IL&FS Scam: NCLT Allows Govt to Re-open Past 5-years Financial Statements of IL&FS, ITNL and IFIN
The National Company Law Tribunal (NCLT) has allowed the government to re-open and re-cast the past five years' financial accounts of Infrastructure Leasing & Financial Services (IL&FS) and  its subsidiaries IL&FS Transportation Networks Ltd (ITNL) and IL&FS Financial Services Ltd (IFIN).
 
Last month, while submitting an interim report prepared by Institute of Chartered Accountants of India (ICAI), the Ministry of Corporate Affairs (CA) had sought the reopening of  financial records of IL&FS and IFIN and ITNL.
 
According to the MCA’s application, IL&FS and its group company auditors, Deloitte Haskins & Sells LLC, EY affiliate SRBC & Co. LLP and KPMG affiliate BSR & Associates LLP, understated bad loans and did not point out the inadequate provisioning made against such loans, violating norms set by Reserve Bank of India (RBI).
 
No reasons were given for increasing the liabilities or loans and the borrowing costs of the financial services subsidiary, leading to non-disclosure of the consequential impact of insufficient provisioning for debts, the report says.
 
ICAI, in its interim report had stated statutory auditors of IL&FS acted in a 'negligent and fraudulent manner' and prepared incorrect financial statements of the debt-laden group. Deloitte Haskins & Sells LLP, SRBC & Co. LLP, an affiliate of Ernst & Young (EY) and BSR & Associates LLP were auditors of IL&FS and its two main subsidiaries. According to reports, the newly constituted National Financial Reporting Authority (NFRA) may be assigned auditing of past five years’ books of accounts of IL&FS. 
 
During the last hearing, the NCLT had asked to send notices to Securities and Exchange Board of India (SEBI), RBI, Income Tax department and other statutory authorities before taking any decision on re-opening of IL&FS books. On Monday, a counsel for SEBI told the Bench that the market regulator did not have any problem in re-opening of the group’s listed companies’ financial statements, says a report from Moneycontrol.com.
 
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IL&FS Scam: Auditors Fudged Accounts; MCA Seeks Reopening of Past 5 Years Financial Records
The Institute of Chartered Accountants of India (ICAI), in its interim report has said statutory auditors of Infrastructure Leasing & Financial Services Ltd (IL&FS) acted in a 'negligent and fraudulent manner' and prepared incorrect financial statements of the debt-laden group. Deloitte Haskins & Sells LLP, SRBC & Co. LLP, an affiliate of Ernst & Young (EY) and BSR & Associates LLP were auditors of IL&FS and its two main subsidiaries. According to reports, the newly constituted National Financial Reporting Authority (NFRA) may be assigned auditing of past five years’ books of accounts of IL&FS. 
 
Last week, the ministry of corporate affairs (MCA) submitted the report from ICAI to the National Company Law Tribunal (NCLT). While submitting the report, the MCA sought reopening of past five years financial records of IL&FS and its units IL&FS Financial Services Ltd (IFIN) and IL&FS Transportation Networks Ltd (ITNL).
 
Moneycontrol.com, which has reviewed a copy of the ICAI report, says, "The ICAI, in their report, stated that the world’s premier auditors — Deloitte Haskins & Sells LLC, EY affiliate SRBC & Co. LLP and KPMG affiliate BSR & Associates LLP — were negligent and overlooked the actual situation at IL&FS, IFIN and ITNL."
 
According to the MCA’s application, the auditors understated bad loans and did not point out the inadequate provisioning made against such loans, violating norms set by Reserve Bank of India (RBI).
 
No reasons were given for increasing the liabilities or loans and the borrowing costs of the financial services subsidiary, leading to non-disclosure of the consequential impact of insufficient provisioning for debts, the report says.
 
As per the ICAI report the RBI had observed that the net owned funds (NOF) of IFIN had turned negative and it was over leveraged in its annual inspection report for FY 2014-15 and similar observations were made subsequently as well.
 
In a report, New Indian Express, says, the central government is planning to assign NFRA the task of auditing last five years’ books of accounts of the fraud-hit group. Quoting an official from MCA, the report says, "ICAI has done its primary investigation and the ministry had already placed its request to reopen the books of accounts of the IL&FS. While the process of appointing an independent professional for the purpose is on, the general consensus is that the task should be done under the aegis of NFRA.”
 
Here are some key findings of the ICAI interim report, which alleged... 
  • That IL&FS did not meet RBI’s regulatory framework for core investment companies.
  • Whether the required approvals were being taken to provide high managerial remuneration.
  • Direct and indirect investments made by the parent IL&FS in its group subsidiaries.
  • The “serious mismatch” between assets and liabilities which indicated liquidity concern on the lender’s balance sheet.
  • Key balance sheet indicators of the beleaguered financier, such as its over-reliance on short-terms borrowings for financing its long-term assets, adverse key financial ratios and deterioration in the value of the assets used to generate cash flows. 
 
