Hello and welcome to NewsClick. This time let's talk about infrastructure leasing and financial services. All of you have heard about this. It's a 348 crore infrastructure and finance conglomerate which sort of exploded in September last year. The government sacked the board and a new board has been appointed which comprises a bunch of retired bureaucrats and headed by Uday Kotak, chairman of Kotak Bank. Now what is new this week is something called Project Icarus. This is a report submitted by Grant Thornton which is an accounting major which has done a forensic audit at the behest of the new board headed by Uday Kotak and this report has been submitted to the board. It is just an interim report and it is about one company which is ILFS Financial Services better known as IFIN. So I am going to keep calling it IFIN henceforth. Just interim not gone into details looked at just one month of work and yet it is so explosive it identifies ten kinds of wrongdoing more importantly pins the blame or points the blame to where it should be which is a committee of directors comprising just four people. But before we come to that let us look at the name itself. Now if you read the report which is Project Icarus it does not sound very hard-eating because it is couched in very mild accounting language but typically the name says it all. Those of you know that Icarus and hubris are terms that come from Greek mythology it is the legend of Icarus who was escaping with wings made of wax and feathers despite his father's advice flew too close to the sun and the wax melted and he collapsed and drowned in the sea. Now clearly this accounting firm thinks that this is what has happened to ILFS that it grew so much it got so arrogant there was so much of hubris that one fine day after 30 years it has just collapsed and that is such a telling comment on how India is regulated how its finance companies are regulated that one person Mr. Ravi Pajsarthi who founded this company with three institutions Central Bank which had a 51% stake Housing Development Finance Corporation and unit trust of India those days unit trust of India was a huge institution when ILFS was founded in 1987 and this closed company unlisted headed by one man was allowed to grow over 30 years into this humongous conglomerate across the world with literally no supervision and disclosures when you hear what Project Icarus says you will understand the significance and importance of what I'm trying to say about complete lack of supervision but what is worrying today before we go into details is that this is one company there are 348 which means we haven't even got to the tip of the iceberg admittedly there are four or five big companies and this is one of them but we need to get a move on towards resolution because remember money that we invested in mutual funds has gone into ILFS money a pension money for the first time in India's history pension money invested by private people who have no social security coming from the government has gone into ILFS everyone is getting worried they're tense and there is no sign of resolution there's not even a resolution plan they are before the NCLT but it's a long and slow process what we have so far is just about 60 companies have been classified as green, amber and red now this doesn't have much meaning because it's just too small the outstanding debt is 94000 crore and people have estimated in the early days that the potential losses are likely to be over 30,000 crore so if you've got just 60 companies identified you're talking about a few companies among those which are identified as red and very few green that has no meaning we need to move and the way to move is going to be to A start selling the projects there's no sign of that happening even though it was partnerships with the state government remember the reason why ILFS has escaped scrutiny and supervision or rather strict scrutiny and supervision was that it positioned itself by masquerading as a government company or at the very least the favorite partner of governments in state governments as well as the central governments it had projects across India and across the world always in partnership with government always masquerading like a government company so where are all these partners who in September last year when ILFS's board was sacked had come forward and said yes we are ready to buy them there is no sign of it because we are not getting towards a resolution plan now let's come to what Grant Thornton has said so this interim report has identified 10 types of possible fraud just these companies alone the fraud amounts to a massive 13,299 crore and let me go one after another about the kind of fraud there is before we go into that again one more point remember at the very least all companies have a statutory auditor which is governed by the institute of chartered accountants of India and they are supposed to certify that the facts given in the audit reports are true do you know that for 10 long years ILFS has one auditor one single auditor who coincidentally after 10 years has just stepped down all the problems have happened then so the auditor here is Deloitte Haskins and sells LLP it was appointed in 2008 completed 10 years in 2018 even in the last audit report when the Reserve Bank of India had adverse comments against ILFS Deloitte found nothing wrong the annual report says there are no adverse comments by the auditor saving grace again is that apparently the institute of chartered accountants is looking at it but honestly we are tired of looking at it we need action I think after the accounting frauds in the US when company like Enron went belly up you remember what happened a large company like Arthur Anderson one of the big four