Srei Infrastructure Finance
Second Forensic Audit Report Finds Irregularities in INR 10.798B Loans Disbursed by Srei Group Entities to IL&FS Group; Alleges Round-Tripping of Funds
Thu 02/17/2022 07:18 AM
A second forensic audit report conducted from April 1, 2016, to Sept. 30, 2020, by chartered accountant firm Saxena & Saxena, on INR 11.798 billion ($157.3 million) loans disbursed by Srei Infrastructure Finance Ltd. (SIFL) to IL&FS group, has found the loans worth INR 10.798 billion “were not disbursed in the normal course of business,” and alleged round-tripping of funds, according to two sources with direct knowledge. Continue reading for more actionable insights on Srei Group, and request a trial to access more reporting and analysis from Reorg's Asia Core Credit team.
The round-tripping of funds has resulted in evergreening of the books of SIFL and its subsidiary Srei Equipment Finance Ltd. (SEFL), inflated profits, suppressed provisioning, non-disclosure of potential NPAs, and wrongful reporting to various stakeholders, the sources said.
Out of the INR 10.798 billion loans disbursed, save for INR 2.129 billion, all the remaining loans were round-tripped back to the company, the forensic audit report concludes, according to the sources. Since the loans worth INR 2.129 billion could not be traced back to be recovered by SIFL or SEFL, the report concluded that there might be a possibility that these funds may have been diverted elsewhere, the sources added.
The lenders of SIFL and SEFL had appointed KPMG Assurance and Consulting Services LLP’s (KPMG) as the forensic auditor of SEFL for the period starting from April 1, 2016, to Sept. 30, 2020, but due to conflict of interest, transactions with respect to the IL&FS group were excluded by KPMG while conducting their audit, the sources said. Consequently, Saxena & Saxena was appointed by the lead lender of SIFL, UCO Bank, to conduct a forensic audit of the transactions related to the IL&FS group, the sources explained.
The evergreening of loans between IL&FS group entities and Srei group was also highlighted in a forensic audit report conducted by Grant Thornton, according to an Aug. 14, 2019 report submitted by the new board of IL&FS before the National Company Law Appellate Tribunal (NCLAT).
Grant Thornton’s July 12, 2019 draft forensic audit report also alleged that top employees of IL&FS Group bribed officials of credit rating agencies with facilitating discounts on villas, donations to trusts managed by rating agency bosses and gifts including football match tickets, smartwatches, shirts and coasters to retain or obtain favorable ratings.
Details of loans disbursed to IL&FS group entities that were allegedly round-tripped back to SIFL or SEFL, according to the Saxena & Saxena forensic audit report, as detailed by sources, are provided below.
The representation of the above transactions in a tabular format is shown below.
"The transactions by IFIN (IL&FS Financial Services Ltd.) with Srei group entities (for the period ended September 2018) were part of the GT (Grant Thornton) forensic report, RBI inspection report and SFIO (Serious Fraud Investigation Office) report on IFIN, IL&FS spokesperson said in an emailed response seeking comment by Reorg today, Feb. 17. “The forensic reports have been shared with regulators and lenders," the spokesperson added.
Saxena & Saxena and Srei Infrastructure Finance, Srei Equipment Finance, administrator Rajneesh Sharma, did not respond to requests for comment.
SIFL’s capital structure is below.
– Dipika Lalwani
The round-tripping of funds has resulted in evergreening of the books of SIFL and its subsidiary Srei Equipment Finance Ltd. (SEFL), inflated profits, suppressed provisioning, non-disclosure of potential NPAs, and wrongful reporting to various stakeholders, the sources said.
Out of the INR 10.798 billion loans disbursed, save for INR 2.129 billion, all the remaining loans were round-tripped back to the company, the forensic audit report concludes, according to the sources. Since the loans worth INR 2.129 billion could not be traced back to be recovered by SIFL or SEFL, the report concluded that there might be a possibility that these funds may have been diverted elsewhere, the sources added.
The lenders of SIFL and SEFL had appointed KPMG Assurance and Consulting Services LLP’s (KPMG) as the forensic auditor of SEFL for the period starting from April 1, 2016, to Sept. 30, 2020, but due to conflict of interest, transactions with respect to the IL&FS group were excluded by KPMG while conducting their audit, the sources said. Consequently, Saxena & Saxena was appointed by the lead lender of SIFL, UCO Bank, to conduct a forensic audit of the transactions related to the IL&FS group, the sources explained.
The evergreening of loans between IL&FS group entities and Srei group was also highlighted in a forensic audit report conducted by Grant Thornton, according to an Aug. 14, 2019 report submitted by the new board of IL&FS before the National Company Law Appellate Tribunal (NCLAT).
Grant Thornton’s July 12, 2019 draft forensic audit report also alleged that top employees of IL&FS Group bribed officials of credit rating agencies with facilitating discounts on villas, donations to trusts managed by rating agency bosses and gifts including football match tickets, smartwatches, shirts and coasters to retain or obtain favorable ratings.
Details of loans disbursed to IL&FS group entities that were allegedly round-tripped back to SIFL or SEFL, according to the Saxena & Saxena forensic audit report, as detailed by sources, are provided below.
- In March 2017, SIFL has disbursed loans of INR 2.50 billion to Gujarat Integrated Maritime Complex Pvt. Ltd. and INR 1 billion to Sealand Ports Pvt. Ltd., both IL&FS group entities. Subsequently, in March 2017, loans worth INR 2.80 billion were disbursed by the IL&FS Financial Services Ltd. to E Village Kendra Ltd., a related entity to Srei group, and INR 700 million worth of loans were disbursed by the IL&FS Financial Services Ltd. to Bharat Road Networks Ltd., also a related entity to Srei group. The Srei group entities - E Village Kendra Ltd. and Bharat Road Networks Ltd. - used these proceeds to repay their existing loan from SIFL of INR 2.80 billion and INR 632.3 million. The auditors could not find the use of INR 67.7 million and alleged that the funds could be diverted by the Bharat Road Network Ltd. in other companies.
