The IL&FS mess seems to get murkier by the day with the Serious Fraud Investigation Office’s (SFIO) probe finding a host of wrongdoings, deliberate regulatory violations and blatant hush ups by the several people in its management and its companies.

The recent chargesheet filed by the SFIO in the IL&FS matter shows that the management of its subsidiary IL&FS Financial Services (IFIN) devised an illegal strategy to lend money to its group companies in violation of the Reserve Bank of India’s (RBI) guidelines.

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According to the chargesheet, IFIN carried out lending to eight companies “without any due diligence or verification of actual requirement of funds, and without ensuring adequate security cover for these entities”.

Those charged by SFIO include former IL&FS Vice Chairman Hari Sankaran and former IFIN MD Ramesh Bawa, both of whom are under arrest.

“Investigation revealed that in case of lending to group entity i.e. IL&FS Transport Network Ltd (ITNL) in breach of RBI guidelines/directions, the management of the IFIN devised an illegal strategy for IFIN to lend the money to its group companies,” it said.

The purpose mentioned for borrowing the funds were very vague and general, revealed the investigation.

Another modus operandi undertaken by the erstwhile IFIN management was that of lending to group entities through third party vendors, the probe revealed.

“In order to do so, the books of accounts of fourteen existing borrowers or contractors of IFIN or ITNL such as Beigh Construction, GHV group, New India Structures Pvt Ltd, Avance Technologies Ltd and Empower Indian Ltd were used for onward lending to ITNL or its subsidiaries/SPVs. All the loans given to these entities have been given on the basis of letter of comfort of ITNL and no security has been taken from these borrowing entities/intermediaries,” said the chargesheet.

Such fraudulent transactions were taken up to bypass the RBI directions on group lending, the chargesheet said. The apex bank in its annual inspection report pointed out at the adverse impact of these on the Net Owned Funds (NOF) and capital to risk-weighted assets ratio (CRAR), which are critical parameters for NBFC’s continuation as a going concern.

Implicating erstwhile IFIN Managing Director, Ramesh Bawa, the chargesheet noted that the intent to deceive the Central bank was apparent from the “false assertion” made by Bawa in his letter dated July 20, 2018m whereby he said that the company had not made any fresh lending to group firms post November 2017.

The intent of the vested management in extending fresh loans to group companies of the defaulting borrowers, was to avoid recognition of the asset as a non-performing asset (NPA).

“This modus operandi led IFIN to project high asset quality and recognition of high revenue. Suppression of NPA and non-provisioning for NPA further led to show a rosy picture of the financial statement of IFIN.”

The SFIO investigation further revealed that by concealing the parameters of NPA and CRAR, IFIN was borrowing from banks, non-convertible debentures and commercial papers, and so on and prolonging its existence as a profitable company.

IFIN would further advance the borrowed funds to its borrowers who would in turn pay their outstanding interest back to IFIN, resulting in overstatement of the company’s profits.

The vicious cycle would continue and these profits formed the basis of payment of higher dividend to the holding company, ILFS Ltd. These fictitious profits, then, became the basis of higher remuneration and performance related pay (PRP) to the IFIN management and the directors drawing salary from for IL&FS.

The directors of IL&FS who were also on the board of IFIN drew a “commission and sitting fees” on the back of these fictitious profits.

“Members of the coterie, abusing their position, connived and through the fraudulent modus operandi of delaying the date for classifying the defaulting borrowers and NPA and making provision for them with a view to keep IFIN and other group companies afloat,” the chargesheet added.