“In fact the SA (statutory auditors) have mentioned that in view of its (IL&FS) positive net worth, positive cash flows, credit ratings and boards proposals, there is no doubt on the ability of the entity to continues as a going concern,” the report noted. 
 
Deloitte Haskins & Sells was statutory auditor of IL&FS till FY2017, of IFIN from FY2016 to 2018. EY affiliate SRBC & Co was statutory auditor of IL&FS for FY17-18 and for ITNL from FY2016-2018. KPMG affiliates BSR & Associates was statutory auditor for IFIN from FY2016-2018. BSR also audited accounts of ITNL from FY2016-2018.
 
The NCLT will hear the case next on 1 January 2019.

 

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COMMENTS

Calm Waters

5 months ago

Ndl.Narendra Damodar5 days ago ICAI says they are educational charitable organization eligible for income tax exemption. Then how they can claim to be regulators of CA auditors. It is non sense. What they said thus in Supreme Court and what thay actually done here does not match. They should first decide what thay are. Such mockery by ICAI should be stopped. If they are charitable educational body let them mind that business. We should strengthen NFRA and SFIO for getting relief from fraud CA community. REPLY


Ndl.Narendra Damodar5 days ago ICAI says they are educational charitable organization eligible for income tax exemption. Then how they can claim to be regulators of CA auditors. It is non sense. What they said thus in Supreme Court and what thay actually done here does not match. They should first decide what thay are. Such mockery by ICAI should be stopped. If they are charitable educational body let them mind that business. We should strengthen NFRA and SFIO for getting relief from fraud CA community".

REPLY
As far as Mr.Damodar's comment goes there should be documentary evidence that the Hon'ble court has been misled by submitting facts or evidence that is not what is conveyed to members of ICAI.
Submit or quote reliable evidence to prove that voluntary educational institutions are not exempt from Itax. The AG or his associates representing the govt. should bring this to the notice of the court


Ndl.Narendra Damodar

5 months ago

ICAI says they are educational charitable organization eligible for income tax exemption. Then how they can claim to be regulators of CA auditors. It is non sense. What they said thus in Supreme Court and what thay actually done here does not match. They should first decide what thay are. Such mockery by ICAI should be stopped. If they are charitable educational body let them mind that business. We should strengthen NFRA and SFIO for getting relief from fraud CA community.

Peruvemba Subramanian Ramachandran

5 months ago


Immediately cancel the licence of all these audit firms; and bar the Chartered Accountant who signed the accounts for life; and seize all his properties to the Government.

REPLY

Peruvemba Subramanian Ramachandran

In Reply to Peruvemba Subramanian Ramachandran 5 months ago

Like the Arther Anderson , the then world No.1 audit and consultancy firm, was disbanded in 1997-8, from practising in any part of the world.

Jubtester

In Reply to Peruvemba Subramanian Ramachandran 4 months ago

Appreciate Moneylife bringing some semblence of sanity to investors minds by their recent exposures. At least some one has their heart and head in the right place. All these audit firms are offshoots of similar narratives. Greed is the only motto they serve & subscribe to . Ravi parthasarathy (ILFS)offered them plenty of fodder to mulch. We have seen this time and again. As history goes western world is beset by much larger issues of fraud & skulduggery by these audit firms - who go scot free by making plea deals. Hope we do better than plea deals , while bringing them to book

IL&FS Scam: Ever greening of loans by IFIN for group and outside borrowers too
One of the points noted by the Serious Frauds Investigation Office (SFIO) report on IL&FS (Infrastructure Leasing and Financial Services) is the ever-greening of loans by its subsidiary IL&FS Financial Services Ltd (IFIN). But these are clearly not any old loans. Why would these companies come to IFIN for money? Clearly, because they were not getting bank credit anymore. And why would a cash-strapped IFIN lend to these select companies knowing fully well that they were in financial trouble and running out of funding options? 
 
It is now clear that IL&FS has been in deep financial trouble for three years covered it up through short term borrowing and by hood-winking credit rating agencies. The obvious answer would be that these companies were very important for the group to maintain its contacts and connections. 
 
Let us look at the list of such borrowers, listed by the interim report from the SFIO, under the ministry of corporate affairs (MCA). The report says, "...borrowers of IFIN, other than the group companies, were extended additional credit facility by the company so that they could service their outstanding, interest and principal repayment obligations and avoid defaulting and classifying the account as non-performing assets (NPA)."
 
During FY2015-16 to FY2017-18, IFIN provided loans worth Rs3,838.70 crore for ever greening. 
 
 
Bankers tell us that most companies that got the benefit of this ever greening were either buddies of founder and former chairman Ravi Parthasarathy or politically connected people in states where IL&FS had large projects. One beneficiary company, SKIL was long headed by a close friend and neighbour of Ravi Parthasarathy. Ind Barath, to which the SFIO report draws specific attention also has promoters with reportedly close links to a Congress leader. Same is the case with promoters of Gayatri group. 
 
