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
New Tirupur Area Development Company Limited

Raul Verma
5 years 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
5 years 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
5 years ago
Krishnan Hariharan
5 years 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.
5 years 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...


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