The Serious Fraud Investigation Office (SFIO), which has been probing the debt-ridden Infrastructure Leasing and Financial Services (IL&FS) group, filed its first chargesheet last week. The 840-page chargesheet focusses on just one subsidiary, IL&FS Financial Services Ltd (IFIN), and it red flags instances of loan evergreening, non-compliance with various norms and fraudulent practices. In light of this development, IFIN may reportedly lose its NBFC licence.
The chargesheet accuses the company's erstwhile top management of forming a "coterie" with its auditors and independent directors to defraud it while running the business as their "personal fiefdom". Of the 30 entities and individuals that were named, some are already in judicial custody
Before taking action against a regulated entity, the RBI issues a show-cause notice to it, gives it a hearing and then takes a decision on whether it should impose a penalty or cancel the certificate of registration granted to the entity. Sources in the know told The Hindu Business Line that given the adverse findings from the SFIO investigation, the banking regulator may invoke Section 45-IA(6) in The Reserve Bank of India Act, 1934, and take the extreme step.
The investigation found that IFIN's management had adopted fraudulent practices to avoid classifying some loan accounts as non-productive assets (NPAs), and thereby escape higher provisioning requirements as per RBI guidelines for NBFCs. The list of such masked stressed accounts reportedly includes some big companies such as the Parsvnath Group, Siva Group, ABG International Pvt Ltd and A2Z, among others. Making matters worse, IFIN also started lending to other companies belonging to the same defaulting borrowers.
The investigation report further found that IFIN's lending to its group companies increased significantly in FY13, with the lending percentage reaching 15 per cent of total loans and advances that year. The lending percentage continued to rise in the subsequent years, hitting 37% of total loans and advances of FY18 or around Rs 5,200 crore.
"In order to continue funding its group companies and prevent them from defaulting, and at the same time not to breach the RBI's credit concentration norms, the coterie [top management], in connivance with independent directors, directors, CFO of IFIN and Group CFO, abused their positions and used various modus operandi to continue lending from IFIN to group entities, causing wrongful loss to IFIN and its stakeholders," the SFIO investigation report stated. It added that fraudulent transactions were taken up to bypass the RBI directions on group lending.
According to the daily, the probe also found that IFIN had supported group entities by lending through vendors or third parties. To do so, the account books of 14 existing borrowers/contractors of IFIN and IL&FS Transportation Network (ITNL) were used for onward lending to ITNL or its subsidiaries or special purpose vehicles (SPVs). Loans to these entities were given on the basis of a letter of comfort and no security or collateral was taken from the group's road arm. Significantly, ITNL had declared a payment default in June 2018, which not only prompted rating agencies to downgrade its commercial paper and credit facilities but also eventually exposed the IL&FS crisis.
Interestingly, the buzz is that the RBI had red-flagged several instances of non-compliance at IFIN in its past inspection reports. But the regulator did not slap any penalties on the NBFC or otherwise hold it accountable. According to The Economic Times, the SFIO chargesheet alleges that it was only in November 2017 that "the classification of group companies in order to arrive at NOF [net owned funds] and credit to risk assets ratio [CRAR] as per RBI Act was strongly conveyed to IFIN". Hence, the probe agency believes that "Action at the right time may have prevented ballooning of the [IL&FS] matter". In its chargesheet, it added that the RBI should conduct an internal investigation and take suitable action.