The SFIO (MCA) , in its complaint, has alleged that the auditors were aware that IL&FS (IFIN) was lending to defaulting borrowers through group companies
Those who don’t Know about IL&FS (IFIN)
Infrastructure Leasing & Financial Services Limited (IL&FS) is an Indian infrastructure development and finance company Founded in 1987. Its projects include some of the largest infrastructure projects in India including India’s longest tunnel, Chenani-Nashri Tunnel, which was opened for traffic in April 2017. In April 2019, its newly constituted board informed investors that the company had 302 entities through which it currently operates, through a highly complex network of multiple business verticals. As of March 2018, the largest shareholders of IL & FS Investment services were as follows
ORIX Corporation, Japan (a part of Mitsubishi): 23%
IL & FS Employees welfare trust: 12%
Abu Dhabi investment authority: 12%
H.D.F.C Ltd: 9%
Central bank of India: 7%
State Bank of India: 6%
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The Ministry of Corporate Affairs (MCA) moved the National Company Law Tribunal on Monday (10-June-19) to bar the auditors of IL&FS Financial Services (IFIN) i.e. Deloitte Haskins & Sells and BSR & Associates from the business for five years for alleged collusion with the IFIN management and failure in reporting mismanagement.
The application filed against Deloitte, BSR, and individuals including former Deloitte Chief Executive Udayan Sen, Deloitte partner Kalpesh Mehta and BSR partner Sampath Ganesh. BSR is a KPMG network accounting firm.
The MCA’s move to bar the IFIN auditors comes after the investigation by the Serious Fraud Investigation Office (SFIO), which revealed that the auditors conspire to do something immoral, illegal, or harmful. with IFIN’s former directors in concealing information about wrongdoings of the management despite having full knowledge of the sorry state.
The tribunal has asked the auditors to file their reply by June 19. The case has been listed for hearing on June 21. The MCA has also sought to appoint a new statutory auditor for the company.
The advocate representing Deloitte told the tribunal that it was no longer the statutory auditor for IFIN. Deloitte was the auditor for IFIN till 2017-18 and BSR is currently the statutory auditor for the company. The MCA will also file a caveat (right to be heard) in the Bombay High Court and NCLAT in case auditors move these forums against the MCA and seek any relief, said the MCA lawyer.
Those who don’t know about caveat
A Caveat is a Notice given by a person, informing the Court that another person may file a suit or application against him and that the Court must give the Caveat-or (person filing the Caveat) a fair hearing before deciding any matter brought before it in the relevant case.
The application to bar IFIN’s auditors was moved under Section 140(5) of the Companies Act. The Section says that if the tribunal, either suo-motu or because of an application moved by the government or by any person concerned, is satisfied that an auditor of a company has acted fraudulently or colluded in any fraud it may, by order, direct the company to change its auditors.
In case the tribunal passes an order barring the auditors for five years, the MCA has made Institute of Chartered Accountants of India, Reserve Bank of India and Securities and Exchange Board of India respondents in the case, so that they can execute the order swiftly.
The SFIO, in its complaint, has alleged that the auditors were aware that IFIN was lending to defaulting borrowers through group companies so that they could suppress their non-performing assets (NPAs) and not provide for the bad debt.
Moreover, it alleged that the auditors failed to verify the end-use of bank finances and money raised through non-convertible debentures (NCDs) despite it being a regulatory mandate for verifying such things.
The SFIO complaint goes on to say that the auditors falsified books of accounts and financial statements of the company from FY14 to FY18 and did not report the negative net owned fund, as well as its negative capital to risk (weighted) assets ratio (CRAR) resulting in loss to investors who had invested in the company’s NCDs. The audit committee members colluded with the management and overlooked the many impairment indicators in contravention of the accounting standards and principals of prudence, the SFIO said in its complaint.
SFIO’s allegations against auditors
- Conniving with IFIN management to conceal information
- Falsifying statements of IFIN from FY14 to FY18
- Having prior knowledge of negative net owned funds and capital adequacy
- Not following auditing standards while auditing accounts of IFIN
- Knowingly signed false statements
- Did not verify end use of bank finance and NCDs
- Allowed evergreening of loans to borrowers in default.