How IL&FS (IFIN) audit panel lived in denial deliberately

The SS Kohli-led IL&FS (IFIN) audit committee chose to live in denial, ignoring whistleblower complaints, RBI inspection reports and even best of breed industry practices to obfuscate facts and figures and generally muddy the waters. It was obvious that this was being done in connivance with the management.

Grave questions and suspect oversight are now being blamed on the S.S. Kohli-headed audit committee. The overarching probe reveals suspension of all credible power of scrutiny and lax supervision as the last mile gatekeeper. Failing to discharge its duty enshrined in the Companies Act in an impartial and unbiased manner is the single biggest issue on hand. Ineptitude and lax supervisory ability being the norm.

Response to whistleblower allegations:

The investigation team analysed the response of the audit committee to the allegations made by the whistle blower. Audit committee is required to have an oversight on the vigil mechanism of the company. From the sequence of events, it is seen that the complaint was known to the management of the company before it was taken up in the audit committee. (Complaint received in March 29 , 2017 and discussed in audit committee in December 2017). The team found that the audit committee, instead of inquiring into the allegations made in the letter, accepted the viewpoint of the management and did not make any independent assessment of allegations made.

Response to RBI Inspections:

The investigation team analysed the response of the audit committee to the points raised by RBI in its inspection reports. From the facts narrated above and the brief of the audit committee, the committee was required to ensure that the company followed the guidelines of RBI, including the various directions given by RBI from time to time.

It was seen from the minutes of the meetings that on the issue of diminution of the value of investments, including investments in the shares which were invoked as a process of recovery of the loan, were not happening timely and properly. This was pointed out by the RBI. In terms of RBI instructions, if RBI has ascertained an asset as a loss asset, then the company was required to treat the asset as Lost/impaired/written off.

In the case of TTSL shares, acquired through invocation of pledge in the Siva group loan facilities, the audit committee agreed to the decision of the management of the company to not provide for such investments in the books of accounts without any demur. In fact, it was found that in spite of the RBI's categorical reply to the company vide their letter dated September 26, 2014 wherein the RBI had disagreed with the views of the company, the audit committee did not direct the management of the company to comply - rather they abetted the fraud perpetuated by the company and its officers.

The investigation team found that the response of the audit committee to the various issues raised with regard to definition of the group companies, calculation of the net owned funds, capital adequacy ratio had been in tandem with the management's viewpoints. It did not take any independent verification, inspections, direction to enter the letter for ascertaining the truth.

The investigation while analyzing Internal Audit Report (Internal Audit Report: Quarter III -- report of FY 17-18 presented in ACM dated 29.01.2018 (FY17-18)) found that internal auditors in their report for quarter 3 of the year 2017-18, while auditing the period of December 2016 to November 2017 of Assets and Restructured Finance -- Delhi, have detected that:

• Further, another facility in case of Golden Glow Estates has turned NPA requiring income and interest reversals...
  
• They had also pointed out regarding the OCD-facility to A2Z Infrastructure Limited and a fresh facility was issued to Earth Environment Managers Private Limited in March 2017 and the corresponding FCD facility was reduced by Rs 20 crore.
  
• The above categorically points out regarding repayment of overdue loans using fresh loans.

However, no action was taken on the same by auditors/audit committee.

In the report dated May 18, 2018 (Internal Audit Report : Quarter IV -- report of FY 17-18 presented in ACM dated 28.05.2018 (FY18-19)), for ASF -- Mumbai for the period dated Oct. 2016 to Sep. 2017 and for ASF - Kolkata for the period dated March 2017 to Feb 2018, it is seen that they have pointed Advantage Raheja Hotel and Pipavav Defence and Offshore Engineering Co. Limited turned into NPA in Aug 17 which required interest/income reversal. The company replied that Advantage Raheja had been fully repaid.

Further, it had pointed out a number of overdues on facilities at Kolkata branch.

The above observation clearly proves that at times the facilities had remained overdue/non-performing, but the same were never taken up for provisioning or income reversals even up to one year.

In the light of the above facts, it is concluded that the audit committee failed to discharge the duties enshrined on it under the Companies Act read with the corresponding provisions of the RBI with regard to the registered NBFCs.

The audit committee had failed to conduct itself in an independent and impartial manner. It had failed to conduct an independent and impartial manner. It had failed to conduct an independent enquiry into the affairs of the allegations which are made against the management of the company. It had failed to obtain any professional advice from the external sources. It had failed to comply with the directions of RBI and has blatantly followed the stand of the management which was illegal ab initio.