IL&FS bosses used loans & advances to bleed company white

In a shocking revelation, the ministry of corporate affairs (MCA) has stated that in two years — between FY17 and FY18 — infrastructure giant Infrastructure Leasing & Financial Services (IL&FS) had siphoned massive funds through loans and advances to its group entities.

The ministry also observed that five top executives, including chairman Ravi Parthasarathy, played major role in the fraudulent activities.

The interim report of the Serious Fraud Investigation Office (SFIO), submitted by the ministry to the National Company Law Tribunal (NCLT) in Mumbai on December 3, found that non-current loans given to group companies increased by 685 per cent from Rs 317.13 crore in FY17 to Rs 2,490.11 crore in FY18.

The report also revealed that the secret source of funds for this increased loans and advances was short-term loans, raised by the infrastructure conglomerate through commercial papers, which went up by 302 per cent to Rs 2,007.29 crore in FY18 from Rs 499.25 crore in FY17 and corporate deposits that increased by 139 per cent to Rs 11,00.35 crore in FY18 from Rs 459.20 crore in FY17. A top ministry source told FC, “In the SFIO report, we have observed that IL&FS had many discrepancies in loans and advances given the its group entities, mostly in FY17 and FY18. The SFIO is investigating every individual involved in the fraudulent activities. We will come with detailed report soon. We apprehend that some top executives of the company played key role in siphoning the funds through loans and advance.”
SFIO has also uncovered shocking details of rampant wrongdoings in the embattled IL&FS group like misreporting of income, dubious transactions, conflict of interest, ever-greening of loans and personal enrichment of key employees, the source said.

The modus operandi of IL&FS on loans and advances is simple. The infrastructure giant procured funds from the market through short-term instruments and invested them in group companies by way of giving them long-term loans and advances, which is prejudicial to the interest of the company in terms of solvency as the short-term debt would mature immediately, whereas, no sources were available for servicing of the matured short-term debts, as the funds were blocked in the long-term loans.

However, the ministry observed due to strained financial position of many special purpose vehicles (SPVs) formed for various projects, particularly in the transport sector and the power sector, these entities were unable to service their borrowings and also failed to procure fresh funds from institutional lenders. “During these stressed times, IL&FS and its key subsidiaries such as IFIN and ITNL were still able to raise short-term market funding through issuance/sale of commercial papers or inter corporate deposits based on its obtained good credit rating,” the report said.

“It would then pass on these short-term loans to its project SPVs or group companies, for helping them service their debt obligations, management being fully aware, thereby avoiding possible defaults and in the process increasing their indebtedness on a standalone basis,’ it added.

On the contrary, cash flows during FY17 to FY18 were disappointing in both IL&FS and its group entities. “The standalone cash flow statements and consolidated cash flow statements of IL&FS for last two financial years show no positive cash flow from the operations at the company level as well as group level. So the negative cash flow from operations were met through funds from secret financing activities, particularly by increasing the short-term borrowings,” the interim report said.

“By adopting this model of covering of operating losses through short-term borrowings, the companies further postponed possible defaults to future periods. Further, despite this continued negative cash flow, the company didn’t put in place any cost saving or austerity measures and continued with its profligate expenditure, especially on its top management,” it added.

To ascertain key executives’ role in this financial mess, SFIO had earlier sought every individuals’ details of assets, which, according to the latest report, have been submitted.

However, the report said former IL&FS chairman Parthasarathy had declared Rs 98.98 crore movable properties besides four immovable properties, while former managing director Hari Sankaran declared Rs 19.04 crore movable properties and three immovable properties.

Former joint managing director Arun Saha declared Rs 59.49 crore movable properties besides nine immovable properties and former CIO Vibhav Kapoor declared Rs 22.47 crore movable properties and two immovable properties.

Former IFIN managing director and CEO Ramesh Bawa declared Rs 32.72 crore movable properties and five immovable properties. K Ramchand, former managing director of ITNL declared four immovable properties.