IL&FS Financial Services' exposure to group cos breaches RBI norms in FY16-18: Newly appointed Uday Kotak-led board

Mumbai: The new board of the troubled IL&FS has found that one of the group subsidiaries, IL&FS Financial Services’ (IFIN) outstanding loans and investments to other group entities are much higher than the permissible regulatory caps for the three years ending fiscal 2018. This finding, a part of the progress report and way forward, was submitted to the Mumbai bench of the National Company Law Tribunal (NCLT) by the government-appointed board Wednesday. It comes amidst the ongoing tussle between the government and the Reserve Bank which has refused the former’s demand to open a special liquidity window for NBFCs which are hit by liquidity crunch following the crisis at Infrastructure Leasing & Financial Services (IL&FS). Governor Urjit Patel has denied that the liquidity situation in the system is that grave and has announced additional OMOs worth Rs 40,000 crore in the month to meet the cash demand arising from Diwali demand. [caption id=“attachment_5251861” align=“alignleft” width=“380”] Representational image. Reuters.[/caption] “A preliminary analysis of the financial statements and records of IFIN for the last three financial years, has found that the company had outstanding loans and investments to group companies worth Rs 5,728 crore, Rs 5,127 crore, and Rs 5,490 crore in FY16, FY17 and FY18 respectively,” the Uday Kotak-led board informed the NCLT. “Prima facie, these appear to be significantly in excess of (RBI) permissible norms, in all of these three years,” it added without quantifying the excess. IFIN is a 100 percent subsidiary of the debt-ridden IL&FS Group, which according to the board has over Rs 94,000 crore debt of which Rs 53,000 crore from banks. The board has also found that of the banks’ over Rs 4 trillion of NBFC exposure, 16 percent are to IL&FS, which is registered with RBI as a systemically important non-banking financial company, providing finance to infra projects. In its report on the progress and way forward, under which it has sought two to three quarter to resolve it, apart from finding certain irregularities in the financial dealings of the group and its subsidiaries. It said a large part of the IL&FS Group, in the past, operated as a single enterprise with no boundaries of legal entities and separate managements, which appeared to be major governance shortcomings, leading to a large contagion impact on creditors of the group. The board further said if this excess exposure is applied for calculation of capital adequacy, IFIN would have significant negative capital adequacy in each of these three years. The finding of the new board comes at a time when the RBI governor is understood to have informed the Financial Stability and Development Council (FSDC) that the liquidity problem in NBFCs is not as severe as is being projected. PTI had reported that Patel, however, assured the government that RBI would provide adequate liquidity in the system. Patel has reportedly informed the government that there was no liquidity crunch in the system, barring certain sectors and that the central bank is keeping a close watch on the financial sector. The high-level FSDC, headed by finance minister Arun Jaitley, met earlier this week to discuss liquidity issues faced by NBFCs and MSMEs. In the report, the new board said as per available records, loans to one group company in excess of Rs 1,500 crore, had been routed through eight other group entities, reflecting “adoption of circuitous transactions to circumvent regulatory prescriptions”. It further found that IFIN has an exposure in excess of Rs 900 crore to companies which are subsidiaries of associates or joint ventures of IL&FS (such as HCPL) and IL&FS Employee Welfare Trust. The group has as many as 347 subsidiaries around 40 percent of them in foreign countries. “These do not get consolidated into the accounts of IL&FS and at the same time, have been treated by the previous management as ‘internal debt’,” as per the findings. The board said the previous management did not follow due processes and transparency in pursuing various asset monetisation activities in the group. The Reserve Bank is in a row with the government to ‘protect’ its autonomy. The crisis has reached such a level that the government has initiated a discussion with the RBI to invoke the Section 7 of the RBI Act of 1934, which has never ever been used. Section 7 allows the government to direct RBI to take certain decisions in public interest. One of the bone of contentions between the two is the prompt corrective action (PCA) framework of the central bank on as many as 11 public sector banks which collectively control a fourth of the system. Under the PCA, these banks cannot lend large amounts and also cannot expand branches apart from many other restrictions. The government feels the framework has led to the current liquidity crisis in the system. It also wants a special dispensation by RBI to help NBFCs, which is facing a liquidity crisis, following default by IL&FS and its group companies. In a recent speech, RBI deputy governor Viral Acharya said governments that did not respect their central banks’ independence would sooner or later incur the wrath of financial markets. Earlier this week, following media reports that the government was planning to invoke Section 7, the finance ministry had clarified it has “nurtured and respected” the autonomy of the central bank and has been holding extensive consultations with it on many issues.