IL&FS’s Tirupur Project: Destructive Impact of RBI’s Failure To Act
The Infrastructure Leasing and Financial Services (IL&FS) scandal is like an onion, for every layer that one peels off, a fresh new layer is uncovered. We find layers upon layers of dubious dealing and regulatory negligence that had been brought to the attention of regulators, long before IL&FS began to default on its humungous borrowings.
 
This column is about the grave financial implications of the Reserve Bank of India (RBI) refusing to do its job as a regulator. It is something that the Serious Frauds Investigation Office (SFIO) needs to examine, if India wants a reduction in scams. 
 
Last week, RC Bhargava, a long-time independent director of IL&FS, claimed that the board ignored persistent letters from a whistleblower because “government guideline for such complaints is to take cognisance of specific verifiable allegations and not vague and general ones.”
 
We now have evidence that regulators were just as callous when a formal complaint making some serious allegations was sent by a foreign institutional investor, based on a special audit. 
 
This pertains to New Tirupur Area Development Corporation Ltd (NTADCL), a unique private project led by IL&FS to bring water supply to this once extremely rich, hosiery-exporting town in Tamil Nadu. The major shareholders of the company are: Tamil Nadu Water Investment Company Limited (TWICL), which has a 32.54% share; AIDQUA Holdings (Mauritius), Inc (AIDQUA), which has 27.89% shareholding; and IL&FS, which holds 11.68%. TWICL, again, is jointly promoted by IL&FS and the Tamil Nadu government. The other shareholders were Life Insurance Corporation of India (LIC), General Insurance Corporation of India (GIC) and Mahindra & Mahindra (M&M).  M&M  is also the O&M (Operations and Maintenance) operator but has never held a board seat.  
 
I have written extensively about the dubious litigation that NTADCL has been embroiled in for almost a decade. This article is about how AIDQUA had appealed to the RBI for intervention with exhaustive details about IL&FS’s fraudulent ways; but the regulator refused to respond—even though this was no anonymous whistleblower. It was a global investment institution. 
 
RBI’s stony silence had serious systemic consequences. IL&FS’s senior management were emboldened to target AIDQUA directors with a frivolous criminal defamation case that has continued even after the board of IL&FS had been sacked by the government in September.
 
The Bombay High Court, and later the Supreme Court, quashed the complaint but an IL&FS nominee director threatened an AIDQUA director with arrest at the NTADCL board meeting. Worse, many potential whistleblowers, including officers of Indian Administrative Service (IAS) were forced into keeping mum, since RBI’s silence signalled that you can complain about the all-powerful IL&FS management, led by Ravi Parthasarathy, only at your peril.  
 
On 26 July 2013, AIDQUA wrote an explosive letter addressed to B Mahapatra, executive director, RBI, bringing to its attention the scandalous dealings of IL&FS. This is a detailed, 21-page letter with four annexures (page 1 below).
 
 
Initially, on 4 September 2013, RBI said it was looking into the issues raised by AIDQUA. It followed this up with a letter to IDBI, the lead banker, seeking its feedback.
 
 
But then, on 30 April 2014, RBI responded to AIDQUA’s follow-up with a terse note saying: “we regret our inability to intervene in this matter.” 
 
 
Undeterred, on 16 June 2014, AIDQUA’s director, Shariff Golem Hossen, wrote to Rajesh Varma, chief general manager, department of banking operations (copied to PR Ravi Mohan, chief general manager-in-charge, department of banking supervision), pointing out, even more bluntly, that AIDQUA was seeking intervention because the NTADCL's corporate debt restructuring (CDR) was contrary to RBI's own master circular which prohibits a debt restructuring via the CDR cell in cases involving frauds and diversion of funds.
 
AIDQUA said that IDBI had provided incomplete answers or selective facts to the regulator. The letter said: “a special audit conducted by an independent auditor, though limited in scope, has revealed serious financial irregularities in the commercial matters of NTADCL including misappropriation of funds by the company's co-promoter, IL&FS, a company regulated by the RBI, leading up to NTADCL's financial distress and resulting in uncertainty of advances/debts.”
 
