IL&FS Fraud a Manufactured Loot: Forensic Audit

The first forensic audit report of Infrastructure Leasing and Financial Services (IL&FS)found multiple instances of potentially irregular transactions involving amount over Rs 13,000 crore, all with the knowledge of the top executives of the group companies.

The preliminary special audit by Grant Thornton covered financial transactions of 11 IL&FS group companies.

In the report, the auditors found different types of anomalies involving potentially irregular financial transactions such as anomalies pertaining to short term borrowing being potentially utilized for long term lending, loans indirectly provided to group companies through third parties, loans at a negative spread to specific borrowers of IL&FS Financial Service Ltd (IFIN), loans sanctioned to borrowers under stress, and anomalies concerning repayment of loans and end utilisation of loans.

Last year, when the IL&FS companies, often called the king of ‘public-private partnerships’, began missing its loan repayment obligations worth thousands of crores, the BJP-led central government was eager to help the group, which even convinced the Life Insurance Corporation of India for its bailout. But, as murkier affairs of the IL&FS flooded in, the Ministry of Corporate Affairs, in October 2018, had appointed a new board headed by Uday Kotak to understand the crisis. Simultaneously, various state agencies started probing the fraudulent system of the IL&FS.

The new board estimated the debt owed by the IL&FS to external creditors to be about Rs 99,354 crore. Of this, 38 per cent of the overall debt – about Rs 35,382 crore – is owed to nationalised banks and another 10 per cent (Rs 9,138 crore) by financial institutions. Essentially, this is the people’s money component of the debt.

The special audit noted that the loan facility which was availed by IFIN to be utilized for short term purpose was instead being potentially utilized for lending funds to borrowers for long term purposes amounted to Rs 541.40 crore. Alongside, the audit ‘identified instances where funds which were lent to certain third parties(borrowers of IFIN) were potentially utilized by them to provide funds to certain group companies amounting Rs 2270 crore.”

Furthermore,Grant Thornton found 29 instances where loans disbursed to borrowers were apparently utilised by the group subsidiaries to repay existing debt obligations with IFIN. And there are six instances wherein the loans disbursed by IFIN to its borrowers were utilized to transfer funds to their promoters or directors.

As per the new board’s findings, IFIN had outstanding loans and investments to companies in the IL&FS Group of Rs. 5,728 Crore, Rs. 5,127 Crore, and Rs. 5,490 crore in FY16, FY17 and FY18, respectively.

The audit findings are in conformity with the Serious Fraud Investigation Office (SFIO) findings, which had earlier stated that the top executives of the IL&FS group had “window-shadowed financials” and borrowed massive funds.

The SFIO accused the group’s top executives Ravi Parthasarathy, Hari Sankaran, Arun K Saha, Vibhav Kapoor, RC Bawa, S Rangarajan, Pradeep Puri, and Mukund Sapre of “mismanagement”.

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 “prepared incorrect financial statements” of IL&FS parent company and its subsidiaries IFIN and ITNL, helping the fraudulent group directors to hide their murkier affairs.