“As much as 13.64% shareholding of IL&FS is held by the employee trust, of which the principal beneficiaries are the senior management of IL&FS, including its former CMD Ravi Parthasarathy, former director Hari Sankaran and others,” stated the February 19 enforcement case information report (ECIR), which ET has seen. “The accused Ravi Parthasarathy, Hari Sankaran and others, in order to increase the fund base and investor base and to lure them into making investments at each stage and sub-stage, have created a myriad, complex and non-transparent structure and a web of companies which have been initially promoted by IL&FS and subsequently by those companies itself.”
ACCUSED FLOATED SHELL COMPANIES TO AWARD CONTRACTS: ED
A case under the provisions of the Prevention of Money Laundering Act (PMLA) has been registered against ILFS Rail Ltd, ILF Transportation Networks Ltd, Parthasarathy and Sankaran.
According to the ED, the persons involved floated shell companies to award contracts and allegedly siphoned off Rs 74 crore that was used to purchase assets. The shell companies were allegedly given a commission of 0.5% of the amount routed through them. While this case deals with subsidiaries, people with knowledge of the matter said the probe into it will widen to include IL&FS and its entire debt burden of Rs 91,000 crore.
The default by IL&FS in September roiled the markets and swamped the nonbanking finance companies (NBFC) sector, prompting the government to step in and force a change in management.
The IL&FS EWT is an unregistered entity constituted under an August 1990 indenture of trust with IL&FS as settler and Parthasarathy, former joint director and CEO Arun K Saha and DK Contractor as initial trustees.
“EWT was floated with a purpose to provide subsidised loans, housing facilities, medical, health and education relief to enlist a few, to needy employees. However, the probe has revealed that, especially post-2006 after amendment to the trust indenture was carried out, EWT has been dominated by the accused and other prominent board members,” said one of the persons cited above. “It was used to further decisions taken by them and also to profit themselves at the cost of the IL&FS group companies. Prima facie, from the transactions carried out by the trust, it looks like it was created for the purpose of creating individual wealth and our probe will focus on unearthing this.”
ED is not the only agency probing IL&FS EWT. The Serious Fraud Investigation Office (SFIO) detailed alleged irregularities in the trust in its interim report submitted to the Ministry of Corporate Affairs (MCA) in November last year.
According to the SFIO report reviewed by ET, less Rs 2.91 crore (1%) was paid toward welfare of needy employees, while Rs 280 crore was the profit realised by select employees on shares distributed by the trust. The trust has outstanding debt of Rs 500 crore.
SFIO, which is now in the process of preparing its final report, is also examining the role of a leading private bank in advancing a loan of Rs 94.76 crore. According to the agency, the security against the said loan were shares that the bank had sold to EWT. “The bank had given a secured loan with an asset coverage of less than 100%, that too against unlisted equity shares. When the loan was repaid in 2015, a fresh loan of Rs 95 crore was granted within a month against the same shares pledged as security without any fresh valuation,” according to the SFIO findings.
Meanwhile, the ED plans to write to the SFIO for a copy of the interim report. “Since they have already investigated and detailed out the irregularities in EWT, we will write to them to share their findings. This will help us to link the present case probed by us to other subsidiaries and also how EWT was misused,” said an ED official with knowledge of the matter.
“The trust, which was created for the purpose of the welfare of all the employees of the IL&FS group companies, through an amendment (carried out in April 2006), had been made a vehicle to invest into the securities of the IL&FS and group companies with the loans obtained from them and there after distributing these shares at very nominal price in a differentiated manner to some select management personnel of the group or selling the investments to a third party and distributing the sale proceeds among the same selected management personnel,” the interim SFIO report states.
According to the SFIO findings, EWT distributed around 3.1 million shares of IL&FS to select employees and managerial personnel under an employee stock option (ESOP) scheme.
“As per the resolution passed in the AGM of the IL&FS, shares were allotted by the company to the EWT in three trenches for the welfare of the employees,” said the report. “The said resolution had no reference to onward sale to employees under ESOP scheme. This is another instance of breaching of corporate governance norms.”
The trust was used as a cover to perpetuate wrongdoing, the report said.