors to prevent further loans and advances. Such discriminator acts of lenders have provided long rope to the directors in control of affairs to put IL&FS in coma," the report added.
Last year, the government superseded the management of the beleaguered company, which has around Rs91,000 crore in long-term debt, through a National Company Law Tribunal (NCLT) order and appointed a six-member board led by Uday Kotak, MD and CEO of Kotak Mahindra Bank, to restore its financial solvency.
In a shocking revelation of new information, it turns out that the government of India, in 2009, had issued a sovereign guarantee on behalf of Infrastructure Leasing & Financial Services (IL&FS), which is at the centre of what is fast turning out to be one the biggest financial scandals in India. IL&FS is a shadowy private company, which has been run by a cabal headed by founder, Ravi Parthasarathy, for almost 25 years.
These guarantees have been issued on behalf of Asian Development Bank (ADB) and KfW (Kreditanstalt für Wiederaufbau of Germany). Since IL&FS is unable to pay, the government has quietly ponied up the money after discussions with the finance ministry. It is interesting that the issue of these payments has not been brought before the NCLAT (National Company Law Appellate Tribunal) which is hearing the bankruptcy proceedings of the group.
Sovereign guarantees are only issued for government projects or, occasionally, for public sector companies. The ADB report suggests that guarantees have been issued to several infrastructure projects as well, especially in the power sector. In 1992, when Enron first proposed a sovereign guarantee for the Dabhol Power Company’s gold-plated project, it was hugely controversial. Clearly, no lessons have been learnt, since infrastructure projects of IL&FS and many others have turned out to be just as inflated.
The government guarantees, once again, expose how closely the Parthasarathy-led cabal worked with a network of compromised officers of the Indian Administrative Service (IAS), to run an organisation that had the best of both worlds—the power of a government organisation and the money of private sector—allowing IL&FS officials to draw high salaries and perks even as the ship sank.
However, the government, which is now found to be making payments on behalf of this massive failed conglomerate, has been treating the ousted management of IL&FS with extremely soft gloves.
Sources in the know say that two payments have been made to the two multilateral institutions in the past couple of months. Reliable sources have confirmed at least one payment of $2 million in the past two months to ADB, for instalments that fell due, and about €600,000 to €700,000 have been paid to KfW.
A search on ADB’s website reveals that a $100-million loan was originally sanctioned to IL&FS around 2001 but half of it was cancelled sometime in 2007 due to “the lack of a subproject pipeline” as part of a revised loan agreement. Finally, a loan of $50.4 million was disbursed.
The document further says, “Since 2002, the borrowings (of IL&FS) from bilateral and multilateral agencies have included the ADB loan under PSIF II and €30.55 million from KfW.”
And that the “(Indian) Government guaranteed the loan, which was made from ADB’s London interbank offered rate-based lending facility with a maturity of 20 years, including a grace period of 5 years.”
Here are the details, in a nutshell, as reported on ADB’s website.
The loan was further distributed to three sub-projects: The Ahmedabad Mehsana Toll Road Project, the New Tirupur Area Development Corporation and Western Gujarat Expressway Project. It was divided into senior and subordinate debt, with tenures of 15 years and 20 years, respectively. This would mean that the last instalments were due when IL&FS got into serious financial trouble.
Of the three projects, New Tirupur is mired in litigation, has gone through restructuring and continues to make losses. The Ahmedabad Mehsana Toll Road Project also made losses in the initial years and also saw its debt restructured. However, IL&FS had been regular in servicing the debt, probably until it collapsed in July last year.
Based on information available on the ADB website, one assumes that a part of the loan would be nearing maturity. Moneylife has written to ADB and KfW seeking a response and this article will be updated to include these, when we receive them. We have also connected with IL&FS’s communication head to ask how much of the loans to ADB and KfW are still outstanding. This, too, will be updated when we hear from them.
Details of the sub-loan are available as follows:
When the ADB financing was being considered, there was talk about KfW of Germany partnering in the project. However, it is not clear if it did, eventually, participate in this project. The ADB document of 2001 says, “KfW representatives joined the ADB Pre-appraisal and Appraisal Missions. KfW has, in-principle, agreed to co-finance the PSIF II up to EUR162 million (about $147 million) comprising concessional funds of EUR25.5 million (about $23 million).” This was subject to government approval; but subsequent documents do not mention any partnership or government guarantee.
In June 2018, just before the group’s financial problems snowballed, media reports show that IL&FS Transportation Networks Ltd (ITNL), raised €23.4 million (Rs186.11 crore) in debt financing from KfW IPEX-Bank. This was a 13-year loan for the Rapid Metro South Extension Project in Gurugram.
At that time, Luis-Miguel Gutierrez, chief representative of KfW IPEX-Bank in India had said, this was the “first ECA financing ever done to support an Indian metro project” and, in doing so, it had “introduced a completely new financing model in the Indian market.”
The fact that the government extended a sovereign guarantee to IL&FS shows how deep was the nexus between IL&FS officials and finance ministry which, instead of monitoring its spending, was happy to guarantee its reckless expansion spree.
The projects follow the familiar IL&FS template where multiple group entities get a share of the project pie by undertaking various responsibilities such as preparing the project report, implementing it, undertaking environmental impact assessment and also monitoring it.
ADB says, in a published document, that it looks for “state guarantees” in order to “meet non-commercial risks and allow disaggregation of risks and proper risk allocation in the Indian environment.”
The document points out that sovereign guarantees have been issued to large fast track infrastructure projects in India. It reveals that a commitment regarding government guarantees or sovereign guarantees were secured in 2001; a BJP-led government was in power then.
However, under the Fiscal Responsibility Bill introduced in that period, there is a commitment that the government “will also not extend guarantees to projects beyond 0.5% of GDP in any given financial year.” The government also earns a guarantee fee. As regards guarantees issued by state governments these are capped by the Reserve Bank of India (RBI).