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The newly-appointed board tasked with reviving IL&FS has found instances of financial mismatch and gaps in corporate governance by the erstwhile management.
For instance, on a preliminary analysis of the financial statements and records of IFIN for the last three financial years, it is noticed that IFIN had outstanding loans and investments to companies in the IL&FS Group of ₹5,728 crore, ₹5,127 crore, and ₹5,490 crore in FY16, FY17 and FY18, respectively. Prima facie, these appear to be significantly in excess of permissible norms, in all of the three years.
Negative capital adequacy
If this is applied for calculation of capital adequacy, IFIN would have significant negative capital adequacy in each of these three years. “Further, we note from records available that loans to one of the companies in the IL&FS Group, in excess of ₹1,500 crore, had been routed through eight other companies of the IL&FS Group, reflecting adoption of circuitous transactions to circumvent regulatory prescriptions,” the board said in a report submitted to the stock exchanges and NCLT.
The new board has also been given to understand that there are certain entities which, in practice, but not necessarily de jure, may have been considered part of the IL&FS Group for the purposes of funding. For instance, IFIN has an exposure in excess of ₹900 crore to companies that are subsidiaries of associates/JVs of IL&FS (such as HCPL) and IL&FS Employee Welfare Trust. These 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’.
The new board said that it is unable to validate whether due processes and transparency have been followed by the previous management in pursuing various asset monetisation activities. For instance, 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 ₹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 for ₹1 crore, the reasons for which the new board finds are inadequately supported.
The new board understands that IL&FS has been appointing some of its superannuated employees as consultants, totalling 55 individuals, at an annual cost of ₹16.5 crore. The new board has resolved to cancel the contracts of these consultants subject to some exceptions.
Properties leased
Further, it has been discovered that companies in the IL&FS Group, have had the practice of leasing properties owned by select employees (or their relatives) as guest houses of group companies. Even as the new board is undertaking further reviews of all such arrangements, illustratively, in relation to six such properties that were taken on lease, the monthly lease rent aggregated to ₹15.1 lakh per month, and with a deposit of ₹2.26 crore. The new board has initiated steps to terminate such leases.
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