Context:
A listed infrastructure Company and its material subsidiary came to adverse notice because of alleged siphoning off of funds. Processes, integral to the functioning of the Company, seem to have been ignored.

• In July, 2020, an FIR was filed by CBI against a listed entity, its material subsidiary, its promoter Chairman and Managing Director (CMD), its Vice Chairperson (VC), who was the CMD’s son and also a promoter, and 9 private companies for cheating, forgery and causing wrongful loss to the public exchequer between 2012- 2018 to the tune of INR 805 crores.
• The material subsidiary, a Joint Venture (JV) between the listed entity (50.5%), a Public Sector Enterprise (PSE) (26%) and a few foreign entities, was formed to modernise a busy airport in India.
• The CMD was the Chair of this subsidiary, and the VC was its Managing Director.
• As per the agreement signed between the material subsidiary and the PSE in 2006, the subsidiary was to run the airport, and share 38.7% of the revenue with the PSE as annual fees. The remaining amount was to be used for the modernisation, operation and maintenance of the airport.
• It was alleged that
  1. The subsidiary had siphoned off INR 310 crores, by showing execution of bogus work contracts with 9 private companies.
  2. The promoters of the listed entity, with criminal intention to cause loss to the PSE, used the surplus funds of the subsidiary, to the tune of INR 395 crores, to finance their other group companies between 2012 and 2018. They fraudulently created forged Board Meeting resolutions of the subsidiary, authorising to keep the reserve surplus funds as FDRs with PSU banks in a city other than the city where the subsidiary was based. Overdraft facilities and loans were availed by the Group against these FDRs.
  3. Premium retail areas of the airport were given to the family members of the promoters and employees at exorbitantly low rates, thereby reducing the revenue of the subsidiary.
  4. The funds of the subsidiary were used to book air tickets and hotel stay for family members of the promoters.
  5. They had siphoned off more than INR 100 crores by inflating the expenditure of the subsidiary, by methods such as showing salary paid to employees who were not on the payrolls of the subsidiary.
  6. The wrongful gain to the accused, mainly the promoters, was approx. INR 805 crores.
  7. The accused had also under-reported the revenue of the subsidiary during the same period, and the likely loss to the exchequer from this was approx. INR 1000 crores.
  8. The subsidiary used fake input credits for tax purposes.
• The listed entity, in a clarification on July 3, 2020 to the Stock Exchanges, stated that the FIR was registered based on unknown source of information received by CBI and that they will fully co-operate with the agency.
• A spokesperson of the subsidiary also stated that the Company was surprised about the case since it would have provided assistance, had the agency sought explanation or any document even if a preliminary enquiry had been initiated.
• As per a media report, in July, 2020, the Board of the subsidiary suggested to the Audit Committee to seek legal advice for future course of action.
• In early July, 2020, the Enforcement Directorate (ED) too registered a case against the Group, and conducted multiple raids at various locations of the Group.
• The Statutory Auditors, one of the big 4 audit firms, who were appointed on September 29, 2017, tendered their resignation as Auditors on August 13, 2020 from the listed entity and one of its Wholly-Owned Subsidiaries (WOS).
• The reason given in the resignation as Auditors of the listed entity was that they did not receive information and explanations from the Company, which was sought in 6 different communications, starting from July 6 to August 12, 2020, without which they were not able to conclude the audit of the financial statements for the year ended March 31, 2020. They also stated that in view of various matters described in their communication, including the recent events in relation to Company’s subsidiary, they had assessed the appropriateness of their continuance as Statutory Auditors of the Company in terms of standards of Quality Control, and had decided to resign.
• In the resignation letter dated August 13, 2020 to the WOS, received by the Company on August 19, 2020, they stated that the recent events in relation to Company’s subsidiary, they had assessed the appropriateness of their continuance as Statutory Auditors of the Company in terms of standards of Quality Control, and had decided to resign.
• On August 28, 2020 lenders of the subsidiary (3 big banks) red flagged the subsidiary’s account as a fraud account. They also appointed one of the big 4 audit firms to conduct a forensic audit of the accounts of this Company for the past 10 years.
• Parallelly, another major Group, with interests inter alia in airports business, showed interest in acquiring control of the material subsidiary. A consortium of foreign investors served legal notice on the listed entity, stating that the stake sale would be a breach of their agreement that they had signed in 2019.
• On August 31, 2020 the major Group acquired 74% stake in the material subsidiary, despite the legal notice. This 74% included the 50.5% of the listed entity and 23.5% from 2 other foreign entities. The listed entity, in a Stock Exchange filing, stated that it had notified the foreign investors that that the transaction documents stood terminated, and were “no longer effective and implementable”. They had also given reasons for this.
• At the end of December, 2020, the probe by CBI was not completed, and the listed Company had not finalised and published the audited financial results for FY 2019-20. Quarterly results were available on its website only till Q2 of FY 2019-20. The AGM for FY 2019-20 had also been delayed. The Company, vide a filing to the Stock Exchanges, stated that this was because the financials of the material subsidiary had not been submitted to it, due to the filing of the FIR.
• In 2019, some media reports had suggested that Ministry of Corporate Affairs (MCA) had conducted an inspection of the group companies of the listed entity, including the material subsidiary, on the basis of a whistleblower complaint.
  Points to ponder
• Were the Audit Committee members, mute spectators, while the alleged diversion of funds was taking place?
• Were the Statutory Auditors and the Internal Auditors found wanting?
• With alleged forged Board meeting resolutions, was the Board asleep at the wheel or turning a blind eye?