It also pointed to two observations of the Madras High Court—one, that “IL&FS had made unilateral deductions from loan amounts purportedly disbursed by it.” And, secondly, that the CDR scheme proposed by IL&FS (and objected to by AIDQUA and a couple of other lenders) was ‘against public interest’ and had stayed the implementation. 
 
Why would RBI refuse to intervene? What was NTADCL’s management, packed with IAS officers nominated by the Tamil Nadu government, doing through all these nine long years? In a nutshell, it is yet another example of the kind of hold that IL&FS had on the bureaucracy across India. 
 
S Krishnan, IAS, acting managing director (MD) of NTADCL, tells me that the company had decided to treat the matter as a dispute between two investors – IL&FS and AIDQUA. This is a rather strange stance, since the repercussions of the wrongdoing and their inaction were directly impacting the company he is heading.
 
Why would powerful IAS officers make a virtue out of passive inaction? Wasn’t it their duty to act decisively when serious wrongdoing was being alleged? Take a look at some issues highlighted by AIDQUA:
1. That IL&FS had withheld funds from the company under several heads such as in respect of alleged costs relating to a USAID loan arranged by them, project management fees, out-of-pocket expenses, etc. The amount was Rs41.24 crore. AIDQUA believed that IL&FS was not entitled to this money and asked for a limited purpose special audit of payments withheld under the USAID loan. The audit confirmed its suspicions; AIDQUA wanted a full forensic audit of financial statements before a CDR proposal could be considered. It offered to assist RBI with the forensic audit. 
 
2. Despite the Madras High Court having reserved its order on 2 August 2012, NATDCL went ahead and allotted shares without a board approval, or a special resolution approved at a general body meeting. AIDQUA learnt about the allocation only through a counter-affidavit dated 5 October 2012 filed with the company law board (CLB) by S Krishnan. “By illegally and surreptitiously allotting shares, Mr. S. Krishnan, IAS, has breached his fiduciary duty towards shareholders of the company,” says the letter. Mr Krishnan, a bureaucrat, acts as the MD of NTADCL even today, although his appointment has not been formalised since AIDQUA has refused to ratify it. 
 
3. AIDQUA says, the promoters “unilaterally changed the business purpose of the company by selling water allocated for industrial use,” which affected the finances of NATDCL.
 
4. IL&FS and the Tamil Nadu government unilaterally decided to divert revenues meant for meeting the costs of Mahindra & Mahindra (the O&M operator) to servicing the debts of the company. This was done in violation of the conditions requiring the company to meet its debt-service obligations from the DSRF (Data System Research Foundations) or through the guarantee given by TWICL as part of the first CDR.
 
5. In 2009, less than 18 months after the first CDR, the promoters proposed a second debt restructuring. AIDQUA, LIC and GIC objected to it; but IL&FS and TWICL simply bypassed them and approached CLB for a clearance to the debt-restructuring plan. This proposal, like the first, wanted terms favourable to the promoters and were not in the interest of the company or the minority shareholders. 
 
6. AIDQUA said, the third CDR had projections which had no verifiable basis and were wholly unsubstantiated. There was no techno-economic study ‘to support the projections’ and there was ‘no demonstrable basis to support the facts and figures given’. The CDR proposal grossly undervalued the future potential business and profits of the company. 
 
7. AIDQUA specifically accuses S Krishnan (now the acting MD) of acting in concert with IL&FS and TWICL of wilfully and deliberately disobeying the CLB order dated 6 March 2012 by signing the master restructuring agreement for the CDR without proper authorisation, issuing shares in violation of CLB directions, and acting in a clandestine manner.  
 
