RBI may cancel IL&FS Financial Services’ licence after SFIO report flags violations

With the Serious Fraud Investigation Office (SFIO) investigation into IL&FS Financial Services (IFIN) flagging ever-greening of loans and serious violation of norms relating to credit concentration and net owned funds, the Reserve Bank of India may look at cancelling the licence of the non-banking finance company (NBFC).

The central bank could invoke Section 45 of the RBI Act, 1934, against the wholly-owned subsidiary of infrastructure lender IL&FS, which itself is under the lens following loan defaults and its ripple impact on the financial system.

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 licence/registration. Following the adverse findings in the SFIO investigation into IFIN, the regulator may take the extreme step, said sources aware of the developments.

Per the findings of the investigation, carried out in relation to the criminal complaint filed by the SFIO in the court of the Additional Sessions Judge-cum-Special Judge (Companies Act) against IFIN and others, the NBFC’s management had adopted fraudulent practices.

This was done in order to not let loan facilities granted to certain companies (of Siva, ABG, A2Z and Parsvanath group and other companies) to be classified as non-performing assets (NPAs), and to avoid provisioning for such NPAs / defaulting loan facilities, which was otherwise required under the RBI guidelines for NBFCs.

IFIN started lending to other companies belonging to the same defaulting borrowers for repayment of the principal and / or interest, the investigation report said. The investigation revealed that IFIN’s lending to its group companies increased significantly from FY13, with the lending percentage reaching 15 per cent of total loans and advances that year. In subsequent years, it continued to increase, and more than doubled to around ₹5,200 crore in FY18.

Abuse of position

“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 (investors and creditors),” the report said.

The report further said IFIN supported group entities by lending through vendors/third parties. To do so, the books of accounts of 14 existing borrowers or 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 of ITNL and no security was taken.

“Investigation revealed that such fraudulent transactions were taken up to bypass the RBI directions on group lending. This clearly brings out the intent of the coterie to disregard legal directions for prudential functioning of NBFCs by RBI,” said the report.

Per the investigation, such fraudulent transactions were taken up to bypass the RBI directions on group lending. The RBI, had, in its annual inspection reports, pointed at the adverse impact of these on the net owned funds and capital to risk-weighted assets ratio, which are critical parameters for an NBFC’s continuation as a going concern.

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