Forensic Audit Report of GTL Infrastructure Ltd by Chokshi & Chokshi LLP, Chartered Accountants, Mumbai.
INDEX
This is a confidential document.
It provides an index of the report with page numbers.
It includes:
Acronyms & Abbreviations.
Introduction, Background.
Executive Summary.
Audit findings related to:
End use of Promoter's Contribution.
Diminution in the value of Investments.
Payments to related parties.
Valuation of Telecom Towers.
Impairment of Fixed Assets.
Outstanding debtors, Legal proceedings/Claims/Arbitration award and amounts written-off.
Write-off of Capital Advance to certain parties.
Operation in bank account - TRA & Non-TRA.
Disclosure of Related party transactions with GTL Ltd.
Reply to the Canara Bank's letter and Secretarial Observations.
Exhibits 1 to 18 are included.
ACRONYMS & ABBREVIATIONS
List of Acronyms & Abbreviations used in the report
Audit: Forensic Audit
Audit Report: Forensic Audit Report
Bank: Union Bank of India (UBI)
Borrower: GTL Infrastructure Ltd. & Chennai Network Infrastructure Ltd.
C&C: Chokshi & Chokshi LLP
CNIL: Chennai Network Infrastructure Ltd.
FY: Financial Year
GIL: GTL Infrastructure Ltd.
MCA: Ministry of Corporate Affairs
NCD: Non-Convertible Debenture
NCLT: National Company Law Tribunal
ROC: Registrar of Companies
TOR: Terms of Reference
%: Percentage
Lenders: Consortium Member Banks
INC: Installation & Commission Certificate
SBI: State Bank of India
BOB: Bank of Baroda
FCY: Foreign Currency
RTL: Rupee Term Loan
EB: Energy Board
CMS: Cash Management Services
DSRA: Debt Service Repayment Agreement
LC: Letter of Credit
HO: Head Office
TRA: Trust & Retention Account
SCB: Standard Chartered Bank
UBI: Union Bank of India
BOI: Bank of India
CDR: Corporate Debt Restructure
SDR: Strategic Debt Restructure
INTRODUCTION
Preamble:
Union Bank of India appointed Chokshi & Chokshi LLP to conduct a forensic audit of GTL Infrastructure Ltd. & Chennai Network Infrastructure Ltd.
The appointment was made vide letter dated April 06th, 2018, and accepted by C&C vide audit engagement letter dated April 07th, 2018.
Terms of Reference (TOR):
The period covered under the Forensic Audit is from January 01st, 2012 to March 31st, 2018.
The scope of the audit includes:
Analysis of the company's Balance Sheet with emphasis on Fund Flow.
Checking accounting practices and adherence to accounting standards.
Verification of Revenue from Operations including Sale Order, Invoice and Controls in the Billing Process.
Analysis and verification of purchases, major expenses, and related documentation.
Review of transactions with sister concerns/group companies.
Review of sales and debtors.
Checking of Fixed Assets, Capital Work in Progress and Maintenance of Fixed Assets Register.
Verification of investments with focus on subsidiaries detailing shares held, acquisition cost, book value, and market price.
Audit of receivables: details of stock/receivables, realizable values, and accounting practices.
Review of key ratios like Debt-Equity, Asset to Turnover, Stock to Turnover, Current Ratio, Contingent Liabilities etc.
Verification of other current assets including loans and advances (all related parties).
Verification of sale price, agreement for sale, and material movement.
Review of cash and bank balances.
Review of minutes of Board Meetings and Internal Audit System.
Review legal proceedings and statutory compliances.
Special attention on transaction from non TRA accounts and comment on amount transferred for non-operational purposes from such non TRA Accounts.
Any other scope in connection to conduct of forensic audit.
Verification of all claims lodged by the company along with amount and stage (with client/arbitrator).
Ageing of Claims Pending with arbitrator.
Details of arbitration awards, along with details of arbitration lost by the company.
