The Ministry of Corporate Affairs (MCA) on Monday moved the Mumbai bench of the National Company Law Tribunal (NCLT), urging that Deloitte Haskin and Sells and BSR Associates, auditors for IL&FS Financial Services (IFIN), be barred from providing audit services in India for five years.
The move follows a probe by the Serious Fraud Investigation Office’s (SFIO), which found that auditors failed to present the “true and fair” state of affairs of IFIN. The MCA counsel said the probe revealed that the auditors did not ask questions when loans were given to companies with negative net worth or inadequate security.
IFIN is among the 348 subsidiaries of the IL&FS group, which owes over Rs 95,000 crore to lenders. The group ran into trouble after many of its arms began defaulting since last September, and on October 1, the government suspended its board and took over the company.
In a fresh plea filed under Section 140 of the Companies Act, the MCA counsel sought the deemed removal of BSR and Deloitte as auditors for IFIN.
Section 140 allows for auditors to be removed. It further provides that “an auditor, whether individual or firm, against whom final order has been passed by the Tribunal under this section shall not be eligible to be appointed as an auditor of any company for a period of five years from the date of passing of the order”.
Audit partners Kalpesh Mehta, Sampath Ganesh and Udayan Sen were also named as respondents in the plea. The NCLT gave respondents time till June 19 to file their replies and the next date for hearing has been fixed on June 21.
The SFIO had submitted its second interim report on the investigation on IL&FS on May 28. On the basis of their findings, the investigative arm of MCA also filed a chargesheet on May 30, which stated that Mehta, Ganesh, Sen and others failed to discharge their duties as auditors as per Section 143 of the Companies Act.
The SFIO accused the audit firms and partners of colluding with officials of the company to conceal facts and of “fraudulently falsifying the books of accounts and thereby financial statements from FY2013-14 to 2017-18”. The audit firms knowingly withheld crucial information, including the negative net owned fund and credit adequacy ratio of IFIN, which directly led to losses for creditors and investors, it said.
To avoid NPA classification of defaulting loan facilities, IFIN’s top management lent to other firms belonging to the borrowing group for repaying the principal and/or interest of the defaulting borrowing company. This modus operandi was repeated several times until the final loan facility was either written off or declared an NPA or went unrecognised.
The SFIO’s investigation revealed that audit committee members were aware of this fraudulent practice. The auditors were aware of the company’s stressed asset portfolio, of non-receipt of fees and income, especially from IL&FS group companies, but they did not ensure adequate disclosure. “The auditors knowingly did not reveal the true state of affairs of the company,” the chargesheet stated.
The RBI, Sebi, and the ICAI have also been made parties to the MCA’s plea. —FE