IL&FS Fiasco: Former Executives, Auditors Held Responsible for Scam

NEW DELHI: On December 20, the National Company Law Appellate Tribunal (NCLAT) said it would hear the plea over moratorium on dues’ recovery from IL&FS group on January 28. That is, the debt-laden IL&FS under a government-appointed new board headed by Uday Kotak will be free from the pressure of loan repayment for one more month.

As the state agencies are probing the IL&FS fiasco, the initial reports have found that the group’s top executives and auditing companies are mainly responsible for the ruin of the shadow bank and massive financial scam.

Enjoying moratorium since October this year, the new board has been gradually implementing its resolution plan -- assets divestment. The sale of IL&FS assets has gathered pace and as of now, the group’s education business (IL&FS Education and Technology services), Alternative Investment Management business comprising IL&FS Investment Manager, 19 projects under construction and held by IL&FS Transport Network, wind power generating plants, IL&FS Securities Services and Group’s Settlement and Transaction Services - were already kept for bidding. While the combined worth of these assets equals to some Rs 35,000 crore, it is still unclear whether they would translate into their actual value.

While the new board is claiming to resolve the IL&FS crisis, as part of its cost-cutting strategy, more than two-thirds of IL&FS employees are now on the verge of losing their jobs.

Auditors Fudged Facts

In its report submitted to the Ministry of Corporate Affairs, the Institute of Chartered Accountants of India (ICAI), which probed the role of IL&FS statutory auditors has found that the premier auditing companies -- Deloitte Haskins & Sells LLC, EY affiliate SRBC & Co.,  LLP and KPMG affiliate BSR & Associates LLP -- have failed in their duty, were “negligent” and prepared incorrect financial statements of IL&FS parent company and its subsidiaries IFIN and ITNL.

ICAI revealed that the auditors did not check requisite approvals from competent authorities for managerial remuneration nor even report that the companies did not meet the criteria for Core Investment Company, which was a mandated by Reserve Bank of India.

These auditors are likely to face another probe by the newly constituted auditors’ watchdog, National Financial Reporting Authority (NFRA).

IL&FS Top Executives are Main Accused

On December 3, the Serious Fraud Investigation Office (SFIO), which is probing the financial fraud of IL&FS, had stated to the National Company Law Tribunal that the top executives of the IL&FS group had “window-shadowed financials” and borrowed massive funds.

SFIO alleged that IL&FS parent company, IFIN and ITNL had “borrowed short-term funds from the market and banks, based on window-dressed financials and high credit ratings” and further lent these funds for “the long term at high interest rates to its project subsidiaries.”

The nine executives accused of mismanagement are Ravi Parthasarathy, former chairman (resigned in July) Hari Sankaran, former vice-chairman and managing director, Arun K Saha, joint managing director and chief executive officer, Vibhav Kapoor, chief investment officer and chairman of Employee Welfare Trust of IL&FS Group, K Ramchand, managing director of IL&FS Transportation Network Ltd, RC Bawa, MD of IL&FS Financial Services Ltd, S Rangarajan, MD & CEO of IL&FS Securities Services, Pradeep Puri, non-executive director and Mukund Sapre, executive director, IL&FS Transportation Network.  These SFIO alleged them as the controlling will and mind of IL&FS crisis who also earned “personal benefits by way of high managerial remunerations”.

The NCLT in its recent order has temporarily restrained these former directors from selling or pledging their personal assets.

Alongside, the market regulator, Securities and Exchange Board of India, is currently probing the role of three rating agencies - CARE Ratings, ICRA Ratings and India Ratings, which had rated the debt instruments of IL&FS and its subsidiaries. These agencies rated IL&FS a high AAA rating until the group began defaulting its debt obligations.