Details of arbitration awards challenged by the company in court and the present status of the same.
TOR excludes examination of account of Joint Ventures/Subsidiaries/ Associates/Related parties/ SPVs/Group Entities, etc. Adherence to the pre & post disbursement procedures of the lenders.
Audit Approach:
The 'Forensic Audit' covers a broad spectrum of activities with terminology not strictly defined in regulatory guidance, and accordingly, it is subjective.
The focus of audit is fact finding based on the defined process.
The audit process includes identification of areas to be verified based on the ToR and applying various procedures to obtain evidence for reporting facts.
The Forensic audit has been performed in accordance with standards and practices for Forensic Audit Engagements as practiced normally and considered relevant in the given situation.
The approach in the process and procedures adopted for such audit are subjective and may vary from each individual perspective.
No opinion, warranty and/or guarantee on the findings is expressed.
Procedures and observations have been identified to the best of our knowledge and belief in the circumstances.
The audit has been conducted on test checks considered relevant with an investigative mindset.
The audit has been conducted based on the extracts of trial balance, ledger accounts, bank book and other reports generated by borrower officials from Oracle Financials System, and provided to us in a phase manner during course of audit, which has been relied upon.
Explanations from borrower officials have been sought wherever narrations are not self-explanatory.
Data/information available in the public domain has been considered.
Matters requiring clarification were discussed with concerned officials during the course of audit and on completion of the audit, draft observations forming part of this report had been shared with them.
The borrower's explanations in regard to business sensitivity and confidentiality within the business environment were relied upon.
The responses provided by the borrower to the draft observations have been considered while finalizing this report.
The audit engagement has been performed in good faith, disclaiming all warranties, representations and/or conditions either express or implied.
Various circulars of Reserve Bank of India (RBI) have been referred during the course of the audit wherever felt necessary.
Diversion of funds has been defined as:
a. Utilisation of short-term working capital funds for long-term purposes not in conformity with the terms of sanction;
b. Deploying borrowed funds for purposes/activities or creation of assets other than those for which the loan was sanctioned;
c. Transferring Borrowed funds to the subsidiaries/Group companies or other corporates by whatever modalities;
d. Routing of funds through any bank other than the lender bank or members of consortium without prior permission of the lender;
e. Investments in other companies by way of acquiring equities/debt instruments without approval of lenders;
f. Shortfall in deployment of funds vis-à-vis the amounts disbursed/drawn and the difference not being accounted for.
Limitations of Audit:
Fixed Asset register was provided in spreadsheet form and was verified for agreement with the books of accounts.
Installation & Commission certificate (INC) copies were provided on sample basis.
Existence of the various towers located in India was relied on lender appointed third party report.
The value of towers was relied on the audited financial statements and we have not tested for impairment being technical matter.
Correlation with the audit observations herein, may be a matter of judgment, and we shall not under any circumstances whatsoever be bound in any manner to provide any clarification/s or comments thereto.
We shall not be under any obligation whatsoever to change, modify, update and/or revise our report to include subsequent events and/or transactions, unless the Bank separately engages us to do so in writing.
We shall not have any responsibility towards the appointing agency after completion of the FA and after this report is submitted to the appointing agency.
The scope of our audit is as per ToR and not guided by any circular, notification released by any regulator/ quasi regulator.
Our report is based on the verification of data/information provided to us on various dates during the course of audit and hence does not cover subsequent Updation, if any, in the aforesaid data/information.
In view of limited period of audit and availability of information, the possibility of additional observations through a detailed verification of these transactions cannot be ruled out.
Our report cannot be considered as definitive pronouncement.
Report Distribution and Restrictions:
The report is submitted to the Bank pursuant to the engagement letter dated April 06th, 2018, and the acceptance cum audit engagement letter dated April 07th, 2018.
The report is strictly confidential and not available for distribution in the public domain.
It cannot be circulated, published, quoted, or referred to without prior written consent.
It is for internal reference by the lenders only, and clarifications can be sought only by the lenders.
