 "Once again, IFCI is in the eye of a storm")
A little over five years ago, the Centre for Public Interest Litigation (CPIL), a not-for profit run by senior advocate Prashant Bhushan, had moved a petition in the Supreme Court seeking investigation into alleged irregularities in IFCI (formerly Industrial finance corporation of India).
Among the prayers were also the removal of the then managing director, Atul Rai, and conversion of optionally convertible debentures worth Rs 523 crore owned by the government into equity.
Last month, after hearing the submissions, the apex court directed a fresh investigation by regulators, including the Reserve Bank of India and the Securities and Exchange Board of India, into the affairs of the company.
Among the important transactions that will be investigated afresh are: purchase of shares of MCX Stock Exchange (now Metropolitan Stock Exchange of India) at Rs 35 each that led to a loss of 168 crore; investments in Blue Coast Hotels; and investments in Satyam group of companies.
All the three deals were earlier investigated by the registrar of companies (RoC) in 2013.
MCX -SX deal
On the investments in MCX-SX, the RoC report said that Rajya Sabha MP Mohammed Ajeeb had complained about irregularities to the Prime Minister, highlighting the difference in the issue price of the share to IFCI and the Union Bank of India, which had received the same share at Rs 10 apiece.
The report found that the allegations were correct and said, “This transaction prima facie smacks of lack of due diligence and is prejudicial to the interest of the company and its members.”
Blue Coast Hotels is a listed company with links to Sushil Suri, the managing director of Morepen Laboratories. The RoC report found that of the Rs 150 crore loan from IFCI, about Rs 72.5 crore was used to repay other lenders and Rs 85 crore was invested in a subsidiary called Silver Resort Hotel. IFCI itself was a major shareholder in the subsidiary. It was also found that after the investment, promoter holdings went down substantially. The report said the objective was to divert funds to real estate. The probe concluded that IFCI failed to conduct “adequate due diligence” and the sanction of loan lacked commercial prudence .
Satyam Group
The RoC investigated a loan of Rs 85 crore granted to companies associated with Satyam founder Ramalinga Raju, on the pledge of Maytas and Satyam shares and certain land parcels, days before the infamous confession by Raju that brought to light the Satyam scam. IFCI had questioned the RoC’s powers to seek details of the pledged shares.
Apart from these three cases, the RoC also looked into the Rs 2,500 crore investments in shares of unlisted firms and over Rs 1,000 crore of bad debts that were written off in three financial years from 2008-09.
The Supreme Court was not happy with the government’s response to the RoC report. The department of financial services under the finance ministry forwarded it to the newly constituted board of the IFCI, which quickly concluded that there were no irregularities.
The apex court has now directed the Serious Fraud Investigation Officer, the RBI and Sebi to independently scrutinise these matters and come up with their report not later than four months from the date of the order.
Signs of change
Many things have changed since CPIL moved the Supreme Court. While Rai is no longer the chief, the government has converted its debentures into equity and owns 55.53 per cent stake in IFCI. But, the financial performance of the company is still far from satisfactory.
In a response to a text seeking his views on the judgment, Rai, said: “IFCI had accumulated losses of Rs 4,700 crore when I took over as MD and it had a positive net worth of Rs 5,500 crore when I left in 2013.”
He added the judgment was based on the material provided by IFCI officers Association, which, according to him, is an interested party. “At this juncture, IFCI is imperiled once again. The judgment would divert the attention of the management from focusing on revival,” Rai added.
An email sent to IFCI spokesperson did not elicit any response.
The decision has cast a shadow on the lender, which is struggling to get its house in order. The stock, which has vacillated aimlessly in a range over the past few years, has lost over 12 per cent since the judgment, closing at Rs 26.75 on Monday.
Even before the decision, the company’s financial performance was not impressive. IFCI reported losses of over Rs 100 crore in each of the last two quarters. “Market has forgotten the stock. There is hardly any coverage on the stock nowadays,” says the research head of a domestic brokerage.
IFCI has been able to maintain its capital adequacy in FY 2015-16 at a decent level over the regulatory norm. It has also claimed that it has “adopted strategies to shift towards fully secured lending practices, thereby increasing its capacity to absorb cyclical stress on asset quality.”
However, the gross and the net non-performing assets of the company grew in FY 2015-16 from the previous year.
Nevertheless, the management was upbeat, saying it could “earn profit ... amid the deteriorating conditions, when many of the banks have registered losses.”
In 2015-16, IFCI reported a net profit of Rs 378 crore, a fall of 32 per cent over the previous year. However, there was a catch: a significant portion of this was from investment gains. “Your company continued with the strategy of selective disinvestment of slow moving stocks. During FY 2015-16, it earned a profit of Rs 280 crore from sale of equity,” the company said in the annual report.
Further, the comptroller and auditor general says that the profits have been overstated by Rs 66.28 crore due to short provisioning in two cases involving Lavasa Corporation and Wisdom Global enterprises. The management has contended that the provisioning was adequate citing strengthening of tangible security and additional security provided. “There has been no understatement of provision or overstatement of profit. However, additional provision, as required, shall be made if the judgment by the Hon’ble Court goes against IFCI,” it says.