- In August 2017, SIFL sanctioned a loan of INR 1.50 billion to IL&FS Transportation Networks Ltd., out of which INR 1.10 billion was disbursed. Subsequently, in August 2017, IL&FS Financial Services Ltd. sanctioned a loan of INR 1.50 billion to Attivo Economic Zone (Mumbai) Pvt. Ltd., a related company to Srei group, out of which INR 1.10 billion was disbursed. Attivo Economic Zone (Mumbai) Pvt. Ltd. used these proceeds to repay its existing loan of INR 1.10 billion to SIFL.
- In March 2018, SIFL disbursed a loan of INR 2 billion to IL&FS Transportation Networks Ltd. and subsequently, in the same period, loans worth INR 1.10 billion and INR 900 million were disbursed by IL&FS Financial Services Ltd. to Giridhan Projects Pvt. Ltd. and Sahaj E-Village Ltd., both companies related to Srei group, respectively. Giridhan Projects Pvt. Ltd. has used these proceeds to repay its existing loan of INR 1.099 billion from SIFL and E-Village Kendra Ltd. has used these proceeds to repay its existing loan of INR 900 million from SIFL.
- In March 2018, SIFL disbursed a loan of INR 2 billion to Chenani Nashri Tunnelway Ltd., a group company of IL&FS. Subsequently, a loan amounting to INR 2.050 billion was disbursed by IL&FS Financial Services Ltd. to Vistar Financier Pvt. Ltd., an investment company of Srei group. Vistar Financier Pvt. Ltd. used these proceeds to repay its inter-corporate deposits (ICD) of INR 1.938 billion to SIFL. The auditors could not trace the use of INR 112 million and alleged that it could be diverted by Vistar Financier in other companies.
- In March 2018, SIFL disbursed a loan worth INR 2 billion to IL&FS group entity Fagne Songadh Expressway Ltd. and in the same period loans worth INR 1.95 billion and INR 2.05 billion was disbursed by the IL&FS Financial Services Ltd. to Attivo Economic Zone (Mumbai) Pvt. Ltd. and Vistar Financier Pvt. Ltd., respectively. Attivo Economic Zone (Mumbai) did not pay SIFL or SEFL in March 2108, but the auditors noted a loan worth INR 2.30 billion was paid to SIFL by Attivo Economic Zone (Mumbai) in January 2018.
- On Dec. 30, 2017, SIFL disbursed a loan of INR 1 billion to IL&FS Energy Developments Company Ltd. for general corporate purposes for the period of 6 months. However, the loan was repaid by IL&FS Energy Developments Company Ltd. within one month, on Jan. 30, 2018. There were no adverse findings with respect to this loan, the auditors noted.
The representation of the above transactions in a tabular format is shown below.
"The transactions by IFIN (IL&FS Financial Services Ltd.) with Srei group entities (for the period ended September 2018) were part of the GT (Grant Thornton) forensic report, RBI inspection report and SFIO (Serious Fraud Investigation Office) report on IFIN, IL&FS spokesperson said in an emailed response seeking comment by Reorg today, Feb. 17. “The forensic reports have been shared with regulators and lenders," the spokesperson added.
Saxena & Saxena and Srei Infrastructure Finance, Srei Equipment Finance, administrator Rajneesh Sharma, did not respond to requests for comment.
SIFL’s capital structure is below.
|
03/31/2021 |
EBITDA Multiple |
|||
|---|---|---|---|---|
|
(INR in Millions) |
Amount |
Maturity |
Rate |
Book |
|
|
||||
|
NCDs |
24,028.1 |
|
|
|
|
INR Term Loans from Banks |
20,951.7 |
|
|
|
|
Foreign Currency Loans |
9,027.8 |
|
|
|
|
INR Term Loans from Financial Institutions |
15,444.8 |
|
|
|
|
Foreign Currency Loans from Financial Institutions |
11,460.8 |
|
|
|
|
Working Capital |
196,103.3 |
|
|
|
|
Collateral Borrowings |
4,045.1 |
|
|
|
|
Long Term Infrastructure Bonds 1 |
386.7 |
|
9.000% |
|
|
Foreign Currency Loans from Banks |
3,058.2 |
|
|
|
|
Foreign Currency Loans from Financial Institutions |
2,393.3 |
|
|
|
|
Inter Corporate Deposits |
10.5 |
|
|
|
|
Subordinate Perpetual Bonds |
4,719.3 |
|
|
|
|
Subordinate Bonds |
21,470.4 |
|
|
|
|
Subordinate Loans |
1,663.4 |
|
|
|
|
2260.1 |
356.3 |
|
|
|
|
Total Secured Debt |
315,119.7 |
|
||
|
NCDs |
21.3 |
|
10.000% |
|
|
Total Unsecured Debt |
21.3 |
|
||
|
Total Debt |
315,141.0 |
|
||
|
Less: Cash and Equivalents |
(4,351.0) |
|||
|
Net Debt |
310,790.0 |
|
||
|
Plus: Market Capitalization |
4,175.6 |
|||
|
Enterprise Value |
314,965.6 |
|
||
|
Operating Metrics |
||||
|
LTM Revenue |
28,531.8 |
|||
|
|
||||
|
Liquidity |
||||
|
Plus: Cash and Equivalents |
4,351.0 |
|||
|
Total Liquidity |
4,351.0 |
|||
|
Notes: 1. Maturity Through 2027 |
||||
– Dipika Lalwani
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