“The findings of the auditors in their financial reports will be scrutinized as part of the investigations. However, at present, the priority of EOW is to interrogate those arrested and get as much information from them," an official at the investigating agency said on condition of anonymity.
Mumbai-based chartered accountant firm Rajeswari & Associates was the statutory auditor of HDIL. The auditor’s job is to ensure that the financial controls in a company are not violated and all accounting principles are adhered to. Based on the disclosures made by the company, the auditor validates the company’s financials and submits its report to shareholders and the board to make them aware of any risks or lapses.
In May last year, while submitting its auditor report for fiscal 2018, the auditor said that one of the units of HDIL, Guruashish Construction Pvt. Ltd, was referred to a bankruptcy court by lenders.
“As a result thereof, the ability of this subsidiary to continue as a going concern is dependent upon the company’s performance in terms of the resolution plan to be approved by NCLT," the auditor noted. “However, in view of the large amount of debt of the company (HDIL), we are unable to express an opinion on the extent of repayment of the aforesaid debt of the company. The consequential effect of the above, on the consolidated financial results for the period ended 31 March 2018 is not ascertainable," said this auditor.
PMC Bank’s auditors did not classify the loan to HDIL as a non-performing asset despite HDIL defaulting on repayments.
The Reserve Bank of India (RBI) guidelines in such cases say that the bank must make a provision for the loss. PMC Bank’s cash reserves stand at around ₹1,000 crore, well short of the loan given to HDIL.
The fraud at PMC Bank unfolded following a confession by its former managing director Joy Thomas to RBI that the bank’s exposure to HDIL is over ₹6,500 crore—four times the regulatory cap, or 73% of its entire assets of ₹8,880 crore.
The EOW registered an FIR against HDIL promoters Wadhawans, PMC Bank and its former managing director Thomas.
According to EOW’s preliminary probe, the bank did not report its exposure to HDIL for 6-7 years.
HDIL, in its financial reports, mentioned that loans taken from PMC Bank are repayable on demand and are secured by pledge of fixed deposit receipts with banks. These fixed deposits offer a rate of interest of up to 14%, according to HDIL’s regulatory filings. Loans taken from Yes Bank Ltd were secured by receipts of project Exotica through a current account for 15 days from the date of sanction of overdraft.
According to the auditor’s report for fiscal 2018, HDIL’s fixed deposits (with less than a year maturity) included ₹10.88 crore pledged with a bank as security for guarantees and ₹79.42 crore pledged with another bank as security for overdraft.
On 3 October, EOW arrested HDIL promoters Rakesh Wadhawan and son Sarang on charges of alleged involvement in the fraud. The father-son duo is in police custody till 9 October for further investigations. Later, Thomas and PMC Bank chairman Waryam Singh were arrested as well. Citing potential audit lapses, PMC Bank was asked by EOW to appoint a forensic auditor to revalidate its financials, money trails and audit reports. Grant Thornton has been hired by PMC Bank as a forensic auditor.
Both the Wadhawans and Singh would be presented to the special EOW court in Mumbai on Wednesday.
“Once the custody of the promoters end, EOW may approach the auditor. However, the police is likely to seek extension of their custody to the court," the official said.
Last week, EOW attached total assets worth around ₹4,000 crore, according to officials. Out of the total, around ₹3,500 crore belong to HDIL and the Wadhawans. It is unclear whether the rest of the assets belong to the Wadhawans or PMC officials.
Separately, the Enforcement Directorate (ED) has attached private jets, among other valuables, belonging to the Wadhawans following a search conducted by the agency on Saturday. So far, the agency has found Falcon 200 and Bombardier jets belonging to HDIL promoters. It has also found a 22-room luxury property belonging to the Wadhawans at Alibaug, in Mumbai’s outskirts. Besides, ED has also attached a total of around 12 luxury cars, including a Mercedes-Benz, Rolls Royce and Range Rover, parked at premises linked to the Wadhawans.