IL&FS Crisis: A Cheat Sheet Of The SFIO’s 800-Page Report 

After a nine-month long investigation, the Serious Fraud Investigation Office has filed a criminal complaint against 30 entities in the IL&FS case.

The SFIO has alleged that the conduct of the company's management, its directors and statutory auditors amounts to fraud under the company law and criminal conspiracy under the Indian Penal Code.

Briefly, here's what the SFIO has concluded:

Management's Misdoings

• The management of IL&FS influenced the employees and the credit decisions of the group's lending arm — IL&FS Financial Services, the SFIO said.
• Top management of IL&FS commanded the operations of IFIN. Although, on paper, IFIN functioned as an independent entity, IL&FS and its key employees controlled the day-to-day affairs of IFIN as well. Ravi Parthasarathy, Hari Sankaran, Arun Saha, Vibhav Kapoor and a few others were in “top management” in both IL&FS and IFIN, the report said.
• IFIN's employees — responsible for pointing out weaknesses in credit proposals — couldn't do so as a result of management influence.
• IL&FS took all the profits from IFIN in the form of dividends except for the cash that was statutorily required to be retained by the NBFC. IFIN continued to pay dividend of more than 50 percent from FY13 to FY17.
• The dividend from IFIN helped IL&FS show profits on its books, which enabled it to declare performance-related pay and incentives to directors of IL&FS and managing director of IFIN.

Dilution Of Policy

• IFIN repeatedly diluted its policy on related-party transactions to continue lending to group companies and obtain favourable reports from independent valuers, SFIO said.
• In May 2015, IFIN expanded the definition of exempt related party transactions. Once a related party transaction falls into the category of exempt RPT, it doesn't require board approval.
• “The effect of these policy changes resulted in increased exposures to group companies, which were facing liquidity, profitability and implementation issues and resulted in a liquidity crunch for IFIN itself,” the SFIO said.

Lending To Group Entities

• IL&FS Financial Services avoided the eventual default by the group through multiple transactions with group entities, the investigative agency said.
• IFIN's modus operandi of evergreening loans to group entities, lending to a group entity via a third party and its non-disclosure of the Reserve Bank of India's observation pertaining to negative net owned fund showed a rosy picture of its financials, according to the SFIO report.

Lending To Non-Group Entities

• IFIN disbursed loans to third parties to be used for repayment of overdue outstanding loans and subsequently declared them as non-performing assets before writing them off, the SFIO report said.
• The total loans disbursed by IFIN to non-group entities amounted to Rs 9,280 crore during 2013-18, the SFIO said. The key recipients were Siva Group and ABG Group.
• Loans were given in violation of the loan policy in total disregard to the credit worthiness of the borrower and against the RBI's guidelines on classification of loans, according to the SFIO report.

Statutory Auditors' Conduct

• The final conclusion of the SFIO relates to statutory auditors — Deloitte Haskins and Sells from 2012-2017 and KPMG India's partner firm BSR and Associates in 2017-2018.
• The SFIO said these auditors colluded with the management of IL&FS Financial Services and fraudulently falsified the books of accounts and the financial statements between 2013 and 2018.
• The auditors knowingly didn't report the true state of affairs of the company, particularly negative net owned fund and negative capital to risky asset ratio. This resulted in the loss to creditors who had lent to the company, the report said.