IL&FS Tamil Nadu Power Co: Was the Fraud Staring Everyone in the Face?
The Romans had, among other religious aspects, fixed 15th March, popularly the ides of March, as a day for settling debts! Lo and behold! Punjab National Bank (PNB), that became a household name after the notorious Nirav Modi and Geetanjali Gems fraud, reported on 15 March 2022 to the stock exchanges the fact that one of their borrower accounts, IL&FS Tamil Nadu Power Co Ltd (ITPCL) has been declared a fraud account to the Reserve Bank of India (RBI) for a sum of Rs2,060 crore, against which the Bank held a provision of Rs824 crore.
 
Frauds in the rarefied Indian corporate world have, in recent times, become so commonplace that its discovery and announcement is losing the shock value it formerly held!
 
IL&FS (Infrastructure Leasing & Financial Services) group, which created major tremors in the last week of October 2018 by its revelation that it had a major mismatch on the asset-liability front which eventually led to major defaults on loan repayments, has, in the 40 months that elapsed, lost its prima donna status as the country has seen more cases of corporate and non-banking financial company (NBFC) defaults surfacing! 
 
ITPCL, being one of the members of the mindboggling cluster of more than 350 companies that constituted the maze of the IL&FS group, was set up sometime in 2008 to implement a power project in the Cuddalore district of Tamil Nadu.
 
The board and the management of the main holding company stood deservingly discredited for the various excesses, resulting in the group having borrowings far in excess of its assets. The case of ITPCL, which functions as a company with an independent board and management team, implementing a project in a domain which is quite earthy and not esoteric—being power generation with coal as feedstock—is a case study in terms of the failed corporate governance and accounting practices which, with the benefit of hindsight, one can dissect and analyse.
 
IL&FS group was the syrup that attracted very eminent persons, like ants, to sit on the various boards as directors. Retired senior bureaucrats adorned its many boards. 
 
ITPCL went a step further and appointed a retired IAS (Indian Administrative Service) officer—MS Srinivasan, who was earlier a secretary in the ministry of petroleum in New Delhi—as its executive chairman with a remuneration package that was a far cry from what the best bureaucrats can earn, inclusive of the money value of palatial homes in the best pin codes of New Delhi and all other accoutrements that go with high positions in government.
 
It is quite uncommon for someone retired from bureaucracy on superannuation, donning a full-time role, to implement a power project that, typically, demands commercial skills beyond the best bureaucratic attainments, though that may include occupying top positions in public sector units.
 
But a power project has many aspects needing liaison with the government, especially the public utility being the principal buyer. The past experience of the incumbent serving in high positions in the  TN (Tamil Nadu) government must have stood in good stead to land this plum assignment despite crossing the personal milestone of 60 years!
 
Most infrastructure projects in the country have suffered from cost padding up and the number of cases that landed up in the insolvency regime is a testimony to it. ITPCL has been no exception to it and the unravelling of its financial manipulations is worthy of a detailed analysis and how the board and the auditors have come out in this.
 
The accounts and the directors’ report of the company, up to the year ended 31 March 2018, carried no indication of the impending discovery. The company’s auditor was Deloitte Haskins and Sells. The directors’ report and the notice of the annual general meeting, for the year ended March 2018, included a resolution for replacement of the auditor who had a remaining tenure of another year, the appointment being for a block of five years made in 2014.
 
The reason adduced in the notice was that the IL&FS parent had decided to change its auditors to SR Batliboi & Co. Thus, the audit change was not an independent decision of the audit committee and the board of ITPCL, but was a fallout of the decision of the parent board. 
 
It is to be noted that the actual surfacing of the problems of the IL&FS group was still a couple of months away, as the notice for audit change was issued in August 2018 and the news-break of the crisis in the group happened in October.
 
On 1 October 2018, the ministry of corporate affairs (MCA) issued suitable official orders to supersede the board of all IL&FS companies and the executive chairman of ITPCL and other independent directors resigned during October/November 2018 and were replaced by new directors appointed by the government.
 
Interestingly, Vineet Nayyar in his 81st year was the go-to person to become the chairman of ITPCL. He, of course, had redeemed Satyam Computers in the 2008 scandal.
 
The accounts for the year ended 31 March 2019, audited by the new auditor, brought out impairment in the value of assets of a substantial amount as given below.
 
 
The reason for the impairment was couched in the profound statement that the management reassessed the cash generating capacity of the project (CGU) and the discounted future cash-flow necessitated the restatement of the value of the assets! 
 