8. The letter claims that IL&FS, in collusion with the then MD of NTADCL (Samir Vyas, also an IAS officer), of having ‘deliberately concealed / suppressed’ vital documents relating to USAID loan and various costs and charges pertaining to it from the board. It names Ravi Parthasarathy, founder of IL&FS, and his role in suppressing facts from the board. The letter says that the USAID “loan was sanctioned in the year 1997 and the Concession Agreement was signed in the year 2000 but the company had little or no knowledge of the liability till September 2002.” Curiously, IL&FS's letter of 25 September 2002 only became known at NTADCL's 25 March 2010 audit committee meeting.
 
9. M/s R Janakiraman & Co, chartered accountants, was appointed to conduct the special audit of the company which ratified the allegations above leading to AIDQUA’s demand for a full forensic audit.
 
10. The annexure says: “…the Company has wrongfully treated the entire Rs90.00 crores as a loan when in fact an amount of only Rs48.76 crores was received from IL&FS… as at 31 March 2010, the company had paid an amount of approximately Rs104.00 crores towards repayment of the amounts which were never received by the company, which speaks loudly of the mis-management in the company. It is pertinent to mention that IDBI, as lead lender, had a responsibility under prudential norms to ensure all monies due from IL&FS were in fact provided to the Company. But, IDBI ignored its responsibility to the company as well as under RBI regulations.” 
 
So why did RBI fail to take note of the AIDQUA’s detailed letter? Was it because of pressure from the many bureaucrats who were represented on NTADCL’s board? Isn’t it ironical that they remain at the helm even today while a board led by Uday Kotak is trying a way to resolve the IL&FS crisis? In fact, yet another bureaucrat has been nominated by the Uday Kotak-led IL&FS to the board of NTADCL. 
 
Since malpractices abound in India, and none of the normal checks & balances work, whistleblowers play a critical role in bringing sleazy facts out in the open. Regulators and independent directors must pay special attention to such complaints. But if they do not respond to anonymous whistleblowers or heed formal, detailed complaints by institutions, investing in India will remain a blind leap of faith. 
 
I have sent a set of questions to Mr Krishnan of NTADCL. We will incorporate his responses when we hear from him. 
 
Update: 16 December 2018

Krishnan’s replies

I had sent the following questions to Mr S Krishnan, who acts as MD of NTADCL, in addition to a phone conversation and a copy of the letter sent to the RBI governor. His answers do not respond to our questions, but are posted verbatim below. Also, while letters from AIDQUA to RBI are written as institution, and has various signatories, Mr Krishnan appears to make it an issue between IL&FS and one directors, while NTADCL and TWICL remined silent. This only confirms they did little to protect the state government’s interest, but are still designated by the governenmt to these organisations.

Moneylife’s questions to Mr S Krishnan:

1)      Why hadn’t NTADCL been able to achieve its projections as per the 1st Debt Restructuring?

2)      ThThee Special Audit was conducted at the behest of the Board  found against IL&FS in October 2010, why was no action taken to recover money withheld by IL&FS.  You said your recent board meeting plans to make a claim before the NCLAT Mumbai - what is the extent of this claim?  

3)      Why did NTADCL not act against IL&FS despite the overwhelmingly large number of IAS officers from TN being on the board? 

4)      Do you or do you not agree with the special audit of October 2010 findings that  IL&FS was found to have siphoned money from NTADCL? Did this not hurt the interest of NTADCL as well as the Tamil Nadu government, who you represent?

5)      Why hasn’t the Tamil Nadu government asked for the Rs 150 Crores back from all Lenders, including IL&FS, when the Madras High Court found in AIDQUA’s appeal against the Order of the Company Law Board that the CDR Scheme is against Public Interest by the use of public money to bailout private lenders, such as IL&FS?

6)   Why was there a right of recompense to Lenders (including IL&FS) for debt-to-equity conversion when getting shares in NTADCL is an asset itself in lieu of continuing to hold NTADCL debt? 