accounting firms went belly up the Satyam scam where the auditor again had not done his job now you have another one where Deloitte has not done his job and nobody is talking about it there are a few small reports but we need action and look at the scandalous things found in one month by Project Icarus which Deloitte Haskins has completely ignored for 10 long years so like I said the amount involved is 13,299 crore let me go up into each one of these 10 kinds of scams first was a tenured mismatch anybody who is a lending organization ensures that when you give a loan, if it's a short term loan then the project for which it's going to be used has also got to be short term instead here 541 crore were borrowed for short term purposes and utilized for long term needs by 8 entities now the entities here are important I am not going to go over all the names because the same names come in each kind of violation that has been identified by GT GT being Grand Thornton so here there are names like SR Shipping Ascent Hotels, Gujarat Integrated Maritime Complex and SKIL Infrastructure SKIL is important because for a number of years it was headed by close friend of Ravi Parth Saty and like I said there were just 4 people there was a committee of directors who oversaw all of this the committee of directors had adopted what is called a system where they had oversight over everything that happened so yes there was a board of directors there were 14 directors on the board these included two former chairman of Indian Nationalized Banks but the core committee was Ravi Parth Saty Vice Chairman Hari Shankaran Mr Arun Saha and Ramesh Sibh Bawa in fact Ramesh Bawa was the managing director of IFIN smiling from all the annual reports when the going was good and was the ace fundraiser for the entire group not just IFIN so like I said this is the nucleus this and ITNL which is another group company which is ILFS Transportation Network these are the two core companies in the group and we will keep coming back to them in various ways these four people had oversight into what happened because today the board has sent a show cause notice to all 14 members like I said among the many pointless slow delaying things which show that we have learnt nothing from 92 this is one of them so the smallest in fact the least of the problems is tenured mismatch is 541 crore now let's look at bigger things they did which is round tripping of loans now here what they did is money lent to certain companies by IFIN was round tripped back to ILFS group companies mainly ITNL which is a listed entity so as a listed entity ITNL again let me repeat it's ILFS Transportation Network needed to show that's performing very well the amount in this case was 2270 crore and again according to the Grand Thornton report they were the last unordited or last minutes of the board meeting which are unapproved not unordited seem to indicate that this committee of directors knew exactly what is going on in many cases the loans were dispersed to third parties who quietly transferred them back to ILFS so ILFS or IFIN lends money to a bunch of companies who again give it back to ITNL or other ILFS group companies in a round tripping operation who are these people it doesn't matter they are large infrastructure projects which apparently were happy to collude in this and this is where I say that you need to have the enforcement directorate serious frauds office moving little faster on finding out what was the incentive that made them become a party to this kind of a scam third one it's interesting it is fudging the credit approval memorandum now what GT found here is that the credit approval memorandum is a document on the basis of which they decide to lend money so they had two kinds of documents one was in the system which was a base called document and then there was a manual document what they found is that in 411 crore worth of lending the system based document had details which are completely different from the manual document and why should this happen I mean everything happens online today there is no explanation in fact they accepted personal guarantees as collateral everything is done to fudge facts and these the companies from whom personal guarantees were accepted included the tourist once like the SIVA group I mean people have heard about the SIVA group in the context of the Tata's right so now we come to the fourth kind of scam just lending at a loss look at this ILFS as a group has been identified as a systemically important company by the Reserve Bank of India and what is it doing lending at a loss not in one or two cases but 18 instances adding up to a massive 2400 crore so what did they do normally the spread at which this ifin apparently lent was 7-8% in a few cases the spread was negative that means they were just giving away the money the spread was negative or as low as 2-3% now why this largest why were certain people certain companies given this kind of bonanza and why would anybody any lending organization in their right senses want to lend money at a loss surely there is a quid pro quo involved or there are political connections or there are other compulsions that need to be investigated by the investigation agencies sure there are agencies there need fast action fifth kind of problem loan to default us so what did Grand Thornton find that in 16 cases amounting to 1922 crore the management cabal committee of directors of four approved loans even after their internal risk assessment team had raised red flags there is a nice little table where they say people inside were doing their job so what is the show it means the rank and file many of whom are likely to lose their jobs have begun to find other jobs so not at fault they were