IL&FS Scam: Gurgaon’s Rapid Metro Was Based on Entirely Fraudulent Numbers
The spanking world-class Rapid Metro, which became operational in Gurgaon (now Gurugram) in 2013, has certainly added lustre to the modern township built by DLF. But the project is based entirely on fraudulent and fabricated ridership claims, to get government sanctions, right of way for land use and other benefits.
 
The metro project was conceived by DLF, the realty giant, and mid-wifed by the scandal-hit Infrastructure Leasing & Financial Services (IL&FS). They are also the two biggest beneficiaries. India’s public sector banks (PSBs), as always, are stuck with the bad loans of this gold-plated project.
 
Here is how it unfolded. DLF originally proposed a 3.2km metro project between Sikanderpur and National Highway-8 (NH8) to the Haryana government in September 2007. It hired IL&FS to prepare the Detailed Project Report (DPR) as a consultant. This was submitted by DLF to the Harayana government's town and country planning department. 
 
Metros, even elevated ones, are expensive showpiece projects and ought to be considered by smaller cities only when other modes of public transport are inadequate to meet growing transportation demand. But when you have a powerful corporate, captive government and pliant bureaucrats, all good sense is thrown to the wind. 
 
The media has extensively documented DLF’s clout with the Central and state governments. It was at the peak of its power in 2007-08. Gurgaon had been transformed into ‘Millennium City’ and DLF had got itself re-listed on the stock exchanges and was being touted as one of the most valuable companies in India. Its shares were trading at a high of Rs1,200 in January 2008 (as against Rs177 on 22 November 2018); but things took a dramatic downturn soon after. 
 
The Haryana Urban Development Authority (HUDA) invited expressions of interest to construct the metro line on build-operate-transfer (BOT) basis with a 99-year lease in 2008 based on DLF’s persuasion. A fresh tender was called in July 2008 because DLF wanted the metro to connect it to its Cyber City as well. 
 
By then, the world was already hit by the global financial crisis. DLF’s stock was down to Rs400 and the company itself pulled out of the project. But, instead of being alert to the global financial crisis and its implications for realty and infrastructure development, the Haryana government ploughed on with the project. 
 
Someone connected with the early plans says, DLF originally pitched the metro as a Rs325-crore project, but the cost soared to over Rs1,000 crore after it was tendered and IL&FS Transportation Network Ltd (ITNL) became the sole owner. The very rationale and viability were based on completely fraudulent claims about potential riders. 
 
The DPR (detailed project report) projected passenger traffic at a huge 100,000 passengers per day in the first year itself. (See table)
 
 
The truth turned out to be vastly different.  The actual riders, in phase-1, were barely 30,000 per day. Five years later, after completion of the phase-2, the riders are less than 50,000 a day. (See table for the latest numbers).
 
 
But every decision with regard to the rapid metro was based on the big fraud of inflated riders. The Haryana government granted right of way as well as land for the project and the metro stations, based on the traffic projections, for only a revenue share in non-fare revenues (such as advertisement income) and connectivity charges, based on these projections. Banks were also persuaded to fund the project based on these false claims. This raises several questions that beg a full-fledged investigation. 
 
  • First, who was the biggest beneficiary of the project? Clearly DFL. It got a free ride on the project, as is clear from the rapid metro’s website. The metro “provides a transport solution for areas in and around Cyber City, DLF phase-2, DLF phase-3, NH8 & Golf Course Road up to Sector 55-56 Gurugram and provides connectivity to Delhi Metro from Sikanderpur Station,” it says. A Haryana government source says that DLF’s ongoing projects saw a minimum cost appreciation of 15% due to the metro, in very difficult times for the realty industry, globally.

 

  • IL&FS was the next big winner. While the project itself was based on spurious projections and doomed to fail, ITNL, the promoter, and the group as a whole, earned plenty in fees, since the Haryana government allowed a generous increase in project cost to the Rapid Metro Rail Gurgaon Ltd (RMGL), a special purpose vehicle (SPV) which built the project. 

 

  • The civil construction contract went to IL&FS Engineering and Construction Company Limited, also at a fat fee. A forensic audit would reveal how much IL&FS, as a group, has earned from the project in various types of fees, costs and expenses.

 

  • The poor riders’ data of phase-1 was a wake-up call. Instead, the second phase of the project was built and cleared. And the combined project has yet to achieve half the riders projected for phase-1.The southward extension for phase-2 was a 6.6km long double-track extending from Sikanderpur to Sector 55 and 56 in Gurgaon and was estimated to cost Rs2,423 crore then. 
 
In February last year, the Comptroller and Auditor General (CAG) rapped HUDA for failing to enforce the terms of concession contract, resulting in undue benefit to the concessionaire of the Rapid Metro in Gurgaon at the cost of public. 
 
