IL&FS board’s report reveals more discrepancies in business transactions

The exposure of IFIN — a subsidiary was in excess of Rs 900 crore to companies which are subsidiaries of associates or JVs of IL&FS and IL&FS Employee Welfare Trust. The board said that these exposure “do not get consolidated into the accounts of IL&FS and at the same time, have been treated by the previous management as internal debt”.

A certain asset of the IL&FS group was transferred from one entity in the group to another entity in the group in June 2017 at a value of Rs 30.8 crore for cash based on an independent fair valuation, and in just about a year (in June 2018), a committee of directors resolved to sell this to a third party at Rs 1 crore (i.e. at a significant discount to the original intra-group purchase price), the reasons for which the new board finds are inadequately supported, it said.

READ | Rs 91,000-crore debt: IL&FS board to submit revival plan to NCLT; sale of company also on the cards

Post superannuation, IL&FS has been appointing some of its  retired employees as consultants. Around 55 individuals have been appointed in this manner at an annual cost of Rs 16.5 crore.  Companies in the IL&FS group have leased properties owned by select employees (or their relatives) as guest houses of group companies. Six such properties that were taken on lease and the monthly lease rent aggregated to Rs 15.1 lakh per month and with a deposit of Rs 2.26 crore, the report said.

“This appears to be one of the key governance shortcomings that has led to a large contagion impact on creditors of the IL&FS Group,” the board in its report. The Uday Kotak-led board on Wednesday submitted a blueprint of its revival plan for the troubled infrastructure financier before the National Company Law Tribunal.

The tribunal indicated it will require time to peruse through the plan, setting the next hearing on the matter for December 3. The board also said that several Indian and global investors have expressed interest in acquiring various assets of the IL&FS group and the new board is “weighing on these” and consulting experts for disinvestment.

The board said that a preliminary analysis of the financial statements and records of IL&FS  Financial Services (IFIN) for the last 3 financial years, found that 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 board said “prima facie these appear to be significantly in excess of permissible norms, in all of the 3 years”.

“If this is applied for calculation of capital adequacy, IFIN would have significant negative capital adequacy in each of these 3 years. Further, we note from records available that loans to one of the companies in the IL&FS group in excess of Rs 1,500 crore had been routed through eight other companies of the IL&FS group, reflecting adoption of circuitous transactions to circumvent regulatory prescriptions,” said the board in its report on IL&FS Group.

IFIN’s exposure was in excess of Rs 900 crore to companies which are subsidiaries of associates or JVs of IL&FS and IL&FS Employee Welfare Trust. The board said that these exposure “do not get consolidated into the accounts of IL&FS and at the same time, have been treated by the previous management as internal debt.

There was no suitably empowered central financial control function that maintained information and accuracy at the group level, the report said.

The new board of IL&FS said that the  IL&FS group has created valuable assets. However, high leverage, poor returns from investments made, asset liability mismatch and various other factors are “expected to entail sacrifices from various stakeholders in achieving the  final  resolution”.

The Kotak-led board of IL&FS said that it has initiated several austerity measures since they took control of the group. Some of these include a reduction in sitting fees of boards and its committees, rationalisation of salaries of employees, discontinuation of 69 superannuated employees retained as consultants among others. The board said the final resolution of the group could be achieved through measures which may include arrangements, compromises, divestments, restructurings of debt or equity or fresh capitalisation”.

The new board will work towards the final resolution, in stages and parts, over the next 6-9 months (subject to market and economic conditions), with the possibility of some early outcomes/part resolutions in the next 60-90 days after obtaining consent of the NCLT for such parts, the IL&FS report said.