doing their job correctly they were pointing out there is information in the public domain pointing out that these companies are dangerous you should not lend to them what happens the file goes to the top goes to the group of four and they wave all the problems and lend to them the very names in the list scream for a detailed investigation again like I said the SIVA group features here in many cases there is SR shipping I am going to come to a lot of them but it is pointless going into this because there are like 30 odd names many of them obviously politically connected or many of them connected with someone or the other who is obviously doing favors to this group so the next six kind of scam is no charge against collateral now you and I know that even if you want to borrow for a home loan you have to have some collateral and it is usually your house they are not satisfied with it they usually have shorties that is a large organization lending to big companies listed entities we are talking in thousands of crores and they do not even bother to check that the collateral offered by them is adequate to cover the loans which means it is all friendly money moving around as and when the committee of four decides that you deserve to get money and you get it this kind of negligence is not possible it is not negligence obviously this kind of favor is not possible without a reason some of the people who benefited are GVQ hotels, Bharat Rods and SR shipping when the collateral was taken the seventh kind of issue is the collateral itself was insufficient so in 14 cases amounting to 1819 crore so no charge against collateral where a charge has not been made no collateral where they do not do the documents that was 15 cases amounting to 1186 crore in 14 instances the amount of charge created against the borrowing is not adequate to cover the outstanding loan which means you take a loan of 100 crore but you give some assets worth 40-50 crore and it is accepted this itself should not have passed master the auditors ought to have pointed it out but like I said 10 years the auditors have done nothing but nicely part of what was going on and they were showing growth every year you have read reports in the past the high salaries that top management got they had incredibly high spending ways and the auditor was not checking anything then evergreening of defaulting accounts so what happens company whom you have lent to is going to default so you do not want to show it as a bad loan because then provisions have to be made under reserve bank of India rules and then that reflects on the performance of the company your profits for the year and naturally your bonuses and emollements the top management gets so what do you do you lend money to some other companies or you give them another loan to pay back the same loan so what has GT found that in some in most cases in evergreening it was so brazen the amount was not that big it was 145 crore new loans were given and on that very same day loans had come back from the same group SR shipping again is one of them silver glazed infrastructure is another prominent name so you give money and you get money on the very same day different groups have come different names of companies within the same group in 29 cases what they found is that 2,502 crore was given and repaid approximately at the same time in the same year to iPhone except like I said instead of the same company getting a fresh loan to pay back in these 29 cases it was forged a little bit so you take a group you give it to X company in the group Y company makes the repayment so it's the same round tripping so you give to A in a group so there is no direct correlation unless someone is looking for it like this forensic audit did but it amounts to wrong behaviour and you know to put it more strongly a fraud the final one funding of promoters and directors this is an interesting one again the amount is small but I think it's really serious that in 6 cases amounting to 94 crore iPhone was giving loans to certain companies a big chunk of the loan went straight to an individual director how strange is that this is like giving a personal loan through the company and in one of these companies the director also happened to be a director in one of the ILFS group companies clear conflict of interest now I think even a layman can see with these 10 examples I keep saying interim report of the iceberg just done in one month if this has come out in one month makes you wonder why is the government going so slow in how it tackles it and with elections coming around if we don't get action the value of all of those companies which had ready buyers which had a lot of interest not just from Indian companies but even overseas infrastructure companies their interest begins to die the amount of money that they are willing to pay to buy these companies begins to reduce and if the losses increase who pays the price look at who has funded ILFS it is about 30 odd banks many of them are Indian nationalized banks it's our mutual fund it's our pension money so we the people need to wake up and say that this can't go on it is our money we need action we cannot have a 1992 Harshad Mehta kind of investigation which goes on for 25 years those days have gone we need to learn from scams we are in an economically liberalized environment we need to settle things within a year 6 months have gone there is no sign that something is going to happen in another 6 months or a year let's look at the rest of the world if you want to be considered a developed country then we also need to learn how to deal with scams in a quick manner we need to first of all resolve the issue of ILFS and its 348 companies and we need to quickly punish the guilty thank you