Mumbai: The new IL&FS board had found that one of the group subsidiaries, IL&FS Financial Services’ outstanding loans and investments to other group entities, were much higher than the permissible regulatory caps for three years ended 2017-18.

This finding, a part of the progress report and way forward, was submitted to the Mumbai Bench of the National Company Law Tribunal (NCLT) by the government-appointed board on Wednesday.

It comes amid the ongoing tussle between the government and the Reserve Bank of India, which had refused the former’s demand to open a special liquidity window for NBFCs hit by the liquidity crunch following the crisis at Infrastructure Leasing & Financial Services (IL&FS). Governor Urjit Patel had denied that the liquidity situation in the system was that grave and announced additional open market operations (OMOs) worth 40,000 crore in the month to meet the cash demand during Diwali.

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“A preliminary analysis of the financial statements and records of IL&FS Financial Services for the last three financial years found that the company had outstanding loans and investments to group companies worth 5,728 crore, 5,127 crore, and 5,490 crore in FY16, FY17 and FY18 respectively," the Uday Kotak-led board informed the NCLT. “Prima facie, these appear to be significantly in excess of (RBI) permissible norms, in all of these three years," it added without quantifying the excess.

IL&FS Financial Services is a 100% subsidiary of the IL&FS Group, which according to the board, had over 94,000 crore debt, of which 53,000 crore was from banks.

The board also found that of banks’ over 4 trillion of exposure to NBFCs, 16% was to IL&FS, which was registered with the RBI as a systemically important non-banking financial company providing finance to infra projects.

In its report on the progress and the way forward IL&FS had sought two to three quarter to resolve it, apart from finding certain irregularities in the financial dealings of the group and its subsidiaries.

It said a large part of the IL&FS Group, in the past, operated as a single enterprise with no boundaries of legal entities and separate managements, which appeared to be major governance shortcomings, leading to a large contagion impact on creditors of the group.

The board further said if this excess exposure was applied for calculation of capital adequacy, IL&FS Financial Services would have significant negative capital adequacy in each of these three years.

The Financial Stability and Development Council, headed by finance minister Arun Jaitley, met earlier this week to discuss liquidity issues faced by NBFCs and micro, small and medium enterprises (MSMEs).

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In the report, the new board said according to available records, loans to one group company in excess of 1,500 crore had been routed through eight other group entities, reflecting the “adoption of circuitous transactions to circumvent regulatory prescriptions".

It further found that IFIN had an exposure in excess of 900 crore to companies that were subsidiaries of associates or joint ventures of IL&FS (such as HCPL) and IL&FS Employee Welfare Trust. The group has as many as 347 subsidiaries, and around 40% of them are in foreign countries.

“These do not get consolidated into the accounts of IL&FS and at the same time, have been treated by the previous management as ‘internal debt’," according to the findings.

The board said the previous management did not follow due processes and transparency in pursuing various asset monetisation activities in the group.

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