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December 14 2019
IL&FS ignored risk assessment reports while extending loans: audit
04 March 2019

‘Firms took money from company to pay off existing loans to its subsidiary’

A forensic audit report of IL&FS has found serious lapses in the manner in which huge loans were extended to certain entities even after internal risk assessment clearly showed that the borrowers were under financial stress.

Further, various instances have been found wherein the committee of directors of the infrastructure financing company extended loans at a negative spread to borrowers facing liquidity issues. (A negative spread occurs when interest rates charged on amounts lent are lower than interest rates paid on borrowed sums.)

Potential stress

According to the forensic audit report prepared by Grant Thornton, the quantum of such loans is pegged at over ₹4,300 crore.

 

IL&FS ignored risk assessment reports while extending loans: audit
 

Among other observations, the report said the forensic audit “identified 18 instances where the Committee of Directors (CoD) ultimately approved loans to those borrowers who appeared to be in potential stress on the basis of media reports/articles in the public domain and in spite of a negative assessment by the risk team” while pegging the quantum of such loans at about ₹2,400 crore.

Meanwhile, another 16 instances with a cumulative loan amount of ₹1,922 crore were found wherein the CoD sanctioned loans at a negative spread or limited spread, for those companies, which clearly were under stress.

Seven loans written off

Of such instances, seven loans have either been written off or are related parties of the companies for whom loans were written off, while in five instances, the CoD ultimately approved loans even after a negative assessment by the risk team, as per the report. Separately, the audit found 29 instances of loans collectively worth over ₹2,500 crore that were given to entities, whose group companies used the money to repay existing loans taken from IL&FS Financial Services, a 100% subsidiary of IL&FS and a Systemically Important Non-Deposit Taking Non-Banking Finance Company.

As per the report, Electrosteel Steels, Kvk Energy & Infrastructure, Pallav Trading and Dev Rishabh Real Estate, were among entities who were either given loans on a negative spread or a limited spread of less than 3%, even as money was lent to many borrowers at a spread of 7-9%.

“Unapproved board minutes appear to suggest that the board of directors — specifically members of the board who are also a part of the CoD — were potentially aware that the loans provided to third parties were further forwarded/lent to IL&FS group companies,” stated the report.

The Hindu has reviewed a copy of the report. It has also highlighted instances of possible conflict of interest wherein loans were given to entities whose promoters also served as directors of IL&FS Group companies.

 

 

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