ADVERTISEMENT

IL&FS Financial Services Resorted To Abusive Funding To Avoid Bad Loans, Says SFIO

This is what SFIO alleges after a nine-month long investigation into the ‘payment crisis’ by IL&FS and its subsidiaries...



Indian five hundred rupee banknotes are arranged for a photograph in Mumbai, India (Photographer: Dhiraj Singh/Bloomberg)
Indian five hundred rupee banknotes are arranged for a photograph in Mumbai, India (Photographer: Dhiraj Singh/Bloomberg)

In the last five years, there have been 88 cases of evergreening of loans by IL&FS Financial Services Ltd. to prevent their classification as non performing assets. The Serious Fraud Investigation Office has alleged so after a nine-month long investigation into the ‘payment crisis’ by IL&FS and its subsidiaries.

IFIN disbursed loans to the accounts of group companies of third parties to be used for repayment of overdue outstanding loans and subsequently declared them as NPAs before writing them off, the SFIO report said, calling it abusive funding. BloombergQuint has reviewed a copy of the SFIO report.

The total loans disbursed by IFIN to non-group entities amounted to Rs 9,280 crore during 2013-18, the SFIO has revealed. The key recipients were Siva Group and ABG Group.

Opinion
SFIO Reveals How The Finance Arm Of IL&FS Managed To Delay The Group’s Eventual Default

Siva Group: 8 Entities, Rs 930 Crore Exposure

The SFIO has found that loans of over Rs 930 crore were sanctioned by IFIN to eight companies connected or controlled by founder of SIVA group, C Sivasankaran.

Between 2004 and 2009, SIVA Group repaid all the loans in the normal course of business but things went downhill after that. In December 2011, IFIN disbursed Rs 310 crore to two SIVA group companies, with shares of unlisted telecom company of the Tata Group — Tata Teleservices Ltd — as security. The SFIO has alleged that IFIN valued the shares of TTSL higher despite knowing that the telecom company was loss-making, had high debt and required frequent equity infusion by stakeholders to service its debt and continue operations.

Lending to entities controlled directly or indirectly by SIVA Group continued between 2011 and 2014 with the purpose of servicing existing loan repayments. In 2015, IFIN invoked the pledge on TTSL shares, post which the outstanding loan stood at Rs 190 crore. But soon after, IFIN subscribed to optionally convertible debentures of SIVA Group’s power company and the amount was used by SIVA Group to repay its debts, the report has said.

The SFIO has pointed to these transactions to say that the loan exposure by IFIN was taken to help SIVA Group tide over the liquidity issues and repay loans of other lenders like IFCI Ltd., Union Bank of India which were either NPAs or overdue. IFIN also failed to monitor the end use of these loans. And in some cases, the SFIO has said, the loan proceeds were used by SIVA Group to pay IFIN professional charges or debt syndication fees.

Loans were given in violation of the loan policy in total disregard to the credit worthiness of the borrower and against RBI’s guidelines on classification of loans.
SFIO Report

An email query to C Sivasankaran remained unanswered. While IL&FS group declined to comment.

Opinion
SFIO Report Concludes Management’s Guilt In IL&FS Fraud

ABG Group: Fictitious Income, Rs 1,080-Crore Exposure

IFIN’s relationship with the ABG Group began in 2010. Despite the group’s inability to service the first loan, IFIN continued to disburse loans to it, the SFIO has said.

IFIN had an exposure of Rs 1,080 crore to ABG Group, which has been classified as an NPA since September 2018. The analysis by the agency showed many of the loans disbursed by IFIN to various subsidiaries of the ABG Group was again to repay existing loans or overdue payments. Shares of Western India Shipyard Ltd. and ABG Shipyard Ltd. were provided as security for the loans. Besides IFIN, two other entities — IL&FS Engineering and Constructions Co. Ltd. and GHV, a contractor of ITNL — together gave Rs 106 crore advance to ABG’s cement company Vardha Raj Cement Ltd. for purchase of cement.

The agency has alleged in its report that IFIN’s management failed to classify the loans into an SMA category, leading to inaccurate reflection of the financials of IFIN as far as provisioning of the assets is concerned.

IFIN did not provide for the stressed assets as per RBI guidelines and booked fictitious income arising out of own funds thereby shoring up its top line.
SFIO Report

IFIN’s questionable exposure to non-group entities also extended to Parsvnath, Unitech, Flamingo, Kohinoor, SKIL and Era Group. Lending to these groups was flawed as these entities were not able to service their first loans due to which these exposures turned NPAs or were written off in September 2018.

Warning signs too were ignored by IFIN, the SFIO said. For instance, IFIN sanctioned a loan of Rs 75 crore to Parsvnath Group despite the company’s rating being downgraded to ‘default’ and adverse comments by its statutory auditors. Similarly, despite Unitech being tagged as a wilful defaulter in 2015, IFIN continued to lend to it, primarily to repay existing loans or overdue payments.

IFIN provided loans to Unitech to bail out SIVA group despite the fact Unitech was sitting on overdue loans of IFIN. The NBFC disbursed Rs 125 crore of loans to Unitech to be paid to SIVA Ventures who in turn cleared Rs 80 crore of overdue loans of IFIN.
SFIO Report

The SFIO has filed a criminal complaint against 30 entities in the IL&FS case. 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 said.

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