MCA seeks to attach personal, financial assets of 9 former IL&FS executives

The Ministry of Corporate Affairs, based on a Serious Fraud Investigation Office (SFIO) report on Infrastructure Leasing & Financial Services (IL&FS), moved the National Company Law Tribunal (NCLT) on Monday to attach the personal property and financial assets of nine former senior executives of the company. 

The two-judge Bench of Justice VP Singh and Justice Duraiswamy in its interim order on Monday, however, declined the plea amidst strong arguments by the former directors’ legal representatives. Instead, the tribunal directed the nine former executives to publicly disclose their financial positions to the court in three weeks. These include property, financial investments, bank accounts and lockers. 

The NCLT also barred the former directors of IL&FS from “creating third-party rights, mortgaging or alienating movable and immovable assets fully or partly owned”. It also said the former officers could not part with their shares in the IL&FS group or in any subsidiary of the group, until further orders. 

The nine executives include IL&FS former non-executive chairman Ravi Parthasarathy, vice-chairman Hari Sankaran, as well as Arun Kumar Saha, Vibhav Kapoor, Ramesh Bawa, Pradeep Puri, S Rengarajan, K Ramchandran, and Mukund Sapre. 

Sanjay Shorey, director of legal prosecution at the MCA, had moved two applications before the NCLT on Monday morning. 

The first application was about the inner workings of the group and mismanagement by IL&FS senior leadership. Shorey told the tribunal, “The SFIO investigation report tells us the manner in which siphoning and diversion of funds took place and people responsible. Six names are prime suspects…. These were the decision makers and controlling the will and mind for the group and its subsidiaries.”

The MCA pleaded for the tribunal to include six names as respondents, excluding Parthasarathy, Sankaran and Saha, who were already made respondents in the main petition against IL&FS which was moved by the MCA in October.   

The NCLT accepted MCA’s first application and directed them to include the six names as part of the case as respondents along with the other three. 

The second application was to attach the personal property and financial assets of the nine former executives. 

Counsel for Hari Sankaran said, “Many of the allegations are generalised and not specified…. This is not a case of promoters taking public money and running away. We are only trying to dispel the notion that the Rs 910-billion debt was siphoned, but went into assets such as roads and power plants. As it happened, these projects didn’t work out. But to jump to a conclusion that this is fraud is huge.”

Last month, after the NCLT permitted the government to take over IL&FS once it began to default on its debt obligations, the MCA had noted there were 347 companies within the IL&FS group (not including the holding company). 

Through the three-hour long hearing, Shorey revealed that over 40 companies that were listed as part of IL&FS’ holding structure at the end of September, have ceased to be part of the group. 

When asked whether these companies were wound up, liquidated or separated, Shorey stated that with the help of SFIO they hope to file a detailed affidavit on the matter within 15 days. The SFIO has raised many allegations against the nine directors. 

The first is that the nomination and remuneration committee of the IL&FS board was in contravention of the limits prescribed in the Companies Act, as the remuneration of executives kept growing in the last few years, and that too disproportionally to that of regular employees’ even while the company’s performance was slipping.  The second allegation raised is that regulations of the Companies Act were circumvented in case of IL&FS Employee Welfare Trust, wherein the trustees of the employee trust were the main beneficiaries as compared to regular employees, the government argued. 

The third allegation levelled against the nine executives is that since many of them functioned on the holding company’s board and on the boards of many subsidiaries, associate or joint-venture companies, there was conflict of interest. 

The “subsidiaries were operating as if they held the holding company as supreme. This is because the holding company was responsible for raising funds,” said Shorey. 

Further, Shorey said creditors continued to lend to IL&FS without adequate due-diligence, while only looking at the company’s good but problematic “credit rating”. This “circuitous” use of funds “routed” loans within the same day to make repayments and evade Reserve Bank of India guidelines.

If IL&FS gave a loan to a subsidiary and if the latter defaulted on the loan, it would reflect as a non-performing asset in IL&FS’ profit and loss statement. 

There are allegations against the audit committee of the board as “profit was fabricated,” amongst other financial statement entries, argued the government. 

The NCLT will hear the matter next on January 16, 2019. 

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