Among the prayers were also the removal of the then managing director, Atul Rai, and conversion of optionally convertible debentures worth Rs 523 crore owned by the government into equity.
Last month, after hearing the submissions, the apex court directed a fresh investigation by regulators, including the Reserve Bank of India and the Securities and Exchange Board of India, into the affairs of the company.
Among the important transactions that will be investigated afresh are: purchase of shares of MCX Stock Exchange (now Metropolitan Stock Exchange of India) at Rs 35 each that led to a loss of 168 crore; investments in Blue Coast Hotels; and investments in Satyam group of companies.
All the three deals were earlier investigated by the registrar of companies (RoC) in 2013.
MCX -SX deal
On the investments in MCX-SX, the RoC report said that Rajya Sabha MP Mohammed Ajeeb had complained about irregularities to the Prime Minister, highlighting the difference in the issue price of the share to IFCI and the Union Bank of India, which had received the same share at Rs 10 apiece.
The report found that the allegations were correct and said, “This transaction prima facie smacks of lack of due diligence and is prejudicial to the interest of the company and its members.”
Blue Coast Hotels is a listed company with links to Sushil Suri, the managing director of Morepen Laboratories. The RoC report found that of the Rs 150 crore loan from IFCI, about Rs 72.5 crore was used to repay other lenders and Rs 85 crore was invested in a subsidiary called Silver Resort Hotel. IFCI itself was a major shareholder in the subsidiary. It was also found that after the investment, promoter holdings went down substantially. The report said the objective was to divert funds to real estate. The probe concluded that IFCI failed to conduct “adequate due diligence” and the sanction of loan lacked commercial prudence .
Satyam Group
The RoC investigated a loan of Rs 85 crore granted to companies associated with Satyam founder Ramalinga Raju, on the pledge of Maytas and Satyam shares and certain land parcels, days before the infamous confession by Raju that brought to light the Satyam scam. IFCI had questioned the RoC’s powers to seek details of the pledged shares.
Apart from these three cases, the RoC also looked into the Rs 2,500 crore investments in shares of unlisted firms and over Rs 1,000 crore of bad debts that were written off in three financial years from 2008-09.
The Supreme Court was not happy with the government’s response to the RoC report. The department of financial services under the finance ministry forwarded it to the newly constituted board of the IFCI, which quickly concluded that there were no irregularities.
The apex court has now directed the Serious Fraud Investigation Officer, the RBI and Sebi to independently scrutinise these matters and come up with their report not later than four months from the date of the order.
Signs of change
Many things have changed since CPIL moved the Supreme Court. While Rai is no longer the chief, the government has converted its debentures into equity and owns 55.53 per cent stake in IFCI. But, the financial performance of the company is still far from satisfactory.
In a response to a text seeking his views on the judgment, Rai, said: “IFCI had accumulated losses of Rs 4,700 crore when I took over as MD and it had a positive net worth of Rs 5,500 crore when I left in 2013.”
He added the judgment was based on the material provided by IFCI officers Association, which, according to him, is an interested party. “At this juncture, IFCI is imperiled once again. The judgment would divert the attention of the management from focusing on revival,” Rai added.
An email sent to IFCI spokesperson did not elicit any response.
The decision has cast a shadow on the lender, which is struggling to get its house in order. The stock, which has vacillated aimlessly in a range over the past few years, has lost over 12 per cent since the judgment, closing at Rs 26.75 on Monday.
Even before the decision, the company’s financial performance was not impressive. IFCI reported losses of over Rs 100 crore in each of the last two quarters. “Market has forgotten the stock. There is hardly any coverage on the stock nowadays,” says the research head of a domestic brokerage.
IFCI has been able to maintain its capital adequacy in FY 2015-16 at a decent level over the regulatory norm. It has also claimed that it has “adopted strategies to shift towards fully secured lending practices, thereby increasing its capacity to absorb cyclical stress on asset quality.”
However, the gross and the net non-performing assets of the company grew in FY 2015-16 from the previous year.
Nevertheless, the management was upbeat, saying it could “earn profit ... amid the deteriorating conditions, when many of the banks have registered losses.”
In 2015-16, IFCI reported a net profit of Rs 378 crore, a fall of 32 per cent over the previous year. However, there was a catch: a significant portion of this was from investment gains. “Your company continued with the strategy of selective disinvestment of slow moving stocks. During FY 2015-16, it earned a profit of Rs 280 crore from sale of equity,” the company said in the annual report.
Further, the comptroller and auditor general says that the profits have been overstated by Rs 66.28 crore due to short provisioning in two cases involving Lavasa Corporation and Wisdom Global enterprises. The management has contended that the provisioning was adequate citing strengthening of tangible security and additional security provided. “There has been no understatement of provision or overstatement of profit. However, additional provision, as required, shall be made if the judgment by the Hon’ble Court goes against IFCI,” it says.