“The company had an elaborate end-use policy, which stipulated the form and manner in which the borrower had to submit the substantive proof regarding the usage of the funds borrowed from the firm. The probe team found that the end-use of the funds had to be as defined in the Credit Approval Memorandum and as per a format enclosed, by the statutory auditor of the borrower,” the charge sheet said. However, on analysis of the end-user certificates, it was found that the certificates gave a very general usage. “Accordingly, it is concluded that the loans were not monitored for their proper end use,” added the charge sheet.
In addition, the company did not follow its own elaborate policy of security classification of loans. For example, a movable property was considered to be secured only after an ‘instrument of hypothecation’ was created. And a loan was considered to be secured only if the ‘instrument of hypothecation’ was created in the favour was IL&FS.
However, the investigation has found that in most of the cases where accounts have been classified as NPAs in September-October 2018 and accounts that were repaid from new lending (evergreening), there was no deed of hypothecation for any movable property. Even when the loan was not securitised within six months, the same was continued to be considered as secured.
In the case of assignment of receivables/future cash flows, the loan is considered secure if the predictability and sustainability of the cash flows have been established in the process of credit evaluation. When the securitisation was done on account of receivables/future cash flows, the predictability and sustainability of the cash flows were never established in credit evaluation. The above process led to a misrepresentation of the firm’sbook of account.