Chanda Kochhar, the former ICICI Bank CEO, may not be the only high profile name to suffer a bonus clawback much longer. The former directors of the crisis hit Infrastructure Leasing & Financial Services (IL&FS) and two group companies, IL&FS Transportation Networks India (ITNL) and IL&FS Financial Service (IFIN), may soon find themselves in the same boat. The government has been mulling this move for about a month now, after the Serious Fraud Investigation Office (SFIO) discovered instances of financial mismanagement at the debt-laden group, but now the IL&FS board has reportedly also joined the bandwagon.
Sources familiar with the developments told The Economic Times that the board is evaluating the option of calling back all bonuses and benefits paid to former directors - including nominees and independent directors - of the three companies mentioned above for the five-year period from 2012-13 to 2017-18. The board expects to recover over Rs 10 crore from each director and as much as Rs 2 crore from each independent director per year.
The clawback would be invoked under Section 199 of the Companies Act, which allows a company that's required to restate its financial statements due to fraud or non-compliance with the law to recall any excess remuneration, including stock options, given to directors for the period under review. The board furthermore plans to file charges against the former directors for accounting fraud.
The SFIO probe had kicked off last October, a day after the Centre superseded IL&FS' board and replaced it with a new one headed by Kotak Mahindra Bank managing director Uday Kotak. A key trigger for the probe was the fact that the infrastructure financing giant, sitting on a debt pile of Rs 91,000 crore, had been paying dividends and huge managerial pay-outs regardless of the looming liquidity crisis. In a court application in April, the SFIO had reportedly cited other misdemeanours by former IL&FS board members that amounted to misuse of public money, including funding borrowers to prevent their loans from turning bad, getting personal favours in exchange for sanctioning loans and enriching themselves with perks.
If the proposal is cleared, the names likely to be on the bonus clawback hitlist include Hari Sankaran, former vice-chairman and MD of IL&FS anf the company's former joint MD and CEO Arun Kumar Saha, apart from former independent directors such as R.C. Bhargava and S.B. Mathur. The SFIO has already arrested Sankaran followed by Ramesh Bawa, former IFIN MD and CEO.
However, the clawback option can be invoked only after the company completes the reopening and recasting of its books of accounts, as proposed by the Ministry of Corporate Affairs and approved by NCLT under Section 130 of the Companies Act . However, after Sankaran unsucessfully challenged the decision in NCLAT, he had moved the apex court, which stayed the process because the NCLAT had ordered the reopening of the books ex parte. Late last month, IL&FS reportedly approached the vacation bench of the top court with a plea for the order to be vacated so that the accounts be restated.
Meanwhile, according to Moneycontrol, Grant Thornton submitted its final forensic audit report on IL&FS the new board last week, in which it found 107 instances of loan evergreening worth Rs 10,264 crore as well as 20 instances where loans worth Rs 1,827 crore were given to companies without any security from the borrowers.
For instance, the auditor found indirect links between Bawa and the Silverglades Group and Ansal Group, which were provided loans to the tune of Rs 487 crore. Moreover, loans were sanctioned to Silverglades without any collateral. In 73 cases, despite negative assessment of borrowing firms, loans had been doled out to them on being approved by the company's director. Bawa reportedly also failed to disclose his investments in AAA Infosystem and AAAB Infrastructure, which may be a violation of the Companies Act.
So the big question now is whether IL&FS will end up making its former directors accountable for such malpractices or not. Irrespective of the board's decision, there is no denying that the country is taking steady steps towards hauling up errant top executives. The RBI, for instance, recently introduced guidelines for the banking sector executives. There were also disclosures pertaining to declaring CEO pay ratio. An important change is that ESOPs have been included in the pay matrix, which the apex bank will review. These rules are expected to become a template for all of India Inc so corporate honchos have to be a whole lot more careful here on.
(Edited by Sushmita Choudhury Agarwal)