Mumbai: Kolkata-based Srei Infrastructure Finance Ltd, a publicly listed non-banking financial company, or NBFC, has come under the ministry of corporate affairs scanner for 36 alleged violations of norms laid down by the Act that governs Indian firms, the Companies Act of 1956.
The ministry has sought an explanation from Srei on charges ranging from investments in the stock market without proper guidelines to loans granted without permission from its board of directors, and misappropriation of funds by an employee.
According to a ministry note, a copy of which was reviewed by Mint, Srei hadn’t furnished an explanation on remarks by auditors, Deloitte Haskins and Sells, on these issues.
M.R. Das, assistant director (inspection) of the ministry, wrote to the company on 30 August, pointing out the 36 violations in the course of “inspection under section 209A of the Companies Act, 1956”, and asking the firm to “furnish comments/explanations supported by documentary evidence...within 15 days”.
Srei has since responded to the ministry, but Mint was unable to ascertain details.
“At the outset, we would like to mention that there are no violations that have been committed by the company,” maintained Subhash Mohanti, vice-president, communications and brand development of Srei, in an email to Mint. “In the regular course of inspection, they (the ministry) have requested for certain comments, which the company has replied to. As the matter is between the ministry of corporate affairs and the company, therefore, we are not in a position to disclose to you our response to the ministry.”
Indeed, a request for information isn’t automatically a suggestion of wrongdoing. Under section 209A, which the ministry often invokes, the Union government can inspect the financial statements of a company, direct special audits, order investigation into the affairs of a firm and launch prosecution against it for violation of norms.
Such inspections are typically conducted to check any mismanagement and unfair practices by companies that might adversely affect the interests of shareholders, creditors and employees.
To be sure, many Indian firms do face such inspections from the government and allegations of mismanagement of funds and other irregularities get levelled against them.
Srei is one of the largest private players that offers customized funding solutions in the infrastructure space.
The government’s letter alleges that the company had invested funds in the stock market without proper guidelines, that two executive directors were given performance bonus without board approval and that some mezzanine capital was disclosed wrongly in financial statements.
Other violations include faulty issuance of non-convertible debentures, exceeding borrowing limits fixed by the board and lack of information on employees drawing excess remuneration as required by the Companies (Particulars of Employees) Rules, 1975.
According to the ministry, between fiscal years 2005 and 2007, the company issued nonconvertible debentures and bonds to raise Rs789 crore, Rs2,068 crore and Rs4,721 crore, respectively, from various banks and companies. The power to issue debentures is to be exercised by the board of directors through resolutions. The ministry claimed these issues were cleared by just a committee of directors.
On the borrowing limit issue, the company’s board had, in January 2001, allowed the committee of directors to borrow up to Rs250 crore. This was superseded by a 2005 resolution, increasing the limit to Rs1,000 crore. This was further increased to Rs5,000 crore in January 2007.
However, the company borrowed funds (except debentures) from various financial institutions and banks worth Rs719.18 crore and Rs1,163.08 crore in 2005 and 2006, despite a limit of Rs1,000 crore.
According to the ministry of corporate affairs, this is a contravention of a particular section of Companies Act, under which only the board of directors can authorize a committee of directors to borrow money. Also, the committee cannot borrow more than the specified limit.
Similarly, the committee of directors and investment committee of the board of directors invested company funds in 240 instances from April 2004, without permission from the board, also a violation of the Companies Act.
The loans and advances for various financing needs had neither been discussed in the meeting of the board nor had the board delegated the power to any committee of directors.
Srei’s shares closed at Rs84.60 a share on the Bombay Stock Exchange, relatively flat. The shares had hit a lifetime high of Rs280.10 on 1 January. Since then, they have lost 69.8%, more than double that of the benchmark Sensex.