This was done to keep ITNL healthy so that it could keep servicing debts and other requisite payments
IL&FS Financial Services Ltd (IFIN) violated Reserve Bank of India's prudential norms on exposure to the group companies by advancing Rs 1,630.05 crore to IL&FS Transportation Networks Ltd, revealed an interim report by the Serious Frauds Investigation Office (SFIO).
"Investigations revealed that IFIN had advanced Rs 1,630.05 crore to ITNL violating the prudential norms (credit concentration) for exposure to group companies framed by the RBI. In order to bypass the above-mentioned norms, the loans ultimately advanced to ITNL were layered through the eight group companies of IL&FS Ltd," reads the SFIO report.
This was done to keep ITNL healthy so that it could keep servicing debts and other requisite payments.
In order to fund IL&FS Transportation, IFIN continuously raised funds from the market, including debentures of Rs 3,900 crore and commercial papers to the tune of Rs 2,730 crore, in addition to the bank loan of Rs 8,500 crore and inter-corporate deposits of Rs 980 crore. IFIN had sourced 75% of its funding from the public as well as banks.
For the purpose of bypassing the central bank's norms, the loans to ITNL were layered through Kanak Resources Management Ltd (Rs 183 crore), Tierra Enviro Ltd (Rs 380.50 crore), Unique Waste Processing Company Ltd (Rs 462 crore), Sabarmati Capital Two Ltd (Rs 701 crore), Livia India Ltd (Rs 560 crore), Motalayja Gas Power Company Ltd (Rs 340 crore), Rapid Metro Rail Gurgaon South Ltd (Rs 935 crore) and Gujarat Integrated Maritime Complex Private Ltd (Rs 465 crore).
"The credit appraisal memorandums (CAM) of loans given to these eight companies reveal that loans were sanctioned without any clear purpose or against a specific project in hand. Funding of high-value loans should be given for a specific purpose or for specific project in hand on the basis of some project feasibility reports. However, the purpose mentioned for these loans is very generic and prima facie, should not have been sanctioned in the normal course of business. Loans were advanced to these companies, despite all the companies suffering negative net worth," mentions the investigation report.
These companies were sustaining continued losses and were incorporated for specific projects. Despite the losses, these companies were used as vehicles to layer or camouflage routing the funds from IFIN to ITNL.
Moreover, these loans to ITNL were approved by the committee of directors (CoD) of IFIN or the lending entity, whose members were also on the CoD of the borrowing entity ITNL and public money was extended to the group companies by IFIN without required security and performing due diligence.
According to the interim report, "The modus operandi of IL&FS Group during the financial years (FY) 2015-2018, prima facie, which emerged from the above was to keep the holding company (IL&FS Ltd) and its immediate subsidiaries financial viable and healthy, through an unsustainable, pyramidal funding, routing short-term funds borrowed at the holding company or the subsidiary company level to its various step-down/project subsidiaries, as the holding companies' contributions or to avoid default on these companies borrowings."
"The holding company (IL&FS Ltd, IFIN, ITNL or other borrowing entitites as the case may be) lent the borrowed amount at an interest rate higher than the average cost of borrowing to the step-down subsidiaries. Many times, this lending to the step-down subsidiaries, joint ventures and project SPVs (special purpose vehicles) was routed through other group companies in order to circumvent the RBI regulations with regard to investment of funds by NBFCs (non-banking finance companies)," the reports adds.
The holding companies, in the process, imposed heavy finance and other fee-based costs (many recovered upfront), especially on the already stressed step-down subsidiaries and made them further financially unviable.
Key subsidiaries of IL&FS Ltd were, therefore, projected as financially sound through the interest charges, dividend and fee-based returns as well as through ever-greening of loans, in order to itself enjoy regular dividends, interest payments and high credit ratings for the IL&FS Ltd and these key entities of the group. Defaults in the group companies were avoided for the period by routing the funds borrowed by the key companies, which projected a financially healthy picture, thus creating an unsustainable bubble in the absence of sufficient revenue generation internally by the group.
DRESSING UP BALANCE-SHEET
- Rs 3,872 cr – Loans sanctioned by IFIN to window dress its balance-sheet in last three fiscals
- Rs 1,630 cr – Its loan to IL&FS Transportation Networks Ltd
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