No other party/entity can seek clarification, cross-examine, or hold us responsible for reliance on the report.
The firm or its partners/employees/consultants shall not be responsible/answerable to any party who may choose to rely on the report.
They shall not be liable for any costs, charges, expenses, damages, losses, and/or liabilities incurred by any party as a result of distribution/circulation/reproduction of the report.
We shall not be responsible for any damage caused to any party if our report is considered as a base for evidence.
We shall not be party in/to any proceedings initiated by the appointing agency against the Borrower.
Our services stand completed on submission of this report, which is neither intended for nor should be considered a substitute for legal advice or opinion.
Details of the firm and partner are provided, along with the place and date of the report (Mumbai, Jan 31st, 2020).
Documents Provided
List of documents provided, is available in (Refer Exhibit - 1).
BACKGROUND
Facts and Background:
GTL Infrastructure Ltd. was incorporated in 2004 and belongs to the GTL group.
It is an independent telecom tower company in India.
The company provides passive infrastructure to telecom operators (Telcos) for hosting their active network components.
GTL Infrastructure Ltd. is IP-1 registered with the Department of Telecommunications, India.
The business model involves building, owning, operating, and maintaining passive telecom infrastructure.
Chennai Network Infrastructure Limited (CNIL) acquired tower business of 17500 towers from Aircel Ltd. in FY 2009-10.
CNIL merged with GTL Infrastructure Ltd. on Dec 22nd, 2017, with the appointed date being Apr 1st, 2016.
Business Environment:
From Jan 1st, 2012 to Mar 31st, 2018, the Borrower/Company brought out various disclosures to Stock Exchanges, Banks/FI's about the telecom business activity, indicating increase/decrease of tenants, reduction of costs, and Corporate Debt Restructuring (CDR).
External events such as 2G telecom industry issues, cancellation of 122 2G licenses by Supreme Court, operators consolidation, business shutdown by certain operators such as Tata-Telenor-Sistema-RCom, contractually committed ROFR cancellation by Aircel Ltd., voluntary liquidation by Aircel Ltd. led to reduced profitability of the borrower.
Shareholders Details (As on Mar 31st, 2018 post merger CNIL):
Banks & Financial Institutions- Shareholding (as on Mar 31st, 2018):
Central Bank of India: 94,21,54,365 shares (7.77%)
Union Bank of India: 87,47,69,676 shares (7.21%)
Indian Overseas Bank: 67,00,32,490 shares (5.53%)
Bank of Baroda: 66,20,87,739 shares (5.46%)
ICICI Bank Ltd: 54,85,75,037 shares (4.52%)
Canara Bank-Mumbai: 51,91,27,403 shares (4.28%)
Bank of India: 45,51,76,703 shares (3.75%)
Punjab National Bank: 43,75,64,781 shares (3.61%)
Oriental Bank of Commerce: 40,56,01,631 shares (3.35%)
Andhra Bank: 37,40,17,637 shares (3.08%)
IDBI Bank Limited: 33,54,79,953 shares (2.77%)
Axis Bank Limited: 22,89,52,339 shares (1.89%)
State Bank of India: 21,83,00,304 shares (1.80%)
Dena Bank: 4,81,01,194 shares (0.40%)
HDFC Bank: 200 shares (0.00%)
Indian Bank: 8,29,80,101 shares (0.68%)
Sarswat Bank: 8 shares (0.00%)
Syndicate Bank: 10,00,00,000 shares (0.82%)
Karur Vysya Bank: 1,34,33,333 shares (0.11%)
Vysya Bank: 400 shares (0.00%)
UCO Bank: 2,78,85,528 shares (0.23%)
United Bank: 11,27,03,703 shares (0.93%)
Vijaya Bank: 1,77,86,263 shares (0.15%)
Total: 7,372,330,104 shares (60.80%)
Directors' details (as on Mar 31st, 2018):
Mr. Manoj Tirodkar
Mr. N. Balasubramanian
Mr. Milind Naik
Dr. Anand P. Patkar
Mr. Charudatta K. Naik
Mr. Vinod B. Agarwala
Mr. Vijay M. Vij
Mrs. Sonali P. Choudhary
Lenders details:
List of Lenders and their outstanding post-merger with CNIL, comments on JLF/observations from statutory and concurrent auditors report do not indicate existence of fraud/diversion of funds.
