Deloitte was aware of loan evergreening in IL&FS Financial Services: SFIO

SFIO report questions the inaction of the auditor, holds up emails showing knowledge of evergreening of cases; former Deloitte CEO rubbishes claims

The Serious Fraud Investigation Office (SFIO) has come down hard on Deloitte for not taking action despite being aware of the evergreening of loans by IL&FS Financial Services (IFIN). Deloitte was the auditor for IFIN, a subsidiary of Infrastructure Leasing & Financial Services (IL&FS) that is involved in Rs 90,000-crore default to banks, mutual funds, and other investors. 

SFIO’s investigating team found a document on IL&FS’ email server, prepared by a Deloitte team. The email, dated May 9, 2018, had two excel sheets on non-group evergreening cases, and group company evergreening cases.

“It is clear that Deloitte’s team was aware that there were several instances of funding interest and principal by IFIN to its defaulting harrowers for avoiding these accounts becoming non-performing assets (NPAs) and also for avoiding the consequent provision,” the charge sheet said. Business Standard has reviewed the charge sheet.  

When the above emails were shown to Deloitte’s former chief executive officer (CEO) Udayan Sen, he told the SFIO: “I do not recall having sighted this document earlier during an audit. Having seen the document now, I note that this seems to be an interim work paper. It also reflects our heightened scepticism on the probable evergreening cases. It also shows the identification of cases during the process. It is clearly an incomplete interim unreviewed work paper, which cannot be relied upon for any purpose whatsoever.”

SFIO, in its first charge in the IL&FS case, notes this response. However, it says that Sen had not stated the manner in which doubts raised over IFIN’s lending accounts were dispelled before issuing of an unqualified opinion on the financial statements.

In an emailed response, a Deloitte India spokesperson said, “We have not been served the charge sheet. DHS LLP (Deloitte) is confident that its audits were performed in accordance with the applicable professional standards and is cooperating fully with the investigative authorities. DHS LLP’s defence, which will be supported by facts, will be presented to the courts and other relevant authorities as and when required.”

Names and details of SKIL Group, Parsvnath, KVK Energy and Infrastructure, Adhunik Meghalaya Steels, Ind-Bharath, Flemingo Group, ABG Group, Unitech, HDIL Group, GHV Group, and D B Realty, among others feature in the two excel sheets. In almost all these cases, IFIN lent more money to help firms’ repay earlier loans and interest. And in some, it lent without knowing anything about the borrower’s financial health, the excel sheet shows.

In the case of Flemingo Group, the excel sheet noted: “IFIN has not received the audited financials of borrower company Oscar Infra for FY15-16 and FY16-17 and audited financials of Geowork Infra for FY16-17. Security issue significant portion unsecured.” Despite this and non-payment of Rs 42 crore in interests and an overdue principal of Rs 235 crore, IFIN disbursed a fresh loan to the group to repay an earlier one. And, this process was repeated multiple times with the same group. That is, the earlier loan was closed and a new loan given, which was again funded on default through the same or another group company.

“Such manner of debt servicing led to ballooning of the outstanding liabilities against a group, which were funded from the borrowings from the market. Ultimately, the final loan facility was declared NPA, or written off, or is still outstanding in most of these cases, resulting in delayed recognition of NPAs, ballooning of debt and ultimate higher loss to IFIN and its stakeholders,” the charge sheet noted.

What the charge sheet says
 

• IFIN management knew about potential problem accounts
• They kept on lending to same companies/group companies to avoid NPAs
• IFIN management showed profits between 2013-14 and 2017-18
•  After provisioning for NPAs at 10 per cent, IFIN was in losses in these five years
• Deloitte team found cases of loan evergreening