Auditor picks a Rs13,000-cr hole in IL&FS Group finances

IL&FS Group, which operates around 24 direct subsidiaries, 135 indirect subsidiaries, six joint ventures and four associate companies, is sitting on debt of Rs94,000 crore.

The report has identified 29 instances where it appears that the loans disbursed to borrowers were in turn utilised by their group companies to repay the existing debt obligations with IL&FS Financial Services Limited (IFIN).

“These together has a financial implication of Rs 2,502 crore,” said the draft report prepared for all high-value transactions undertaken by IL&FS Limited and a few of its group companies for the period commencing from April 1, 2013 to September 30, 2018.

The report said there are 18 instances where the Commercial Operations Date (COD) ultimately approved loans to those borrowers who appeared to be in potential stress on the basis of media reports in the public domain. “Loans over Rs2,400 crore were given in spite of a negative assessment by the Risk team,” it said.

The report has indicated 10 major anomalies, grouping together various types of potentially irregular transactions and the sums involved in each deal type. The aggregate sum of these comes to Rs13,290 crore. There were several instances where funds, worth Rs541 crore, were borrowed for short term purposes, appears to be potentially utilised for long term purposes. 

“We reviewed the Asset Liability Management Committee (ALCO) minutes and noted the details of funding gaps (ie, funds not available for estimated committed disbursement). Based on the details, it appears that since May 2013, IFIN was under stress to borrow funds in order to fulfil the commitment of loans already sanctioned,” it said. 

The report has mentioned instances of risk assessment not being registered in the system and discrepancies between the details mentioned in the manual Credit Approval Memorandum (CAM) and the system CAM, which was the base document for the sanctioning of loans.

Further, the forensic auditor found five instances wherein there was no adequate monitoring with regards to the personal guarantee provided by the promoters of the borrowers.

"We reviewed Credit Approval Memorandum, CAM is a document which provides the details with regards to credit screening process undertaken to evaluate the prospective borrower's credit worthiness. It also highlights the basic details of the deal along with risk and mitigations factors identified by the dedicated reviewers and approvers of IFIN. There are two forms of CAM - Manual CAMs and Electronic (‘System’) CAMs and based on our discussions with the ASF team, we were given an understanding that in order to expedite the lending process, Manual CAMs were prepared first which were reviewed by the dedicated teams, post which the same were recommended / approved by the Committee of Directors('CoD'). Further, the Manual CAMs were recorded in the ERP system generating System CAM. 

Post facto approvals were taken in the ERP system from the dedicated teams (this process is known as 'regularization'). Hence, based on discussions, it is noted that the regularization of a manual CAM appears to be recording the details of the manual CAM in the system as it is. Based on a review of the documentation, it appears that the rear e-control lapses during the regularization of the manual CAMs and it appears unusual that the terms on which the loan sanction has been approved are potentially changed while regularizing in the system," stated the report.

In most cases, a personal guarantee of the promoters of the borrowers were taken as collateral against the loan sanctioned to the borrowers.

"In order to ascertain if the personal guarantees of the promoters of the borrowers are adequate with regards to the loan provided, we requested for the net worth certificate of the borrower’s promoter. However, it was noted that no supporting documentation was taken from the borrowers which can help to ascertain the net worth of their promoters," as per the report.

Further, as per the forensic audit report "the Asset Liability Management Committee minutes and noted the details of funding gaps (i.e. funds not available for the estimated committed disbursement). Based on the details, it appears that since May 2013, IFIN was under stress to borrow funds in order to fulfill the commitment of loans already sanctioned. 

Further, it said, there was a steep increase in the funding gap during the month of July 2018. It was also on 21 July 2018 that IL&FS erstwhile chairman Ravi Parthasarathy resigned. 

The auditor has identified 18 instances worth Rs2,400 crore where the committee of directors ultimately approved loans to those borrowers who appeared to be under potential stress, despite such information being available in the public domain and even a negative assessment by the risk team.

"It appears to be unusual that loans were sanctioned by the Committee of Directors even when it was highlighted by CRMG team (risk team) that the companies are under stress. Till date, out of 16 cases mentioned in the report, in 7 cases IFIN has already written off loans or has done provisioning," it said while adding that 29 instances were identified where it appears that the loans disbursed to borrowers were in turn utilized by their group companies to repay the existing debt obligations with IFIN.

Based on the analysis carried out, it appears unusual that out of Rs 390.63 crore worth of loans provided to the borrower of companies, Rs 145.33 crore were in turn utilized to repay the existing debt obligations, it said.