The Serious Fraud Investigation Office (SFIO) is probing the role of HDFC Ltd in connection with its ongoing investigations into alleged fund diversion and mismanagement by Infrastructure Leasing & Financial Services (IL&FS) Ltd and a few of its subsidiaries.
The agency recently examined and recorded the statement of a top HDFC executive. It may also examine former nominee directors appointed by HDFC on the board of IL&FS, sources told The Indian Express.
HDFC has a 9.2 per cent stake in IL&FS. An interim report of the SFIO alleged HDFC indulged in “accommodative lending” to IL&FS Employee Welfare Trust (EWT). The report has referred to a transaction during 2013-14 between HDFC and IL&FS EWT where the trust acquired 8 lakh shares of IL&FS Ltd from HDFC at Rs 1,184.50 a share. The SFIO alleged that these shares were acquired at a high price without any valuation at a time when the trust was “suffering from fund crunch” as it “not able to generate enough cash flows to service its own debt and was taking new debt from the group companies to service the existing obligations”.
Red flags on disclosure, valuation
HDFC Ltd’s twin transactions of IL&FS share sale and funding its purchase by IL&FS Employees Welfare Trust raises red flags on disclosures and corporate governance, particularly given the relationship between HDFC and IL&FS. Since IL&FS is an unlisted firm, it is critical that the valuation of shares is fair and justified because this acts as a price benchmark for future private placement.
HDFC Ltd did not respond to queries mailed to it Tuesday. Significantly, SFIO alleged these shares were acquired by IL&FS EWT from HDFC Ltd with a Rs 94.76-crore advanced to it by HDFC Ltd itself.
“The loan of Rs 94.76 crore received from HDFC Ltd is still outstanding in the books of EWT as on date and for servicing of interest on this debt the EWT is regularly taking debt from IL&FS Ltd or its group companies. The loan taken from HDFC Ltd to finance the transaction has resulted into interest payment of Rs 53.77 crore until June 30, 2018,” said the SFIO interim report.
The probe agency has alleged that collateral against the loan of Rs 94.76 crore was shares that HDFC Ltd itself had sold to EWT.
An HDFC Ltd valuation report later pegged the value of this collateral at Rs 80 crore – meaning the asset coverage ratio was lower than 100 per cent, said the SFIO report. After the loan was repaid in 2015, HDFC Ltd issued a fresh loan of Rs 95 crore within a month against the same collateral without doing a fresh valuation.
IL&FS was incorporated in 1987 and initially promoted by HDFC, the Central Bank of India (CBI), and Unit Trust of India (UTI).
Subsequently, over the years, institutional shareholders were inducted. Currently, state-owned insurer Life Insurance Corporation of India (LIC) is the largest shareholder in IL&FS with a 25.34 percent stake, followed by Orix Corporate, Japan (23.54 percent), Abu Dhabi Investment (12.56 percent), Central Bank of India (7.67 percent) and State Bank of India (6.42 percent) among others.
The crisis at IL&FS was triggered when IL&FS Transportation Networks delayed repayment of Rs 450 crore of inter-corporate deposits from Small Industries Development Bank of India (SIDBI) in July 2018.
Subsequently, rating agencies downgraded its debt papers/credit facilities citing weak financials. In September, the group defaulted on a Rs 1,000-crore term loan owed to SIDBI.
Following the defaults, rating agencies downgraded IL&FS and its subsidiary from high investment grade (AA plus and A1 plus) to junk status. Later, the Reserve Bank of India (RBI) initiated a special audit of the IL&FS Group. In October, the government superseded the company’s board to contain the fallout.
Since then, the IL&FS Group that has total liabilities of Rs 94,000 crore has come under the scanner of SFIO. The SFIO has found several irregularities across corporate governance and financial parameters that led to the default crisis at IL&FS.
Interestingly, as per annual reports of IL&FS, HDFC has not appointed a nominee director on the board of IL&FS since Harish Engineer, former executive director at HDFC Bank, stepped down on September 14, 2017, without citing any reason.
Before Engineer, Keki Mistry, the current vice chairman and chief executive officer of HDFC Ltd was the nominee director on the board of IL&FS.