Why the Delay in Action When GT Report Pins Responsibility on Cabal of Four at IL&FS
Although couched in politically correct accounting-speak, accounting and consulting major, Grant Thornton (GT), has systematically exposed what is clearly a massive fraud, mismanagement of funds, capricious actions and total disregard for regulators and regulation by the previous top management of Infrastructure Leasing & Financial Services (IL&FS). And, yet, this is just an interim report on the financial irregularities inside just one company—IL&FS Financial Services Ltd (IFIN) – out of the 348 companies of this complex infrastructure and finance conglomerate.
Significantly, GT has clearly narrowed down the responsibility or culpability for the scam to just four people—the committee of directors (CoD) comprising—founder and former chairman Ravi Parthasarathy, former vice-chairman Hari Shankaran, director Arun Saha and IFIN’s former managing director, Ramesh C Bawa.
With this report in hand, one wonders why multiple agencies are conducting raids and investigations, instead of making a cohesive effort to zero in on the perpetrators. Also, there has to be some speed and urgency in selling the more viable projects set up in partnership with various states. 
Things are moving too slowly for comfort. Nearly six months after the IL&FS holding company’s board was sacked, we don't even have the contours of a resolution plan. All we have, so far, is that 60 companies have been classified into categories of red (38), green (22) and amber (10) based on the extent of impairment of assets and chances of revival. Another 100 are being assessed for viability, leaving 175-odd companies in limbo. Investors and creditors (including pensions funds, mutual funds and banks), who have lent over Rs94,000 crore to the group, are turning very anxious in the absence of a clear direction, or will, by the finance ministry in handling this mess at multiple levels. 
The new IL&FS board, headed by Uday Kotak, has now issued show-cause notices to 14 directors of IFIN, based on the GT investigation. The board comprised former nationalised bank chairpersons Surinder Singh Kohli, Ms Subbalakshmi Panse and others including Manu Kochhar, Neeru Saggi, Renu Challu, Uday Ved, Shazad Dalal, Milind Patel, Vibhav Kapoor and Rajesh Kotian, other than the four CoD members. Many of these were key former employees and persons deeply involved in decisions. But when the buck clearly stops at the four in the CoD, shouldn’t there be a greater focus on them?
What is worrying investors is that general elections are bound to be announced in the next few days when the Code of Conduct will become operational and the entire government usually goes into a limbo. Unfortunately, we seem to have learnt nothing since the 1992 securities scam, and all others in between, about handling complex financial scandals by separating resolution from criminal investigation and action. 
Coming back to the GT report, it has aptly named its investigation ‘Project Icarus’. Icarus and hubris are words that are often used in the context of large hedge funds and trading operations that blow up by ‘flying too close to the sun’ with wings of wax (as the Greek character Icarus did). IL&FS was, indeed, founded and led by one man, Ravi Parthasarathy along with his chosen cabal, for 30 years. But he and his company was allowed to grow unchecked into a massive 348 entity empire masquerading as the favourite partner of state and Central governments because regulators, marquee shareholders (banks and institutions) and the board of directors failed in their fiduciary obligation to regulate and supervise his actions. Is it any wonder that hubris set in and it flew too close to the sun? 
The 166-page interim report of Project Icarus exposes 10 different kinds of fraud, which are succinctly tabulated with names, numbers and detailed proof, provided in the annexures. But this is just the tip of the iceberg. We need the serious frauds investigation office (SFIO) and the enforcement directorate (ED)—as a team—to go into details of each case of favoured treatment or egregious violation to ask some simple questions: What was the pressure, illegal gratification or quid pro quo that prompted the CoD of four to ignore rules and internal red flags and lend? Or was IL&FS just a large ponzi scheme that carried on for decades because of the support of bureaucrats and multiple state governments?
According to GT, the 10 types of possible fraud identified by it in IFIN alone involves a massive Rs13,299 crore. The report also points out that IL&FS had adopted a ‘unified approval framework’ to facilitate intra-group synergy and to provide IL&FS group visibility for all transactions. This further pinpoints responsibility, primarily, on the CoD of four persons.
Here is what the report says. 
1. Tenure Mis-match: Over Rs541 crore borrowed for short-term purposes were used for long-term needs by eight entities—Indus Equicap Consultancy, Nysa Marine Services, Essar Shipping Ltd, Ascent Hotels, Gujarat Integrated Maritime Complex, SKIL Infrastructure, Gujarat-Dwarka Port west, Sabarmati Capital One. Amount involved: Rs541 crore. 
2. Round-tripping of Loans: Money lent to certain companies by IFIN was to be round-tripped back to IL&FS group companies, mainly ITNL (IL&FS Transportation Networks Limited), the large listed entity. Amount involved was Rs2,270 crore. GT says that minutes of the board meeting on 11 September 2018 indicate that the management cabal or CoD was aware of this. In many cases, the loans were disbursed to third parties who transferred them back to IL&FS group companies on the very same day. 
Investigation agencies need to examine and tell us what was the incentive/ quid pro quo to the third parties for being part of this round-tripping operation. The loans were received by the following IL&FS group entities: ITNL (Rs1,150 crore), Srinagar Sonmargh Tunnelway (Rs390crore), Gujarat Integrated Maritime Complex (Rs250 crore), Fagne Songard Expressway (Rs200 crore), Chenani-Nashri Tunnelway (Rs150 crore), Sea Land Ports (Rs100 crore), Sikar Bikaner Highway (Rs30 crore).
