MCA moves NCLT against Deloitte, BSR over fraud at IL&FS subsidiary

Ministry asks SFIO to probe the role of lenders, credit rating agencies in the IL&FS fraud case

The ministry of corporate affairs (MCA) has launched a prosecution against Deloitte Haskins and Sells as well as BSR and Associates LLP and their former auditors for their role in “perpetuating the fraud” at IFIN, a subsidiary of Infrastructure Leasing & Financial Services (IL&FS). 

The ministry’s regional director had moved National Company Law Tribunal (NCLT) for debarment of these audit firms and their audit partners. It sought interim attachment of their properties, including bank accounts and lockers. 

MCA further directed the Serious Fraud Investigation Office (SFIO) to probe the role of lenders to IFIN and credit rating agencies covering the aspects of borrowings by IFIN from banks.

It will also look into the role of bank officials borrowing from the market using instruments like commercial papers, non-convertible debentures, ECB and so on. The SFIO has been asked to submit the status report to the ministry. 

Further, it instructed the serious fraud office to initiate disciplinary action against statutary auditors before ICAI and NFRA. It was asked to share the investigation report with the current management of IL&FS for initiating action under various provisions of Companies Act. 

The moves comes after the SFIO filed a chargesheet on Thursday against 30 persons, including these two audit firms, for concealing information by not flagging the alleged criminal conspiracy and misreported the financial statements of IL&FS firms. 

The hearing will be commencing next week before the tribunal, said a government official aware about the development. Based on the chargesheet, the ministry approved the prosecution against all the 30 entities and instructed its regional directors to initiate the proceedings against the audit firm and auditors under Section 140 (5) of the Companies Act. 

“The regional director is authorised to initiate proceedings under Section 140 (5) of the Companies Act before the NCLT against Deloitte Haskins, Udayan Sen (Deloitte’s former CEO), BSR & Co LLP (KPMG conducts audit through BSR), Kalpesh Mehta, Sampath Ganesh, Shrenik Baid, Rakesh Jain, Nishit Udani, Anju Rawat, Payal Rathod, AP Shah and AP Shah and Associates “for their role in perpetuating the fraud and seek debarment,” the ministry said in an order dated May 29. 

It further called for seeking interim attachment of movable and immovable properties of all persons, including lockers, bank account and jointly held properties. Business Standard has reviewed the MCA order. 

Invoking Section 140 (5) of the Company’s Act in the case would allow debarring an audit firm for at least five years.

When contacted, a Deloitte spokesperson said, “We are not privy to any such proposed action as reported in the media. DHS LLP is confident that its audits were performed in accordance with the applicable professional standards, and is cooperating fully with the investigative authorities and regulators.”

Simultaneously, directors of IL&FS and IFIN — Ravi Parthasathy, Hari Sankaran and Ramesh Bawa — have been charged for violations of the Companies Act and under Indian Penal Code (IPC) for cheating and conspiracy. SFIO, in the chargesheet, alleged that the directors were aware that the crisis was building and they allegedly did a cover up job. 

The management (IL&FS) was aware of the potential problematic accounts which were getting stressed in the succeeding month from the reports generated through the management information system (MIS) of IFIN, said SFIO in the chargesheet.  

The directors did not declare the non-paying borrowers as non-performing assets (NPA) and were lending money to borrowers of the same group companies to pay the outstanding, it added.

The auditors colluded with the coterie to conceal material information and fraudulently falsified the books of accounts and thereby financial statements from FY13-14 to FY17-18, th SFIO said. Auditors did not report the correct state of affairs on net owned funds and capital to risk weighted assets ratio or CRAR.