Innovative ways to cook up money making schemes within the IL&FS Group through a fee based business model were some of the jiggery-pokery methods employed by the closed user group cabal which controlled the shadow bank for over 25 years.
The Serious Fraud Investigation Office (SFIO) and the Ministry of Corporate Affairs have found this innovative model in their overarching investigation.
The investigation team analysed the novel and off centre Brand Subscription Policy of the Infrastructure Leasing & Financial Services Limited (IL&FS). The following facts emerged:
* The policy stipulated that all subscribers and associate companies which were using the name of "IL&FS" or which intends to use the brand of "IL&FS" or which acknowledge having relationship with the IL&FS group, shall pay a base subscription fee (BSF) as quantified in the policy to IL&FS Ltd.
* Prior to subscription to the policy, the group entity shall obtain necessary internal approval for the same.
* Subscriber to the brand will derive commercial benefit from the subscription to the IL&FS brand. The benefit may emanate from different factors and may be useful for the subscriber from numerous dimensions.
* The policy states various rationales for the brand subscription. The development of a fledgling business, to a large extent, has been possible because of the support and branding that has been provided by IL&FS. IL&FS group entities derive various benefits from the use of the "IL&FS" brand and enjoy a variety of services which IL&FS provides to all these entities.
* The policy laid down the brand subscription fee as lower than the 1 per cent of total income/turnover, or 5 per cent of profit, before provision for contingencies and taxation.
* The income, turnover and profit would be based on the previous years' audited accounts. Further, the brand subscription fee has been made subject to minimum of Rs 10 lakh per annum.
* The subscription fee has to be charged annually and payable quarterly.
Now comes the clincher. From the year 2010-11 to 2017-18, IFIN had paid an amount of Rs 128.58 crore to IL&FS Limited towards the subscription fee of the brand IL&FS as per the following details:
Brand subscription fee paid to IL&FS Limited (in Rs crore):
FY 11: 10.34
FY 12: 11.04
FY 13: 14.28
FY 14: 17.55
FY 15: 18.15
FY 16: 19.21
FY 17: 19.21
FY 18: 18.80
Syndication and advisory activities
From the investigation it was revealed that one of the sources of income of the company was from syndication business wherein the company entered into contracts with borrowers to arrange for sanctions/funding from different sources.
The syndication was undertaken by IFIN through the Project Syndication group. IFIN earned a fee for the syndication activities, termed as "syndication fee". Further, the company also used to undertake advisory assignments, wherein the company used to provide advisory services. IFIN also earned a fee income for the said advisory activities.
Investigation revealed that the advisory mandate was approved by an Advisory Approval Memorandum (AAM) providing the details of the client, funds required, instrument for raising funds, potential fee income etc. All the AAMs are reviewed and approved by the Head, Debt Syndication & Distribution, and are reviewed by the related party transactions assessors i.e. Chief Risk Officer, IL&FS, Chief Financial Officer, Company Secretary and Legal Head. Post review, the AAM is approved by the Deputy Managing Director (DMD) and the Committee of Directors.
IFIN had undertaken various syndicate assignments for its group entities during the period 2014-18. These transactions were "related party transactions" within the meaning of Section 188 of the Companies Act, 2013. Investigation revealed that the company had been booking fees income on accrual basis from the group entities.
During the course of investigation, the various syndication transactions carried out by IFIN for the various group companies has been examined by SFIO. The following conclusions have been arrived at:
* As the fee income from syndication activities was booked on accrual basis, the profits of IFIN in the relevant period were boosted to that extent.
* However, as the income was not received, the concerned company/client of IFIN from whom the syndication activity was undertaken, was shown as "debtors"/"sundry debtor" in the books of IFIN.
* The total debt syndication fees charged by IFIN in the respective financial years is as under:
Fee income booked
FY 14: Rs 85.7 crore
FY 15: Rs 112.4 crore
FY 16: Rs 120.5 crore
FY 17: Rs 132 crore
FY 18: Rs 142.5 crore
There was a year-on-year non-receipt of fees and accordingly the same was written off in FY 2018-19.
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