7)   As part of implementing the CDR via signing the MRA, why didn’t the GOTN notify the restriction on groundwater use for non-domestic purposes as per the specific conditions of the CDR itself?

8)   When the Tamil Nadu government opted for equity instead of  preference shares (or even subordinated debt) didn’t it cause a loss to the people of Tamil Nadu for losing out on any interest or dividend?

Mr S Krishnan’s response on behalf of NTADCL:

1.      One of the shareholders of NTADCL is a Company known as AIDQUA Holdings (Mauritius) Inc, (AIDQUA). AIDQUA invested in the Company as per the Shareholders Agreement signed by them and other investors in end of 2002.   There is litigation between AIDQUA and the IL&FS and its subsidiary Tamil Nadu Water Investment Company Limited (TWICL) since 2006 onwards on various issues.

2.      Mr Faizal Syed, the AIDQUA nominee Director after almost 6 – 7 years of approval of USAID related costs by NTADCL Board, again raised the issue of payment of the USAID related costs to IL&FS by NTADCL and demanded a special audit of the same in the Board meeting held on 23rd August 2010. A Special Audit was conducted by M/s R Janakiraman, Chartered Accountants and placed before the Board.  However in the meantime, AIDQUA preferred to file Company Application CA 32 of 2010 in CP 18 of 2007 before the Company Law Board on this issue. The Board could not proceed further as the matter was sub judice.

3.      The NCLT, Chennai had adjourned the matter  sine-die pending disposal of SLP 11694/2014 before the Supreme Court, which was again filed by AIDQUA against the judgement of Hon’ble High Court of Madras on CDR.

4.      The issue has not been lost sight of by the Company and finds mention in the note forming part of the Accounts in each annual report and is also noted specifically by the Statutory auditors.

5.      The Board of NTADCL has recently taken a decision to refer the issue of USAID related costs raised by Mr.Faizal Syed to the Independent Auditor and Internal Auditor of the Company to examine whether NTADCL had a valid claim which should be pursued with IL&FS.  The company’s interests will be protected. 

Update: 17 December 2018

In response to Mr S Krishnan's statement, Mr Faizal Syed, who he mentions repeatedly has sent us the following response, which is being published unedited.

Ms. Dalal 

While you explain well how Mr. S Krishnan, IAS, did not expressly answer your questions as part of his correspondence with you, I disagree with what he did have to say about the USAID Audit and other deductions wrongfully made by IL&FS at NTADCL. 

Your article was originally about how the RBI had not taken action with respect to specific claims against the behavior of IL&FS, which are now found mirrored in the SFIO’s interim report of “massive mismanagement” prejudicial to public interest by past IL&FS employees in the IL&FS Group companies including Mr. Ravi Parthasarathy and Mr. Hari Sankaran, along with questioning the behavior of IAS Officers. 

More specifically, the letter of AIDQUA had pointed out that Mr. S Krishnan, IAS, had taken unilateral actions at NTADCL such as the allotment of shares to IL&FS without any Board or Shareholder approval. Further, with respect to the claim of Mr. S Krishnan, IAS, that I had belatedly asked for a re-examination of the USAID deductions of IL&FS, please know that the Special Audit was conducted at the request of the Audit Committee of NTADCL and please recall your other article which had recorded that the Hon’ble Bombay High Court had gone through the matter of USAID deductions by IL&FS “threadbare” and had recorded in its learned Judgement that “unwarranted deductions” had indeed been made by IL&FS. Thus, there is no question of whether the IL&FS deductions ought to have re-examined via the Special Audit and there is no question that IL&FS needs to repay NTADCL with compounded interest for all wrongful deductions. 

It should also go without saying that there is no bar from any judicial authority for the recovery of funds wrongfully withheld. In fact, NTADCL had long ago told the Hon’ble CLB that its Board would discuss the Special Audit for consequent actions. To read that anyone would now even remotely question the Special Audit does not speak well for NTADCL or the responsibilities of its Board members to the Company, the Shareholders, the Lenders and other stakeholders, including the state of Tamil Nadu.

