IL&FS Financial Services Diluted Policies To Continue Lending To Group Companies, SFIO Says

The non-bank lending arm of Infrastructure Leasing & Financial Services Ltd. repeatedly diluted its policy on related-party transactions to continue lending to group companies and obtain favourable reports from independent valuers, SFIO said.

IL&FS Financial Services Ltd. had a board-approved related-party policy for lending to group or associate companies as per the central bank's guidelines on exposure norms and the Companies Act, 2013. But, according to the Serious Fraud Investigation Office, it made several changes between 2015 and 2017 to dilute that. BloombergQuint has reviewed a copy of the SFIO report.

Dilutions To RPT Policy

Related-party transactions which were in the ordinary course of business and on an arm's length basis qualified as exempt RPTs, according to IL&FS Financial Services' (IFIN) policy. Such transactions required approval only from a committee of directors, unlike non-exempt RPTs which had to be reviewed by the audit committee and required board and/or shareholder approval depending on their materiality.

In May 2015, the SFIO report said, the definition of ‘Exempt RPTs' was expanded to say that there could be deviations in exempt RPTs with group companies under the following circumstances:

• Economic reasons, including corporate debt restructuring, financial conditions and other extra-ordinary circumstances.
• Obligations of IL&FS as a promoter or joint venture partner of a project and a consortium member.
• Regulatory enactments or obligations, if any.

The dilution, the SFIO report said, allowed IFIN to exclude some of the existing RPTs—where it had already lent funds—from the ambit of RPT.

Two years later, exempt RPTs was expanded to also include "lending transactions where the tenure of transaction has been extended up to six months from the date of original tenor and where the other terms and conditions remain unchanged".

Similarly, to determine the arm's length pricing, one of the criteria was valuation by "independent valuers". In 2015, this was amended to say "independent valuation by an empaneled set of independent valuers".

“By diluting the definition of Independent Valuers to Empaneled Valuers, IFIN was able to get favourable reports for the transactions' underlying values,” the report said.

To be sure, the Reserve Bank of India allows systemically important NBFCs like IFIN to determine their RPT Policy and only requires them to disclose it. The other legislation that governs RPTs is section 188 of Companies Act, 2013 which prohibits certain transactions with related parties unless it is pursuant to a board approval or where certain “thresholds” are crossed, the shareholders of the company have approved it.

In defining and diluting exempt RPTs as it did, IFIN's transactions with related parties didn't require board or shareholder approval, the SFIO's report has suggested.

“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.”

Free Hand To RPTs

In 2014, the Audit Committee had suggested that the statutory auditors must review IFIN's RPT Policy. But in September 2014, it was decided that the internal auditor could review it. The review by the internal auditor wasn't completed until February 2016 and until then all RPT proposals were accepted by the Audit Committee without any deliberations. The deficiencies pointed by the internal auditor in February 2016 were ignored and deferred for further deliberation, the SFIO has said.

The SFIO has filed a criminal complaint against 30 entities in the IL&FS case after its nine-month long investigation. It has stated that the members of the ‘coterie'—Ravi Parthasarathy, Hari Sankaran, Arun Saha, Vibhav Kapoor, K Ramchand, Ramesh Bawa, Milind Patel and Rajesh Kotian—had abused their position at IFIN, flouted regulatory stipulations for an NBFC while lending to external parties and group companies. They also presented false, deceptive and misleading financial statements to obtain credit facilities. And so, their conduct amounts to fraud under company law and criminal conspiracy under the Indian Penal Code, the SFIO has stated.

Statutory auditors—Deloitte Haskins and Sells from 2012-2017, BSR and Associates in 2017-2018—colluded with the management of IFIN and fraudulently falsified the books of accounts and the financial statements between 2013-2018, the SFIO has concluded. The members of the audit committee—SS Kohli, Subhalakshmi Panse, Shahzaad Dalal, Manu Kochhar, Renu Challu, Uday Ved and Neera Saggi—connived with the coterie and overlooked the violations resulting in loss to the company, as per the SFIO.

The Ministry of Corporate Affairs has directed the SFIO to file a criminal prosecution complaint against the members of the coterie, the independent directors and the statutory auditors.