 Hello and welcome to NewsClick. I am Paranjoy Gohatakurtha and with me here in the studio I have independent analyst who closely tracks the banking sector in this country. I am happy to welcome once again Himindra Hazari. Recently we had a series of four discussions. We looked at the ICICI Bank scandal involving Mrs. Chandakochir. We looked at the infrastructure leasing and financial services group, the IL and FS group which is again a big scandal. Then we looked at two banks that are not so closely scrutinized. Gohatak Mahindra Bank and Yes Bank. We start another series of conversations with Mr. Hazari and today's conversation looks at the IL and FS group with HDFC, originally Housing Development and Finance Corporation which is India's premier mortgage financier and it was a co-founder of the infrastructure leasing and financial services which is as you know a sprawling group with many subsidiaries and associates. Mr. Hazari, let me ask you to summarize what is contained in the interim report on ILFS and its subsidiaries dated the 30th November 2018 by the Serious Fraud Investigation Office which works under the Ministry of Corporate Affairs and this report has been given to the National Company Law Tribunal and it was leaked to the media by MoneyLife headed by Sushit Adelal. If you could summarize and explain what this report has stated and its links with HDFC. So I will focus on the links to HDFC because for the first time the public and analysts like myself came to know how HDFC had reduced some of its stake in ILFS. Now it was one of the founding members, founding institutions of ILFS and in FY 2012 HDFC had about 10% stake as well as it had maintained the director's anomaly since ILFS was founded in 1987. Now what the SFIO found out was that in FY 2013 that out of the about around 12 million shares that HDFC had they sold 800,000 shares to the Employees Welfare Trust of ILFS. Now it was a rather strange transaction in the sense that one the trustees of the Employees Welfare Trust were all of them were senior managerial personnel of ILFS. Normally a trusteeship should you know they should be totally separate from the management of the company. Now the SFIO they had documented various transgressions the way this EWF was working. And let's name some of the names Mr. Vibhav Kapoor, Mr. K. Ramchand, Mr. R.C. Bhava who were senior executives in different companies in the ILFS group and they were trustees including our trustee chairman Mr. Kapoor was the chairman. Yes please continue. So as of March 31st 2012 HDFC had about 12 million shares the total value was 83.5 crores. Now when they sold about 800,000 shares at a price of say 1184.5 they made a huge profit because the cost of their holding was only 67.4. Their profit you has was estimated at 89 crore rupees. Exactly so just by selling a small fraction of their holding they had recouped their entire cost of their entire portfolio of ILFS. However and this is where the it becomes very interesting is that the Employees Welfare Trust even prior to this transaction as documented in the SFIO report it had insufficient cash flows from its own operations to surface its own debt. So the question arose how are they going to actually purchase these shares which you know they were acquiring from HDFC and now it turns out that HDFC fully financed this transaction by extending a 180-day loan at a coupon rate of 11% to the Employees Welfare Trust. Now what is unusual? This does this imply this rather unusual transaction that has been commented upon by the serious fraud investigating office what does it imply some sort of a collusion some sort of what should I say could there be possible conflicts of interest in the manner in which this transaction took place? You see there are conflicts of interest because here's HDFC which had a strategic stake this is a strategic stake in ILFS it is divesting part of its strategic stake and it is fully financing it and it's booking a profit now we know that that profit is really a paper profit actually because that was fully funded by HDFC as a loan. So it's just a notional kind of a transaction? It is actually a real profit but the fact is you have funded the entire profit yourself. Now what is interesting is and again this is all documented in this report is that when anyone gives a loan against a security and here the security was the shares that HDFC had sold to the Employees Welfare Trust the value of your loan should be much less than the security that you hold that is the margin the lender keeps the you know any prudent lending against a security the value of the security will be more than the value of the loan now here it transpires that HDFC in its own valuation had valued the securities at less than the value of the loan. Now interestingly there are two remarks that have been made you say it is not very assuring that the party which has purchased the shares was managed by what you describe as a crony club of senior managers in the Infrastructure Leasing and Financial Services Group and secondly you raised the question of the unusual circumstances of the transaction whether the board of the HDFC which is headed by Mr Deepak Parik whether or not it should have been apprised and given its formal approval for that transaction and it's not just Mr Deepak Parik who's the chairman of the board of directors it's a very very eminent panel Mr Keshav Mahindra is there Mr Dien Ghosh the former head of the state bank of India Mr Siddish Patel Mr B. S. Mehta Mr Dien Sukthankar Mr S. A. Davey who was with the Securities and Exchange Board of India Mr Ram Taneja Dr Bimal Jalan former governor of the Reserve Bank of India member of parliament Dr J. J. Irani managing director of Tata Steel Ms Renu Soodkarnaad Srinivas Raghavan and about Dr Ram Taneja Nasir Munji and not last but not the least Mr Keke M Mistry the vice chairman as chief executive officer now explain this that these are eminent persons and as per the corporate governance what should I say norms followed by the HDFC then this transaction they should have been aware of this. Now that is the question that I ask is that because of the unusual nature of this loan transaction where you're giving a loan where the value of the security is less than the value of the loan where the entity you're giving the loan to is unable to service its own pre-existing debt and therefore how is it going to service this additional debt that it is taking from