(Rs. in crore) Outstanding as at Mar 31st, 2018:
Indian Overseas Bank: 418.62
Punjab National Bank: 237.18
Corporation Bank: 161.18
Union Bank of India: 504.61
Bank of Baroda: 349.73
Oriental Bank of Commerce: 210.93
Andhra Bank: 210.37
Bank of India: 191.23
Central Bank of India: 486.09
Canara Bank: 277.70
IDBI Bank: 154.12
Vijaya Bank: 17.32
State Bank of Bikaner & Jaipur: 8.44
Indian Bank: 52.07
State Bank of India: 106.64
State Bank of Patiala: 16.82
State Bank of Travancore: 16.64
United Bank of India: 77.90
Dena Bank: 31.11
Axis Bank: 105.24
Life Insurance Corporation of India: 218.98
ICICI Bank: 312.35
DEG (EUR 75,00,000 @ 80.15394): 62.75
Total: 4,228.03
Regulatory Fillings:
The various information about Statutory filings in regard to modified business plans and licensing, the Listing related disclosures to SEBI and Stock Exchanges and reporting of extra ordinary events, ROC filings, tax filings, tax assessments, Settlement Commission Order, tax refund's, disclosures about merger, related party transactions, arm's length pricing, reporting's on going concern being reported upon, within the minutes of the Board of Directors, AGM, reports by various Internal/External auditors during the period from Jan 1st, 2012 to Mar 31st, 2018 are available.
Current Status:
The CDR has been implemented from Jul 1st, 2011 and the SDR has been invoked from Sept 20th, 2016.
Post implementation of SDR, the total debt exposure of the borrower with the Financial Institutions as of Jun 30th, 2018 is Rs 4,144/- Crore.
The fair enterprise value of the borrower is Rs. 2410 crore as per valuation report dated May 3rd, 2018 provided by the bank.
the offer of Rs 2400 crores by BoML –EARC has been accepted for the proposed sale.
The borrower has also participated in the NCLT and other legal process for recovery of its claims from customers aggregating Rs. 14,881/- crore, which is under process.
EXECUTIVE SUMMARY
The summary of the observations:
End use of promoter's contribution: The borrower received the promoter's contribution in the Trust & Retention Account ("the TRA A/c) i.e. Collection Account from investor i.e. Global Holding Corporation Ltd., which was inter alia utilized for making payments for network related services to GTL Ltd. As per the transfer pricing report/tax assessment order, the same were indicated to be at arm's length during the ordinary course of business.
Diminution in value of Investments: No provision was made for diminution in the value of investments in Chennai Network Infrastructure Ltd. (CNIL) via trust and provision for investment in Global Rural Netco Ltd (GRNL) was made only in FY 2014-15. The book value per share of CNIL was showing decreasing trend during the audit period.
Payment to related party for services obtained: The borrower had entered into an agreement with GTL Ltd., a group company for providing operation and maintenance services. As per the Audited Financial Statements of GTL Ltd., the borrower was one of the major customers of the GTL Ltd. Based on sample verification, it was observed that the borrower had made advance payment aggregating Rs. 236.58 crore to GTL Ltd. In respect thereof, out of 164 invoices, 157 invoices aggregating sum of Rs. 229.05 crore have been received and accounted within 90 days.
Lower valuation of Telecom Towers by insurance advisory report: As per the Audited Financial Statements for FY 2016-17, the Telecom towers were valued at Rs. 3181.41 crore, whereas as per the lenders' insurance advisory report (February 2018), the towers were insured based on the