20 June 2019: The ministry of corporate affairs (MCA) has directed the Serious Fraud Investigation Office (SFIO) to probe banks as well as their officials who lent to the Infrastructure Leasing and Financial Services Ltd (IL&FS) group of companies, according to documents reviewed by Mint.
The government’s white-collar fraud investigation agency has so far only moved against IL&FS Financial Services Ltd (IFIN) directors and their auditors. This would mark the first time that banks who lent to IL&FS group companies would come under formal investigation.
The SFIO filed its first charge-sheet on 31 May in the IL&FS crisis against 30 individuals, including directors and auditors, alleging fraud and criminal conspiracy at IFIN, the non-banking financial company within IL&FS.
It will now investigate banks who lent to the IL&FS group and IFIN. It will check whether the banks followed established norms while lending to the IL&FS group of companies and whether they were aware of the financial stress in the company, said two people with direct knowledge of the matter, including a government official.
“According to statements made by some bank officials to SFIO, one private lender had lent funds to the financially distressed group as late as June 2018,” said the government official.
June 2018 was the first time that a group company of IL&FS defaulted, an early sign of the financial stress in the group. In that month IL&FS group’s transport subsidiary IL&FS Transportation Networks (ITNL) delayed repayment of ₹450 crore of inter-corporate deposits to Small Industries Development Bank of India (Sidbi). Subsequently, rating companies ICRA and CARE Ratings downgraded ITNL’s debt papers and credit facilities citing weak financials.
“This private lender lent about ₹2,000 crore to IL&FS and ITNL’s SPV. This loan was extended at a time when the signs of financial stress in the group had become public with defaults on repayments and rating downgrades. As per statements given to the SFIO by bankers, a large public sector bank and a large government-owned financial services firm had requested the private lender to extend this loan to IL&FS and the ITNL subsidiary,” said the second of the two people cited above.
The additional funding to an SPV of ITNL at a time when it had defaulted is a cause for the investigators. “Furthermore, signs of stress in ITNL which contributes to 35% of IL&FS debt should have rung the alarm bells for banks and they should have been cautious in lending to the parent company,” this person added.
Separately, the MCA has asked the SFIO to submit a report on IFIN’s borrowings from markets by using instruments such as non-convertible debentures (NCDs), commercial papers and external commercial borrowings.
As of March 2018, IFIN had a total debt of ₹17,590 crore. A major chunk of it is bank exposure while a sum of ₹5,109 crore was raised through debentures.
According to the investigative agency, the NCDs were used for purposes other than what was stated—to fund group entities, parents and group companies.
Norms laid down by the Reserve Bank of India say that non-banking financial companies can use debentures to fund their own balance sheet and not to fund resource requests for other group entities, parents or group companies.
As per the SFIO’s filings in the special sessions court in Mumbai dated 31 May, some of these NCD holders include postal life insurance funds, the army group insurance fund, and provident funds of Tata Power and Infosys.
“SFIO’s fresh report is to ascertain the final end use of these funds,” said the government official.
While the investigative agency has already found the auditors lapsing as they did not verify the end use of debentures, the role of merchant bankers will also come under scrutiny.
“The merchant bankers in NCD offer documents had said the proceeds would be used for other corporate purposes without elaborating and verifying what were those corporate purposes,” said the second person quoted above.
The MCA has also directed the SFIO to investigate and submit a report on the role of rating agencies, who are alleged to have failed to raise alerts.
India Ratings & Research, Icra and Credit Analysis and Research Ltd (CARE) had given IL&FS the highest rating of AAA, even after its subsidiary, IL&FS Transport Networks, defaulted in June.
There was also an abrupt downgrade in the ratings of bonds sold by IL&FS and related entities, after they defaulted on payment obligations in September. Credit rating agencies had downgraded the bonds from high investment grade (AA+ in some cases) to default or junk.
Meanwhile, ED which is investigating a case of alleged money laundering in the IL&FS debt crisis on Wednesday evening arrested two former directors of the financial services company.
“Arun Saha and K Ramachandra, former directors of IL&FS were arrested by the Mumbai branch of ED. Further probe in underway,” said an ED official.