Sincerely yours, 

Faizal Syed
Director 
New Tirupur Area Development Company Limited

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COMMENTS

Raul Verma

6 months ago

Sad that even after specific inputs the regulators do not take the minimum bit of action, wouldn’t be surprised if there are many more skeletons in the financial landscape.

Muthusamy Thangavel

6 months ago

Now that a friend of Mr Ravi Parthasarathy is the RBI Governor there is no way there is going to be an end for this loot. And the city of Tirupur has become poor post this fiasco.


The city is struggling post GST implementation woes and demonetisation.

Ramesh Poapt

6 months ago

excellent!

Krishnan Hariharan

6 months ago

What can one expect out of Krishnan - MD, when he kniwingly colluded with erstwhile ILFS management to queries raised by Money life but only vague and evasive responses! Defrauding and escaping law has become so common in this country.

M PALANIAPPAN

6 months ago

We appreciate your sincere efforts to expose this fraud of ILFS Promotors. It is a shame for the investors. Still not able to understand that there is no limit for the looting. To some extent we can be greedy for money. But in India, the so called rich / Politicians are more greedy about money without bothering about our country. Continue your good column of exposing the serious fraud.
Really love to read your stories...

Regards,

Palaniappan

How IL&FS and its key subsidiaries financially crushed step down units
Infrastructure Leasing & Financial Services (IL&FS), and its key subsidiaries like IL&FS Financial Services Ltd (IFIN), IL&FS Transportation Network Ltd (ITNL) had literally crushed the group's step down units by imposing heavy finance and fees, mostly collected upfront, making them financially unviable, reveals the submission before the National Company Law Tribunal (NCLT). 
 
Quoting the interim report of the serious fraud investigation office (SFIO), the ministry of corporate affairs (MCA), says, "The modus operandi of IL&FS group during FY2015-2018, was to keep the holding company and its immediate subsidiaries financially viable and healthy, through an unsustainable, pyramidal funding, routing short-term funds borrowed at the holding company or the subsidiary company level to its various step-down or project subsidiaries, as the holding companies' contribution or to avoid default on these companies' borrowing."
 
"The holding company (IL&FS, IFIN, ITNL or other borrowing entities as the case may be) would lend the borrowed amount at an interest rate higher than the average cost of borrowing to the step down subsidiaries. Many a times, this lending to the step down subsidiaries, joint ventures and project special purpose vehicles (SPVs) was routed through other group companies in order to circumvent the Reserve Bank of India (RBI) regulation with regard to investment of funds by non-banking finance companies (NBFCs)," it added.
 
During the investigation, the SFIO 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.
 
 
SFIO also found that the credit appraisal memorandums (CAMs) for these loans given to above mentioned eight companies were sanctioned without any clear purpose or against a specific project in hand. "...the purpose mentioned for these loans is very generic and prima facie, should not have been sanctioned in the normal course of business. Loans were advanced to these companies despite all of these companies suffering negative net worth."
 
"...these companies were sustaining continued losses and were incorporated for a specific project(s) and despite this these were used as a vehicle to layer or camouflage routing the funds from IFIN to ITNL," the report reveals.
 
According to SFIO, this was done to project key subsidiaries of IL&FS as financially sound through the interest charges, dividend and fee based returns as well as through ever greening of loan. This allowed IL&FS and its key subsidiaries to enjoy regular dividends, interest payments and high credit ratings. 
 
The report says, "Defaults in the group companies were avoided for the period by routing funds borrowed by key companies, which projected a financially healthy picture, thus creating an unsustainable bubble in the absence of sufficient revenue generation internally by the IL&FS group."
 
