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Wednesday, July 08, 2020

Deloitte helped ITNL avoid disclosure of contingent liability by tweaking LOA: Grant Thornton forensic report

The issue relates to Letter of Assurance/ Letter of Comfort issued by ITNL in order to help borrowing at the special purpose vehicle (SPV) level for projects facing cost overruns or that required bridge funding.

Written by Sandeep Singh | New Delhi | Updated: June 5, 2020 2:51:50 pm
The issue relates to LOA/LOC issued by ITNL in order to help borrowing at the SPV level for projects facing cost overruns or that required bridge funding.

The forensic report by Grant Thornton India on the books of accounts of IL&FS Transportation Networks India Limited (ITNL) reveals that its auditor — Deloitte Haskins and Sells — assisting the company in tweaking the language of the Letter of Assurances issued by the company in a bid to avoid disclosure of contingent liability in its financial statements and then also failed to flag the same in its audit reports. ITNL is a group company of financial firm IL&FS.

The issue relates to Letter of Assurance/ Letter of Comfort issued by ITNL in order to help borrowing at the special purpose vehicle (SPV) level for projects facing cost overruns or that required bridge funding. The forensic audit report by Grant Thornton, seen by The Indian Express, shows that there are at least 19 instances where ITNL issued LOA/LOC for loans sanctioned by group company IL&FS Financial Services (in 16 instances) and other financiers (3 instances)— aggregating to over Rs 2,700 crore — to various external parties who were also vendors of ITNL.

In one instance, when ITNL issued the Letter of Assurance, its then CFO and now its CEO, Dilip Bhatia in an email to another ITNL official Prashant Agarwal on August 31, 2015, asked to confirm if according to auditors, giving such a letter (LOA) will not be treated as guarantee (contingent liability) for ITNL.

The very next day, Agarwal replied to the email where he stated that he checked the draft LOA with Deloitte and the draft has been updated after “incorporating Deloitte’s suggestions”.

In relation to this, the Grant Thornton report states, “It appears that Deloitte assisted them in a change of language in LOA to avoid disclosure of Contingent liability in financial statements.”

The report further states that in another mail in October 2015, an employee of ITNL wrote an email to its then company secretary Krishna Garg where it was noted that ITNL had to issue a letter of assurance to ICICI bank on behalf of Noida Toll Bridge Company Limited for availing a term loan of INR 60 crores. In the email the employee also stated that the LOA had been cleared with Deloitte for checking on the contingent liability aspect.

With regard to this, Grant Thornton in its report noted, “It appears that Deloitte was aware about non-disclosure of contingent liability in the financial statements and no qualifications were raised in respect of the same point in audit reports.”

Sources say that a copy of the report that was submitted by Grant Thornton earlier this year, has been submitted with the Ministry of Corporate Affairs and also with the investigating agencies for further probe and action.

An email cited in the report also hints towards a possible influence from top management of IL&FS over such treatment of contingent liability. The report cites an email dated 15 April 2016 sent by Arun Saha (Director at IFIN, a group company of IL&FS that was in the business of debt syndication and lending) to Ravi Parthasarathy (former chairman IL&FS Group) and Ramesh Bawa (MD & CEO of IFIN). In the said email, Saha states a plan of action to avoid ratings downgrade. “As per the said plan, it was suggested that the letter of comforts would be issued in in a form that they are not accounted as an outside liability/ contingent liability,” said the report.

While a contingent liability is a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence and non-occurrence of one or more uncertain future events and not wholly within the control of the entity, Grant Thornton notes that as per IND AS-37: “Provisions,Contingent Liabilities and Contingent Assets”, where an entity is jointly and severally liable for an obligation, the part of the obligation that is expected to be met by other parties is treated as a contingent liability.

In the report Grant Thornton says that as per “our understanding of IND AS-37, it appears that ITNL is required to disclose the total value of potential liability arising due to issue of such letters as a ‘Contingent liability’. However, based on our review of the annual report of ITNL, it appears that the said letters have not been disclosed as a Contingent liability”.

In another divergence from norm, the GT report states in many cases the approval from board of directors or committee of directors (CoD) was not taken before issuance of the LOAs/ LOCs. “It appears that separate approvals were not taken from the Board or the COD for issue of letters to external parties. However, in certain instances, we have noted that COD approval had been taken into considerations for issuing such letters for loans sanctioned by IFIN to ITNL,” the report said.

However, in the report, ITNL representatives have been quoted as stating that ITNL has no direct/ indirect responsibility to pay the Bank in case of failure of the SPV to pay. ITNL has only taken upon itself that it will ensure that the SPV settles the unpaid dues. In view of above, these LOAs do not fall within the definition of Contingent Liability and hence have not been disclosed as Contingent liability as required under IAS-37.

As IL&FS group companies started defaulting on payments to lenders in September 2018 and collectively owed over Rs 90,000 crore, the government took over the board of IL&FS and appointed a new board led by Uday Kotak, MD, Kotak Mahindra Bank. The new board then appointed Grant Thornton to conduct forensic audit of each of the IL&FS Group companies. Grant Thornton had submitted the forensic report earlier this year and after the comments from the company in the report, a copy of the same has been handed over to Ministry of Corporate Affairs and investigating agencies.

Deloitte India Spokesperson said, “We have not seen the report referred to in your mail and are unable to provide comments to your queries. Necessary disclosures were made according to the auditing standards and the same practice was also adopted in successive annual reports after our tenure as an auditor. We continue to believe that our audits have been performed in accordance with applicable laws, regulations and professional standards in India. DHS LLP is committed to the highest standards of audit quality and ethical conduct in its professional practice.”

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