HDFC. Now in normal banking or financial this would have made it a very high risk loan therefore in my opinion had the executive management of HDFC you know informed the entire board of HDFC that such a transaction is being done. It may not have been approved you suggest. I don't know because I do know when I looked at the FY 2013 annual report of HDFC that no disclosure has been made to shareholders that such a transaction was done apart from the mandatory disclosure which shows that the shareholding in ILFS stands reduced by that amount but there is no disclosure in the annual report to say that HDFC itself financed the loan. Now what do you think should happen from here onwards the serious fraud investigation office has submitted an interim report on the ILFS group and its subsidiaries. The final report correct me if I'm wrong has it been prepared if it has been prepared it may not be in the public domain. You are also wondering whether these important individuals in HDFC India's premier housing mortgage financier whether they should be questioned and whether the shareholders may have a lower financial loss than what was originally estimated. Now explain what has happened or what is likely to happen. See the very fact that in the SFIO report they have kept a small a certain section of their report particularly on this transaction implies that they have found something that it is worthy of investigation you know to find out something more. In addition we have an Indian Express report which came out which said that the senior official of HDFC have been questioned and some of their nominee directors on ILFS are also going to be questioned. Now if that is the case and you know HDFC has not refuted that story it would imply that Mr Keke Misri who is the current CEO or the vice chairman of HDFC since he was a nominee director on ILFS is there's a high probability that he will be questioned and to me for a blue chip marquee name with such an impressive list of directors for it to be even mentioned in an SFIO report is alarming that its senior executives now could be called for questioning is definitely you know it is now has Mr Misri been called or not? It implies that but I do not know that's not I'm not aware. Tell me the other than the Indian Express people like Sushita Dalal in Money Life and people like you the rest of the media seems to have ignored this bit of information that is now in the public domain and not been contradicted by anybody. It is not just the media it is even my own community of highly trained highly skilled highly paid analysts and it is our job ostensibly especially on a blue chip stock like HDFC which has got wide you know it's got majority foreign ownership foreign institutional ownership there's so many analysts who regularly do updates they have totally and deliberately in my view ignored this story are you suggesting there is some sort of a conspiracy of silence if so why it is not a conspiracy of silence it is really self-censorship I see because and this is not just on HDFC but any prominent name which is widely tracked widely held by foreign institutional investors you will find that critical views or even critical information which may cast a poor light on the concerned entity the media and the analyst will try to ignore it until it blows up like you have in Chandakochir's case in ICICF. Tell me have you tried to engage with HDFC as an analyst? I have been engaging with them since you know the mid 1990s but what I found very interestingly is that you know I've done one or two critical articles on HDFC in the recent past and then after that those were published where in smart karma in the wire? Yes one in smart karma not in the wire okay and then I found that they are just not responding to my questionnaires they don't acknowledge it they don't reply to it when asked them can we meet to discuss you know some of the concerns that I've had they've again totally ignored it and mind you this entity used to be very thrilled with me when I was to write somewhat critically about their competitors in the early 2000s and this is what I notice you know you are a good analyst as long as you criticize their competitors but the moment you start doing any critical analysis on a concerned entity you know you become a radicalized you know kind of a totally divergent analyst and the best way to treat them they think is not to communicate that with them. Mr. Hemindra Hazari you know I don't know much you'll know much more than I about your fraternity of financial analysts but as far as the media is concerned do you think this kind of silence on this issue may have something to do with the fact that HDFC the company itself the group itself which includes the bank HDFC are major advertisers? Well that's very true see not only because it's a it's a financial conglomerate you have HDFC you have HDFC bank you have HDFC life insurance you have HDFC asset management company you have HDFC general insurance so it is a financial conglomerate and market cap terms it is gigantic so therefore not only it is their advertising power which definitely influences media but more importantly it is corporate access and this is something which is not so well talked about is that media and well as analysts lot of their revenue comes from doing interviews with the top management for calling them for you know various functions seminars and typically what happens is that if you're critical then it's they just totally cut off corporate access and there goes your business model and that's what they've done to you as well yeah but fortunately for me you don't have a business model I don't have a model business model and I don't take revenue from them all right thank you so much Hemindra Hazari for talking to Newsclick on this rather unusual transaction involving the HDFC housing development and finance corporation India's premier housing mortgage financier and the infrastructure leasing and financial services group which has been adversely commented on by the serious fraud investigation office and time alone will tell whether this investigation proceeds and keep watching Newsclick and I'm going to have more conversations with Mr. Hemindra Hazari in fact our next conversation will be about Axis Bank which was earlier known as UTI Bank as it was founded by the unit trust of India and we're going to look at some very very interesting and unusual developments in Axis Bank keep watching Newsclick