The banking regulator is looking into potential internal lapses in monitoring IL&FS and its units after a federal probe agency pointed to oversights that may have played a role in causing the localised debt problem at the infrastructure financier to snowball into an industry-wide crisis.
“The central bank has begun investigating internal lapses in regulating IL&FS and IFIN,” said a source close to the development. “In its past audit reports, the regulator had mentioned the lapses but failed to take appropriate actions. For the first time, an investigating agency has questioned the regulator.”
Mint Road is looking at its own processes related to the IL&FS oversight after observations by the Serious Fraud Investigation Office (SFIO), which in its charge sheet suggested the Reserve Bank of India (RBI) conduct an internal probe. It also suggested the RBI take suitable policy measures to prevent such fraudulent action.
RBI did not respond to an email query.
In its inspection report 2016, RBI had observed that although the leverage of IL&FS stood within the prescribed limit of 2.5 times, the group’s leverage stood higher at 7.14, which was a matter of concern. A copy of that report has been seen by ET. RBI had asked the company to submit a time-bound action plan for reducing the group leverage ratio.
The report talked about deficiencies in credit appraisal while giving loans to group entities.
SFIO, in its charge sheet, said that RBI had repeatedly pointed out the non-compliance with group exposure norms and wrong calculation of Net Owned Funds (NOF) in its Inspection Reports for the year 2015 onwards. But no penalties were imposed during the period and IFIN was allowed to continue its operations without any corrective action.
SFIO said in the charge sheet that action at the right time may have prevented the matter from becoming as widespread as it now is. The charge sheet also said that IFIN did not disclose the negative NOF amount as assessed by the regulator for FY15, FY16 and FY17 in its financial statements.
RBI’s inspection report said that IL&FS and its group entities followed a unified memorandum for approvals on transactions, bid submissions, advisory services, investments, and loans. Irrespective of the value of transactions, all approvals for the company and its subsidiaries were given by directors and chairman of the company.
“As a matter of good corporate governance, the designation of the approvers should be mentioned in the document instead of names. A committee of directors of individual group entities should be the approver of high-value transactions instead of individuals,” said the RBI’s inspection report.
RBI had also observed that the investment policy did not cover classification of investment as current or non-current, value of investments and identification of investments as non-performing investments. Also, compliance with the central bank’s guidelines was not part of the RBI audit.
As on March 31, 2015, RBI said that IL&FS Financial Services’ reported owned fund of Rs 4,353.23 crore was assessed at Rs 3,461.80 crore. The difference of Rs 891 crore was due to reduction of premium of redeemable preference shares of Rs 400 crore from free reserves, identification of additional provision for investments of Rs 250 crore, and reversal of interest accrued on investments of Rs 182.5 crore.
Preference shares that carried a premium were redeemable in 2021. The total premium collected by the company on the preference shares amounted to Rs 400 crore, which was also outstanding as on March 31, 2015. RBI said that since the preference shares were redeemable, the same was not considered to be part of the free reserves.
The new IL&FS board led by Uday Kotak had taken over in October and a resolution process is underway. The board is seeking to sell assets in sectors such as roads, energy, and financial services to reduce outstanding debt, which stands at roughly Rs 1 lakh crore.
Source- Economic Times.