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IL&FS has accumulated a debt of more than ₹91,000 crore and defaulted on some of its commitments. Photo: Mint
IL&FS has accumulated a debt of more than ₹91,000 crore and defaulted on some of its commitments. Photo: Mint

Government seeks to reopen IL&FS books

The corporate affairs ministry is looking to reopen financial statements of IL&FS and two of units and recast them under the never-used Section 130 of Companies Act

Mumbai: The corporate affairs ministry on Friday approached the National Company Law Tribunal (NCLT) seeking to reopen the financial statements of Infrastructure Leasing and Financial Services Ltd (IL&FS) and two of its units after two initial probes found evidence of financial mismanagement.

The two units are IL&FS Financial Services Ltd and IL&FS Transportation Networks Ltd (ITNL).

The ministry’s decision to approach the tribunal comes after primary investigations by the Serious Fraud and Investigations Office (SFIO) and Institute of Chartered Accountants of India (ICAI) found financial mismanagement in the affairs of the companies and alleged fraudulent transactions.

Sanjay Shorey, director of legal prosecution at the ministry of corporate affairs (MCA), said during the arguments that the ministry wants to reopen accounts going back five years.

The MCA is seeking to reopen the accounts under Section 130 of the Companies Act. The law allows for reopening of accounts on a court order if the earlier accounts were prepared in a fraudulent manner and affairs of the company were mismanaged, casting a doubt on the reliability of the financial statements.

The government urged the NCLT to appoint an independent chartered accountant to take a closer look at the accounts and revise the balance sheets of IL&FS and its two units.

The implications of reopening of accounts are manifold, according to Ashish K Singh, founder of law firm Capstone Legal.

“Firstly, it can have a cascading effect on the current accounts as well because any change in the past years would definitely impact the present accounts. Secondly, recalculation can lead to changed tax implications especially with respect to income tax. Reassessment of tax would follow the reopening of accounts. This is a remedy which should be used sparingly as it can immensely affect the financial stability of any company," said Singh.

The petition also made a reference to ICAI’s findings related to Deloitte Haskin and Sells’ audit of IL&FS and ITNL and BSR and Associates’ audit of IL&FS Financial Services, SRBC & Co.’s audit of ITNL and IL&FS. BSR is an affiliate of KPMG and SRBC is an affiliate of EY Ltd.

The division bench presided by V.P. Singh and Ravikumar Duraiswami said that this is the first time such a petition has been moved and, as per the law, the tribunal will have to inform all the departments and people concerned, including the Securities and Exchange Board of India (Sebi), income tax department and Reserve Bank of India (RBI), as their positions needed to be heard.

“We have also informed the Sebi, RBI and the income tax department for initiation of the process," said Shorey.

The court will next hear the matter on 1 January.

The tribunal directed the government to serve proper notice to all relevant departments in the next three days so that they can prepare their response.

Meanwhile, the tribunal approved the appointments of Vijay Kumar and N. Srinivasan on the board of IL&FS.

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