Top executives of Infrastructure Leasing & Financial Services (IL&FS), including Ravi Parthasarathy, Hari Sankaran and Arun Kumar Saha, misused Employee Welfare Trust (EWT) and "the trust deed was instituted fraudulently with criminal intention to gain unlawful benefits," reveals the submission before the National Company Law Tribunal (NCLT). The submission also exposes how the EWT was mainly used for enriching few select employees. EWT, with outstanding loans of Rs500 crore, holds a 12% stake in IL&FS.
Quoting the interim report of the Serious Fraud Investigation Office (SFIO), the ministry of corporate affairs (MCA) reveals how the trust deed was amended six times, with the last three supplemental indentures without any board approval.
"...it is clear that the last three amendments were carried out without any approval of the board of directors of IL&FS, the settlor of the trust. This indicates that the intention of the trustees of EWT, who happened to be the directors of IL&FS and its group companies, was to fraudulently benefit themselves," the report says.
According to SFIO, the fifth indenture was made on 17 April 2006 to include that the trustee should have the powers to sell or any portion or part of the trust investments either by public auction or by private contract, indicating that the trustees started acting in a completely arbitrary manner without being accountable.
There was an important provision in the fifth supplemental indenture which stated, "The employees of the IL&FS being the beneficiaries under the said indenture of trust as amended from time to time have given their consent to this fifth supplemental indenture."
However, SFIO said, no document pertaining to the employees' consent to change the indenture of the trust is available. "This is (a) fraudulent act on the part of the trustees and directors of IL&FS as criminal intent to defraud is apparent. In addition to this, they also had conflict of interest in discharge of their duties as they happened to be beneficiaries of fraudulently amended indenture deed without disclosure to IL&FS," it added.
As per the report, the committee of directors (CoD) of IL&FS consisting Ravi Parthasarathy, Hari Sankaran and Arun K Saha approved the indenture. It says, "All these three persons were also the trustees of the EWT at that point of time. There was conflict of interest on part of the CoD and trustees, as the same persons occupied both offices."
After the amendment, the EWT was used to invest in securities of IL&FS and group companies with the loans obtained from IL&FS and its group entities. These shares, however, were distributed at a very nominal price to some select management personnel of the group. After selling the investment to a third party, the sale proceeds were distributed among the same selected management personnel at the cost of EWT objectives and IL&FS group, the SFIO pointed out.
From 1 April 2011, Vibhav Kapoor, K Ramchand and Ramesh C Bawa were trustees of EWT.
By the sixth supplemental indenture on 31 March 2011, the board of trustees at EWT was reconstituted and Vibhav Kapoor, K Ramchand and Ramesh C Bawa were made permanent trustees till 31 March 2016. However, SFIO found out that these three continued to remain on the board of trustees beyond March 2016. They resigned only on October 2018.
While Mr Kapoor was the chief investment officer of IL&FS, Ramchand was the managing director (MD) of IL&FS Transportation Network and Bawa was the MD of IL&FS Financial Services.
EWT Was Used To Enrich a Few Select Employees
According to SFIO, the IL&FS employees welfare trust- EWT, as used as conduit to give shape to fraudulent motives of the key managerial persons of IL&FS."...the financial statements for the past eight years indicate that less than 1% of the total expenditure was made towards welfare of employees and the remaining was diverted towards enriching few selective employees," it said. (See the table below)
The interim report of SFIO also shows creation of another trust, IL&FS Group Employees Trust (IGET), for which Vibhav Kapoor was settlor and Arun K Saha and Hari Sankaran were beneficiaries. IGET's trustee was IL&FS Trust Co Ltd (currently known as Vistra ITCL Co Ltd).
While there are no documents to determine the relationship between IGET and EWT, the SFIO found that IGET aggregated all the shares held by employees and sold it to Life Insurance Corporation of India (LIC) at Rs1,100 per share. The same money was paid to employees.
EWT had distributed these shares to employees at Rs84 per share (about 15 lakh shares or warrants) and Rs132 per share (around 15 lakh shares). This deal shows windfall gain and also a violation by EWT for the conditions of warrants.
"While distributing the shares, the EWT had violated the conditions of the share warrants issued by IL&FS, with respect of transferability of the warrants, the condition was that the EWT cannot deal in the warrants as long as warrants were not exercised and were converted to equity shares. The trustees were in haste and even before warrants were converted to equity shares, the same were sold to employees," the SFIO report says.
The report also exposes how loans were extended to IL&FS employees' welfare trust -EWT to buy shares of IL&FS or a group company and to pay interest on the loans.
SFIO says, "The loans extended to EWT were approved by the CoD of the respective IL&FS group companies. The EWT was dependent on interest and dividend income from the group companies, for servicing its debt. From 2006 onwards, as the sale proceeds of shares were distributed among the select few employees rather than being used for repaying the debts."
"The trust was continuously suffering funds crunch on account of debt and was forced towards seeking new debts from the IL&FS group companies for service its existing obligations on regular basis, leading it into a debt-trap. These loans have caused further stress to the lending group companies and their extension reveal lack of due diligence and conflict in decision making," the SFIO concluded in its interim report.
It is shocking that an employee welfare trust seems to have been converted into a trading vehicle of sorts to enrich a few top executives.
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