This also helped key management executives such as, Ravi Parthasarathy, Hari Sankaran, Arun Kumar Saha, Vibhav Kapoor, K Ramchand, Ramesh C Bawa, Pradeep Puri, S Rangarajan and Mukund Sapre and others to continue to enjoy unmitigated personal gains through high remunerations, perks and other means, such as the employee welfare trust (EWT) and untrammelled control over IL&FS group despite the stress. This control was also misused in the case of EWT to enrich employees, including especially the key individuals and to create liabilities for the group, SFIO says.
 
Ravi Parthasarathy was chairman and managing director (CMD) of IL&FS as well as director and member of committee of directors (CoDs) in several group companies. From October 2017 till he resigned in July this year, Mr Parthasarathy was non-executive chairman of IL&FS group. 
 
Hari Sankaran was vice chairman and MD of IL&FS. He also was director and member of CoDs in several group companies. Mr Saha was joint MD and chief executive of IL&FS and also was director and member of CoDs as well as audit committees in several group companies. 
 
While Mr Kapoor was the chief investment officer of IL&FS and chairman of IL&FS EWT, Mr Ramchand was the managing director (MD) of ITNL and trustee of EWT. Mr Rangarajan was the MD and CEO of IL&FS Securities, Mr Sapre was executive director of ITNL, while Bawa was the MD of IL&FS Financial Services and trustee of EWT. Mr Puri, an officer from the Indian Administrative Services (IAS) was chairman of IL&FS Water Ltd and director and member of CoD of ITNL.
 
During investigation, SFIO found multiple immovable properties and movable properties worth crores of rupees amassed by the top executives of IL&FS. 
 
"Ravi Parthasarathy had declared Rs98.98 crore movable properties besides four immovable properties. Hari Sankaran had declared Rs19.04 crore movable properties and three immovable properties. Arun Saha declared Rs59.49 crore movable properties and nine immovable properties. Vibhav Kapoor declared Rs22.47 crore movable properties and two immovable properties. Ramesh Bawa declared Rs32.72 crore movable properties and five immovable properties. K Ramchand had declared four immovable properties," the SFIO report says.
 
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COMMENTS

Rajendra Ganatra

6 months ago

I have known how perfunctory, RBI's inspections of the banks have been for decades, and it's inability to see the rot, much less stem it. The truth is that through various fraudulent schemes like SDR to the S4A, RBI was complicit in the banks evergreening. Recall RBI's scandalous circular titled "Foreign Exchange Management (Transfer or Issue of Security by a Person
Resident Outside India) (Sixth Amendment) Regulations, 2014" dated May 22, 2014 under which many companies evergreened their rupee loans by securitising future exports of many years. The future forex loan default was conveniently forgotten. After some time the circular was withdrawn. Probably ny that time, the target beneficiaries made hey.

BUT RBI's abdication of responsibility in Tirupur is ultimate.

Period of limitation doesn't apply to legal irregularities. The government must prosecute all concerned for the irregular acts and create deterrence.

tanay

6 months ago

The audit firms will simply wash their hands off any responsibility by claiming that the management hid facts from them and hence they are not liable.

Rajendra Ganatra

6 months ago

I always termed IL & FS as a black box. After crash, this black box continues to deliver never ending shocks. This piece raises serious questions on the credit analysis of both the banks and credit rating agencies. These questions must be answered and analytical debilities of banks and credit rating agencies must be addressed. Will RBI & SEBI remedy this?

REPLY

Anil

In Reply to Rajendra Ganatra 6 months ago

There is no remedy and investigation even if its there will be just eye wash. The scam appears to be much larger than it appears and wouldn't have happened without the active involvement of big names.

IL&FS Scam: SFIO Reveals How Employees Welfare Trust Was Used by Top Executives for Unlawful Benefits
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.
 
You may also want to read…
 
 
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COMMENTS

Mahesh S Bhatt

6 months ago

Who are the accountants/auditors who were also taken care for not flagging?Does wisdom come after monetary rapes after every fraud or we enjoy rapes & then metoo# as there are so many laws ease of business is dizzy so cash greases calms noises Mahesh Bhatt Kirticorp

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