A central bank inspection of the books of IL&FS Financial Services Ltd (IFIN) in 2017 had highlighted 11 stressed accounts, most of which are now facing investigation by various agencies. The final inspection report of the Reserve Bank of India (RBI), though, named only four accounts, since the lender held requisite loan collateral for the rest.
In its draft inspection report of IFIN in December 2017, RBI had named 11 stressed accounts amounting to ₹1,200 crore, as per excerpts of RBI’s draft inspection report reviewed by Mint.
All these accounts were classified as standard by the IFIN management, but RBI had considered these accounts as doubtful, sub-standard and in one case of Siva Group as loss. The Siva Group’s ₹190 crore loan account also figures in the 800-page charge sheet filed by the Serious Fraud Investigation Office (SFIO).
“SFIO is currently in the process of collecting documents from the companies which were labelled as stressed by RBI," said a government official, speaking under condition of anonymity.
The final inspection report of June 2018, however, highlighted only four accounts as stressed and the others were fully provided for, or were fully repaid, the documents cite.
“This is because RBI considers collateral as determining factor for NBFCs. If collateral is adequate, then the account can be considered as standard," said an audit professional, who declined to be named. The SFIO charge sheet also recommended that RBI should conduct an internal probe and take necessary action. It also said that if RBI had acted earlier, the situation would not have escalated. The auditors who have been charged with not red-flagging alleged evergreening of loans had discussed these accounts with the audit committee before the final accounts were prepared.
Based on their discussion with the IFIN management, the auditors had recommended writing off two of these accounts; one was fully repaid and provisioning was done for five of them.
In their defence, auditors Deloitte Haskin & Sells LLP and BSR & Co. (KPMG affiliate) in their submission before the National Company Law Tribunal have said that the audit committee was made aware of these stressed accounts, two people with direct knowledge of the matter said.
“The audit firms submitted their replies to the NCLT last Wednesday evening. The auditors have been charged for not red flagging the so-called evergreened accounts but these were all discussed with management and presented to the audit committee. Some of these were finally provided in fiscal year 2018 based on RBI’s norms for NBFCs," said one of the two people quoted above.
The ministry of corporate affairs on 10 June had moved a petition in NCLT under section 140(5) of Companies Act which gives it powers to ban auditors for five years from all companies, listed and unlisted.
The audit firms have been charged with concealing of information by not raising red flags on the mis-statements in the accounts of IFIN. The SFIO charge sheet has pointed to evergreening in IFIN accounts and says the auditors colluded with the IL&FS management to conceal information.
Meanwhile, BSR & Associates on Thursday said it has resigned as auditors of IFIN, after responding to a notice from the company and providing explanations. “We believe we have discharged our duties in good faith and have acted in a bona fide manner and we will continue defending ourselves," it said.