This staid language passes muster when the reassessment of values is done in a routine case. In this instance, the quantum and the context is indicative of serious irregularities which neither the board nor the auditor felt necessary to highlight or at least underline.
 
The new board, which had taken office in November 2018, issued the report for the year 2018-19. The report, which runs to many pages, is completely silent on the so-called reassessment of the cash-flows and the consequent write-off.
 
The auditor did issue a qualified report on a host of other matters but didn’t see the salience to draw attention to this as an extraordinary matter, given the order of proportion. 
 
Has not the auditor a duty to consider the possibility of a fraud causing such write-offs? Does the role stop with getting the management to restate the numbers to make it more in line with reality and leave the issue of whether there has been a fraud, which rendered the monies belonging to lenders to have been siphoned off, for other agencies to care about?
 
The bigger question is of the role played by the previous management, headed by a retired IAS officer in an executive role drawing a considerable salary and on paper being fully accountable for the conduct of the business; the independent directors who were on the board and most importantly, the statutory auditors. 
 
The impairment testing, which resulted in almost 30% of the balance sheet being shrunk in 2019, should have been done in 2018 as well, because it is an annual requirement. What changed so much in the business model or the conditions that created such a big write-off in 2019, just a year later? Can the earlier auditor stand up and explain? 
 
It is equally the responsibility of the new board and the new auditor to have explained this, though they were not responsible for the mess.
 
It is after a lapse of three years that the PNB has discovered and declared the fraud. While making no defence for inept management in banks, their task is made no easy by auditors who fail to call out and highlight wrongdoings when it has surfaced. In fact, the audit report has specific reference to the way accounts can be misstated due to frauds and excluding the auditors’ responsibility to detect fraud. 
 
But a case like this needs no bloodhound to sniff a fraud and call out the management to do a full-scale investigation and hold the issue of the audit report till the investigation is done.
 
The new management had commissioned a forensic audit as part of the overall systemic failure in IL&FS and note 48 of the annual report of 2020-21 of ITPCL mentions that three employees have been charge-sheeted for misconduct. Nowhere is the sedate note indicating to the almost Rs5,000 crore of foul play so far detected (including another Rs561 crore written off in 2020-21 as impairment) being mentioned.
 
In this case, the questions that arise are the role of the former executive chairman and of the board and the auditors. If the chairman was completely unaware about how the project spent so much more than necessary, then it is a major reflection of the inadequacy of the person after drawing a remuneration close to Rs2 crore per annum! Not necessary to spell out further, in case he knew of the irregularity and kept silent!
 
The erstwhile auditors should ask themselves the question of the competence they brought to bear to audit a project of this nature. The new auditor needs to reflect if the job is done only by shooting over the shoulders of the management and take no independent call in a case like this.
 
The unsolved puzzle is why the new board is fighting shy of publishing the forensic report and bringing out the exact excesses of the previous management than use a humdrum expression like ‘impairment’ to wash all the sins!
 
(Ranganathan V is a CA and CS. He has over 43 years of experience in the corporate sector and in consultancy. For 17 years he worked as Director and Partner in Ernst & Young LLP and three years as senior advisor post-retirement handling the task of building the Chennai and Hyderabad practice of E&Y in tax and regulatory space. Currently, he serves as an independent director on the board of four companies.)
Comments
Ramesh Popat
3 months ago
1000 cr to 1100 cr in earlier comment. error regretted.
Ramesh Popat
3 months ago
has it been sold for 100 -1100 cr to foreign co; ver recently ?
though some indian co. was also ready to take it?!
Kamal Garg
3 months ago
Is public becoming increasingly sick and vary of all the scams hitting the country regularly. It was IL&FS, DHFL, Geetanjali Gems, Nirav Modi, ITPCL and every day a new revelation comes out.
r_ashok41
3 months ago
ILFS have been involved in so many cross holdings and looks like one is opening a pandora box with so many loose skeletons not know where to look for .
Our laws are so cumbersome and not straightforward hence people with the connivance of the powers that be resort to these kind of money laundering activities.To unearth them ones lifetime may not be sufficient
radhikaasb
3 months ago
While I appreciate and agree with the contents, as an ex banker, I want to thank you for bringing out the dubious role played by Auditors of such companies and hoodwinking bankers and public about the wrongdoings done. What is even more serious is the first hand experience that Auditors ignore lender banks communications if they point out and try to get an explanation on such Audited balance sheets and when taken up with ICAII does not bother to even respond.

However, govts and media find an easy scapegoat in hapless banker, which line common public naturally falls for.
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