Kohinoor Housing Development Pvt Ltd from the Kohinoor also received Rs120 crore as loan for two years (see the table above). This group is associated with Maharashtra's former chief minister Manohar Joshi. His son Umnesh and daughter-in-law Madhavi are the directors of Kohinoor Housing Development. The group had also acquired Kohinoor Mills, strategically located in front of the Shiv Sena headquarters at Dadar in Mumbai, with Raj Thackarey, founder of the MNS (Maharashtra Navanirman Sena) and nephew of Shiv Sena Founder Balasaheb Thackarey. Raj Thackarey later sold his stake to IL&FS and the project continues to languish and incomplete even today. 
 
Earlier in 2005, IL&FS through its subsidiary Consolidated Toll Network India (CTNL) had acted as syndication agency for Rs421 crore deal with Kohinoor group. That time CTNL had tied up with Mr Joshi’s Kohinoor group and Raj Thackeray’s Matoshree Realtors. Incidentally, during that period, Umnesh and Raj Thackeray emerged as winner in the auction for the NTC’s Kohinoor Mill land at Dadar, says a report from Times of India.
 
According to a report from the Mint, ILFS India Realty Fund II, with a corpus of $895 million, was raised in 2007 and has invested in 28 portfolio companies including Kohinoor CTNL Infrastructure Company Ltd and GK Industrial Park Pvt Ltd.
 
During both FY2015-16 and FY2016-17, IFIN gave a loan of Rs271.60 each year to Earth Environment Management Services Pvt Ltd, a unit of A2Z group. During the same period, Abhitech Developers Pvt Ltd from the Shishir Bajaj group also received Rs225 crore each year from IFIN as loan. 
 
Earth Environment Management Services, registered in Delhi was incorporated on 30 June 2104 and has Alok Kumar Gupta, Dalip Sharma, Manoj Tiwari, and Ajay Kumar Bajaj as directors. As per information from zaubacorp.com, the company has given 28/142, Ground Floor, West Patel Nagar New Delhi Central Delhi DL 110008 as its registered address. The same address is shared by four other companies, Topcon Sokkia India Pvt Ltd, Avanirit Corporate Solutions Pvt Ltd, Digismart Education Services Pvt Ltd, and A2Z Green Waste Management Ltd, the record from the website shows.
 
SFIO says, "The ever greening of the loans resulted in inflated profits, suppressed provisioning and non-disclosure of possible NPAs in the books of IFIN. To this extent, the financial statements were misstated to show window dressed view or rosy picture of the financial statements. Further investigation into disbursal of these loans is underway."
 
Not only ever greening, the investigation by SFIO revealed write offs in past debt and supply of fresh loans to many companies. "There are instances where an account was written off in the books of IFIN as bad debt and fresh loans were advanced to the company or group despite the fact that the company had written off previous debts of the same borrower entity."
 
"This is observed in the case of credit facilities extended to Shiva group of companies. It is observed that Shiva group had been a defaulter in its loan commitments from 2011 itself. In November 2017, the Reserve Bank of India (RBI) has also made an observation for making of provisioning for said bad loans. In spite of such history of the borrower, IFIN extended another loan facility of Rs175 crore to Shiva Shelters & Construction Pvt Ltd and disbursed an amount of Rs50 crore in February 2018," the SFIO report says. 
 
Coming back to the SFIO report, during its investigation, the agency found continuous fund raising by IFIN from the market, including debentures worth Rs3,900 crore and commercial papers worth Rs2,730 crore. In addition, IFIN also took bank loan of Rs8,500 crore and raised inter-corporate deposits of Rs980 crore. Overall, SFIO says, IFIN had sourced 75% of its funds from the public or banks.
 
"Investigation revealed that IFIN had advanced Rs1,630.05 crore to ITNL violating the prudential norms (credit concentration) for exposure to group companies framed by the RBI. In order to bypass these norms, the loans ultimately advanced to ITNL were layered through eight group companies of IL&FS," SFIO says. (Read: How IL&FS and its key subsidiaries financially crushed step down units)
 
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COMMENTS

AAR

3 months ago

Why no criminal action against Ravi Parthasarathy? Heard he is hiding in USA.

shivaraju gowda

5 months ago

All the auditors to be banned lifetime and send to all auditors signed and audited auditors to jail lifetime , These auditors dint have any rights to do any audit, Many of the auditors are working only for money doing manipulate in audit report.
Many investors are invest money based on audit report who will give the money to investors because of these types of irresponsible auditors.
The Government has to implement strict law for against these auditors and has to recover all the investers losses from these auditors.
What action will ICA will take only they will ban one or two years or they will not do anything.
Government has to take strick action against ICA only

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