IL&FS Top Brass Gained Over Rs 440 Crore From Employee Trust: SFIO

The Serious Fraud Investigation Office has accused the former top management of the insolvent IL&FS group of using employee welfare trusts to enrich themselves by over Rs 440 crore, revealing a cocktail of embezzlement, conflict of interest and lack of accountability.

India's white-collar crime investigator has detailed in its interim report—which was reviewed by BloombergQuint—that the former executives sold and distributed shares of two employee trusts, IL&FS Group Employees Trust and IL&FS Employee Welfare Trust.

The then senior management of IL&FS—Ravi Parthasarthy, Hari Sankaran and Arun Kumar Saha—who were also the trustees of the two employee trusts, tightly controlled sale and distribution of shares and investments owned by the trust to gain personal benefits, according to the report. The IL&FS Group Employees Trust was created without the knowledge of the company's board.

The report points to conflicts of interest when they amended conditions of the welfare trust thrice—in 1999, 2006 and 2011. The three trustees were also part of the committee of directors that approved amendments to the trust deed, without seeking board resolution or employees' consent. The report also points lapses in distribution of shares and investments, which were doled out at a nominal price "in a differentiated manner to some select management personnel of the group". That way, the trustees gained power to sell shares owned by the trust to a third party and distribute its investments to select employees “as they may in their absolute discretion think fit and proper without being answerable for any loss occasioned”.

An email to the legal representatives of these individuals remained unanswered.

The report, among others, found instances that justified its allegations on misuse of employee welfare trust.

The Group Welfare Trust was constituted with Vibhav Kapoor as its settlor, and Saha and Sankaran as its beneficiaries. The trustee company was IL&FS Trust Co., later renamed as Vistra ITCL Co. Ltd. The company issued warrants and shares to employees in form of stock options with transfer restrictions. The warrants/shares were transferred to its employees in two tranches of 15 lakh shares each at Rs 84 apiece and 132 apiece. These 30 lakh shares were later aggregated and sold to Life Insurance Corporation of India at Rs 1,100 apiece and the consideration was transferred to its employees giving the select employees a gain which was 10 times the price at which shares were distributed to its employees. The total value of the sale was Rs 330 crore and done without the permission of the Employee Welfare Trust.

The trust also dealt with the IL&FS warrant without permission. As per regulation it was not allowed to deal till warrants are converted into shares and transferred to employees.

Other Instances Of Misuse Of Employee Welfare Trust

• The SFIO report also alleges that IL&FS also received a proposal of merger from the Piramal Group. Had the merger and capital infusion deal gone through it would have led to windfall gains to nine senior executives, among other employees, chosen by the trustees, the report said. The trust at that time owned 1.5 crore shares, 90 percent of which were vested with the senior employees at Rs 2 apiece.
• Another instance involved acquisition of 8 lakh shares from HDFC Ltd. in 2013-14 at Rs 1,184 apiece. The shares were bought by the Employee Welfare Trust, the report found, at that time when it faced fund crunch and was not able to generate enough cash flow to service its debt. The shares were therefore bought through a Rs 94.76 crore loan from HDFC, which used the same shares it sold to the trust as security against the loan.
• The trust took more loans from IL&FS and its group companies to service this debt, and paid Rs 53.77 crore till June 3, 2018, as interest payment to HDFC.
• The SFIO report says the housing finance company did a valuation exercise of these shares it had sold to the IL&FS employees' trust in May 2012 and had valued them at Rs 80 crore. To start with, the loan was secured against the shares. But as the value of shares fell, the shortfall remained unsecured.
• In 2015 when the first loan was repaid, HDFC gave another loan of Rs 95 crore within a month of repayment of the first loan, against the same shares as security and without a fresh valuation. The corporate crimes investigator has also accused HDFC of “accommodative lending” which departed from its normal course of business, for carrying out the said transaction. An HDFC spokesperson, however, said that the amount of Rs 95 crore has been fully provided for. As a result, according to the report, the trust created for the welfare of needy employees was “used as a conduit to give shape to fraudulent motives of the key managerial persons of IL&FS”.
• The IL&FS Employees Welfare Trust had a 12 percent stake and an outstanding loan of around Rs 500 crore. The trust never had formal meetings after 2008, the financial position and outstanding debts was never discussed by the trustees and the trust was managed unprofessionally, said the report.