3. Fudging Credit Approval Memorandum (CAM): In five cases, amounting to Rs411 crore, GT found that a system-based CAM, the base document for sanctioning loans, was different from the details mentioned in the manual CAM. What is worse, personal guarantees were accepted as collateral to fudge facts, without ascertaining whether they had the net worth to provide such a guarantee or obtaining any documents to back the guarantee. 
4. Lending at a Loss: GT has identified 18 instances, adding up to a massive Rs2,400 crore, where the management cabal approved loans to specific companies, at very low spreads of 2% to 3%  (average cost of borrowing minus lending rate) or a negative spread – which means a loss to IL&FS. As opposed to this, the average spread for IFIN loans was 7% to 9%. Many of the companies that got this largesse were already defaulters and, in seven cases, the loans were written off, or extended to companies connected to such defaulters. 
5. Loans to Defaulters: GT found that in 16 cases, amounting to Rs1,922 crore, the management cabal approved loans even after their internal risk assessment team had raised red flags about such loans. It may be recalled that a whistleblower had desperately written to the Reserve Bank of India (RBI) and the IL&FS board drawing attention to such dubious lending, but was ignored. The names in this list scream for a detailed investigation into why the IL&FS’s top management wanted to oblige these borrowers at the cost of its own finances.
6. No Charge against Collateral: In 15 cases, totalling Rs1,186 crore, IFIN hadn’t bothered to create a valid charge on the assets that were taken as a collateral against loans provided. Such negligence is not possible unless the top management instructed officials not to bother with creating a charge. Again, investigation agencies have to fix responsibility. 
7. Insufficient Collateral: In 14 instances, totalling Rs1,819 crore, the amount of charge created against the borrowings is not adequate to cover outstanding loans as on 30 September 2018.
8. Ever-greening Defaulter Accounts: In eight cases, loans totalling Rs145 crore were used to repay previous loans, probably to avoid classifying them as defaulters and making provisions. In most cases, the payments were received on the same day that the loans were given. 
9. Round-tripping for IFIN: In 29 cases, adding up to Rs2,502 crore, some corporate groups obtained loans and repaid approximately the same amount in the very same year to IFIN – except that the loan was taken from one company and the repayment made by another in the same group. 
10. Funding Promoters/Directors: This is a serious one – in six cases, totalling Rs94 crore, a part of the loans disbursed to companies was transferred to specific directors. In one case, the promoter was a director in an IL&FS company. One of these loans was to Bay Capital, whose promoter, Siddharth Dinesh Mehta, is a director of IL&FS Energy Development Company Limited and stinks of conflict of interest, in addition to being irregular.
Finally, let us not forget that Deloitte Haskins & Sells LLP was appointed in 2008 and remained the auditor until it completed 10 years in 2018. The audit report had absolutely no adverse findings even in 2017-18. The Institute of Chartered Accountants of India is investigating the role of statutory auditors in multiple IL&FS group entities. But, if such large-scale fudging has been found by GT in a quick, limited audit, then this is a fit case where at least one audit firms needs to be given the same treatment that the US gave to Arthur Anderson, the auditor of Enron Plc which flamed out after large-scale fudging of books. 
5 years ago
Keep up the good work!
Ashok S
5 years ago
If these financial irregularities were being committed what is the role of bankers with 35-years of experience on the board .It is time to check the loans that have gone bad
in their respective banks they were heading.Please check the their investment portfolio
in different industries
5 years ago
It is eminently clear that frauds on such a massive scale would not have happened without the active collusion of ILFS's auditors. Credit rating agencies and auditors ought to be imposed with exemplary punishment including but not limited to cancellation of their licenses as their lackadaisical approach to their key functions have placed the savings of millions in jeopardy. MoneyLife appears to be the only publication in the country that is persistent in its coverage of the scandal. The story appears to have lost its steam in most of the financial and mainstream media. A scandal so massive may soon recede from public memory and the key perpetrators would go scot free if such blatant inaction for corporate misdemeanours continue.

Keep up the good work, Sucheta.
5 years ago
Thanks madam for forcing regulators to wake up
Rajendra Ganatra
5 years ago
Though extremely shocking, it doesn't surprise since we are now used to IL&FS's extraordinary criminality. This article raises a deadly point, of meandering probe with the result that the criminals are just chilling! Is the IAS lobby bent upon adopting tokenism and let the criminals slip away? The criminals must be put behind bar immediately.
Meenal Mamdani
5 years ago
This is stunning news. These 4 individuals are primarily responsible but the others too are responsible in various degrees.
Why are the 4 not in prison? The govt is quick, almost indecently hasty, to label ordinary citizens as "Maoist", "Danger to security of the country", etc. Are these massive financial scams not a danger to India? These scammers will be horrified if they are treated as ordinary prisoners, no VIP treatment. Let them sit in prison until the financial cases are adjudicated.
The main reason they are not in prison is because they are indecently wealthy and as all such people, have contacts in high places in political ranks and as well as bureaucracy.
Modi has famously said "Na Khaoonga, Na khane doonga". This is the test of his credibility; empty catchy slogan or real resolve.
Free Helpline
Legal Credit