The report said: “HUDA had entered into a concession contract assuming 80 per cent of liabilities of concessionaire in the event of termination of the contract and default of the concessionaire as to the costing of the project and extent of potential liabilities.” But CAG also did not go into the fact that the entire project was based on false projections. 
 
In February 2016, IL&FS, the failed group holding company, partially bailed out  ITNL which promoted RMGL by acquiring a 49% stake at Rs509.9 crore (Rs17 a share for a hugely loss-making project). This was, obviously, to airbrush the performance of ITNL which was a listed company and attracted close scrutiny by stock market analysts and funds. 
 
Interestingly, just around the time that the IL&FS board was sacked by the government in August 2018, the Rapid Metro had issued a notice to the Haryana government alleging “breach of the concession contract and making a claim of Rs1,484 crore.
 
One of its allegations is that the Haryana government had “promised that other modes of transport like shared autos would not be permitted on the metro route once it became operational.” Whether such an outrageous promise, to block the most easily accessible public transport, had actually been made is also worth investigation. It would indicate the extent to which the bureaucracy was compromised. 
 
Unfortunately, bankers and bureaucrats appear to have ganged up to protect their own. There is no attempt to go into the dubious deals of the IL&FS’s management cabal. 
 
The Reserve Bank of India (RBI), which is fighting the government to preserve its independence, also failed badly where IL&FS is concerned. Umesh Baveja, founder of RAHI Aviation, who was put behind bars by IL&FS on what looks like trumped up charges, had sent detailed account about the scandalous Rapid Metro in his 2 October 2015 letter to Dr Raghuram Rajan, then governor, RBI. 
 
RBI raised a red flag about IL&FS being over-leveraged. But it was kept a secret. Had it made its conclusions public, bankers, rating agencies, pension funds and mutual funds would have been alerted at least two years earlier.
 
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COMMENTS

B. KRISHNAN

3 weeks ago

Will Raghuram Rajan who is sitting in US and tweeting about our Govt policies, reply why he did not act when the issue was brought to its attention?

Manju Singhal

3 weeks ago

With banks like SBI on board as members , wonder how such people in senior positions tweaked bank rules to allow a fraudulent firm IL&FS get a tender in the first place?

Durgesh Kumar

3 weeks ago

great news

Mahesh S Bhatt

3 weeks ago

Mili Juli Bhagat Maal Gol ho gaya Koi Jail Nahi Gaya Celebrate till next maal gets Gol again n again Jio India Jai Ho India Mahesh Bhatt

Bipin Kochar

3 weeks ago

Metros worldwide are expensive to build and are successful only if the state / city encourage commuters to use these over using private vehicles. Moneylife has done a great service in exposing HUDA which has wilfully held back payment on the termination of the metro contract inspite of signing concession contract assuming 80 per cent of liabilities. Sadly, not just HUDA but also many other Government agencies are wilfully refusing to honor their contractual commitments resulting in SPVs of even renowned companies like L&T and HCC becoming NPAs

Harish

3 weeks ago

Excellent and well-researched article, as usual.

Ashok Senniappan

4 weeks ago

When red flag was raised by Umesh Baveja, founder of RAHI Aviation why didn't Raghuram Rajan Act?

Krishnan Hariharan

4 weeks ago

Great and well researched article. It exposes lapses in all our esteemed and well respected institutions and government authorities. RBI still refuses to disclose names of willful defaulters thus making room for more such skeletons to hide in the cupboard. RBI has no locus standing to yield to government claims on it.

IL&FS Lenders Oppose 90-day Moratorium for Loans
Several lenders of Infrastructure Leasing and Financial Services (IL&FS) have opposed the 90-day moratorium over loans taken by the debt-laden group and its subsidiaries. Lenders also requested the National Company Law Appellate Tribunal (NCLAT) to allow them not to classify IL&FS accounts as non-performing assets (NPAs) in case of defaults. However, there was no decision and the NCLAT fixed 17th December as next date of hearing. 
 
Last month, the NCLAT had stayed all proceedings against IL&FS group and its 348 group companies till further orders, over an urgent petition moved by the government.
 
During the hearing on Tuesday before the Appellate Tribunal, the government submitted a revival plan for IL&FS, which is likely to take shape over the next six to nine months and also sought continuation of the moratorium for a three-month period.
 
Earlier, the ministry of corporate affairs had approached the appellate tribunal after the Mumbai bench of National Company Law Tribunal (NCLT) turned down its plea to grant 90-day moratorium over the loans taken by IL&FS and its subsidiaries. On 1 October 2018, the NCLT suspended the board of IL&FS on the government's plea and authorised reconstitution of the board by appointing seven directors two days later.
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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?
 
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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.

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