ED conducts searches on two former IL&FS audit firms

Enforcement Directorate on Wednesday conducted searches on audit firms BSR and Associates and Deloitte Haskins and Sells, both former auditors of IL&FS Financial Services, over alleged financial irregularities.

This is the first time in the IL&FS probe that the auditors are being searched by the ED.

Last week, the Supreme Court had set aside the Bombay High Court verdict, which had quashed the SFIO probe against the audit firms.

Allowing the appeal of the Serious Fraud Investigation Office (SFIO) and the Centre against the high court verdict, the top court also upheld the validity of Section 140(5) of the Companies Act, 2013. The provision deals with removal and resignation of auditors and imposes a five-year ban on an auditing firm that is proven to have "acted in a fraudulent manner", or to have "abetted or colluded in any fraud". “The challenge to the constitutional validity of section 140(5) of the Companies Act, 2013 fails and it is observed and held that section 140(5) is neither discriminatory, arbitrary and/or violative of Articles 14, 19(1)(g) of the Constitution of India, as alleged,” a bench of justices M R Shah and M M Sundresh said in its 103 page judgement.

It set aside the high court judgement which had quashed the proceedings against the audit firms under section 140(5) of the Act on the ground that the auditors had resigned.

Infrastructure Leasing and Financial Services Limited (IL&FS) filed for bankruptcy in 2018.

The Serious Fraud Investigation Office (SFIO) is an agency under the corporate affairs ministry that investigates and prosecutes white collar crimes and frauds.

The money-laundering probe into the alleged financial irregularities at IL&FS was launched by the Enforcement Directorate (ED) in 2019 after the federal agency took cognisance of a Delhi Police Economic Offences Wing (EOW) FIR filed against IRL, ITNL (group companies of IL&FS), its officials and others.

The ED also took cognisance of a complaint filed by the SFIO against IL&FS Financial Services (IFIN) and its officials.

The ED had also attached assets of various entities in this case in the past.

Arun Kumar Saha, one of the former members of the committee of directors of IFIN, and Karunakaran Ramchand, former managing director of ITNL, were arrested by the ED, which subsequently filed a chargesheet before a special PMLA court in Mumbai.

The ED alleged in the chargesheet that the senior management of IL&FS indulged in acts of commissions and omissions, leading to illegal personal gains to them at the expense of the company.

The ED had said in order to maintain the credentials of IFIN -- so that they could continue to receive high remuneration -- the directors allegedly falsified the accounts and indulged in "circuitous transactions" to artificially boost the balance sheet of the IL&FS group, whereas in reality, these illegal activities were leading to further losses to the group.

According to records, the IL&FS group companies had an aggregate debt burden of more than Rs 91,000 crore and a series of defaults had taken place between June and September in 2018, threatening to collapse the money markets of India.

This had led to initiation of action against the firms and their auditors.

The Union government took the management control of IL&FS and appointed a new board in October 2018 in an effort to control defaults and restore confidence and financial stability in capital markets.