IL&FS Transportation Forensic Audit report Shows Gross Irregularities and Manipulation
Moneylife Digital Team 19 February 2022
The forensic audit report of IL&FS Transportation Networks (ITNL) and its special purpose vehicles (SPVs) by Grant Thornton, shows gross financial mismanagement, withdrawal of funds from projects by ITNL leading to large cost overruns and accounting manipulation. The report found that road projects had to suffer Rs8,077 crore cost overrun, largely due to funds being taken out by ITNL. Interest cost overruns of Rs3,433.42 crore were one of the significant components of project cost overruns contributing 42% of the total project cost overruns. The mechanism of this is as follows: 
IL&FS initially advanced loans at 10% to the SPVs. These loans were later assigned to other lenders. The assignment resulted in effect where SPVs had borrowed funds from the new lenders and repaid the loans taken from ITNL. The SPVs were charged an interest rate of 14-16% on loans assigned by ITNL against the 10-12% charged by ITNL earlier. The interest was to be borne by the SPVs, resulting in a cost overrun of Rs3,433 crore.
The report highlights several instances of circular transactions where the provider of funds is the ultimate recipient as well. The trouble from IL&FS spread to the parent with the holding company disbursing multiple loans to ITNL. 
Response from ITNL was “ IL&FS as a Holding company of ITNL had been providing funding support to ITNL on a regular basis based on its requirements. The decision for the same were taken at the Group level by IL&FS Group Management Board taking into account overall group requirement, exposure level etc. Similarly, ITNL as a parent company of the SPV was required to provide funding support to the SPVs to meet their cash flow requirements. This was also necessitated due to various Sponsor undertakings provided by ITNL to Senior lenders at the time of financial closure of the Project” 
Further ITNL used short term borrowings to make long term investments including equity investments in SPVs, which resulted in potential asset liability mismatch as well as liquidty issues in standalone ITNL. 
ITNL availed temporary loan facilities from ILFS (300 crore) to repay its debt to indusind bank (545 crore). The report notes many such instances of circular transactions and also oints out that SPVs had to incur interest cost even on non-cash transactions. 
ITNL took out the money from the road projects by charging excess project development and project management fees (PDF & PMF) taking out additional Rs2,281 crore. This fee money was used to make equity contributions into the SPVs. 
Source: GT forensic audit report
In majority of the instances (i.e. 16 SPVs), the PDF/PMF charged by ITNL is more than 50% of the total funds (equity and sub-debt) invested by ITNL in its SPVs. ITNL had utilised borrowings from external lenders and Group companies of IL&FS Limited to partly fund its share of equity as a sponsor/promoter of the SPVs.
In fact, in case ITNL had not recognised PDF/PMF, it would have potentially suffered a loss of Rs146.96 crore.
Source: GT forensic audit report
Some other significant observations from the report:
  • ITNL/SPVs availed the loan facilities based on the project cost mentioned in PIM(Project Information Management), which was higher than the project cost as mentioned on the website of DEA (Department of Economic Affairs) by Rs5,203 crore.
  • Discussion regarding margin revision, design fees, O&M start-up fees, etc. to be charged from SPVs were conducted in advance to ensure that the financial forecast of ITNL for Q3 of FY 2016-17 is converted from a loss of INR 116 crs to Profit After Tax.
  • To reflect profitability in standalone financials of ITNL revenue of Rs329 crore was accounted in the books of ITNL during 08 February 2017 to 31 March 2017 by way of revisions in contracts between ITNL and SPVs which led to profit after tax of Rs195.71 crore for the FY 2016-17.
  • Potential payments were made by SPVs (MBEL and HREL) to ITNL against invoices to reduce cash balances in SPVs, which might have resulted in a better financial picture in terms of reduced cash to debt ratios.
  • During FY17-18, ITNL provided interest-free loans of Rs111.19 crore to a few of its SPVs. However, the same entities were during that time facing financial and liquidity constraints. 
Additionally, many other irregularities like potential anomalies in advance extended to various parties even though work was not carried out, Financial assistance by providing excess bills, awarding contracts to parties without a proper bidding process, misrepresentation of lenders of the SPV projects by submitting inflated toll revenue estimates etc have been abundantly noted in the report.  
The forensic investigation analysed financial records, bank statements, public domain searchers, digital evidence recovery and review of top executives to come up with the findings. GT notes that some of the request for data were not met by the company. The GT reports points to fraud and manipulation in the company.
The report reiterates the fact that the there were severe corporate violations like evergreening, gross irregularities and anomalies, compromised tender process and general circumvention of rules that misled regulators as well as investors. 
The audit tracked emails of employees to establish the circular transactions were deliberate. Thus, it appears to be unusual that IL&FS Limited had disbursed multiple loans to ITNL even though ITNL was facing severe liquidity issues, which were known to the then KMPs of the IL&FS group.
In 2018, several IL&FS group entities defaulted on repayments due to severe liquidity problems. Later, the government superseded the board of directors, and the new board under the Chairmanship of Mr Uday Kotak was constituted. The board started working on ways to revive the ailing group. One of the actions taken was appoint Grant Thornton Bharat LLP (GT) to conduct forensic audits on some group companies with the purpose of unearthing financial irregularities; finding fraudulent transactions and wrongdoings by the erstwhile management, identify and fix the responsibility and assess its impact on the ongoing resolution process. For the review period Karunakaran Ramchand was the Managing Director of the company, Mukund Sapre was the Executive Director and Neeru Singh was the Non-executive Director. 
ITNL, a subsidiary of IL&FS Limited, is a developer, operator, and a facilitator of surface transportation infrastructure projects, taking projects from conceptualization through commissioning to operations and maintenance under public to private partnership on a build-operate-transfer (‘BOT’) basis in India. ITNL is one of India's largest BOT road asset owners, with approximately 13,100 lane km in its portfolio.
The forensic report titled ‘Project Icarus’ was finalised by Grant Thornton was released to the stock exchanges by ITNL on Friday.
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