Investigating authorities of the Registrar of Companies (ROC), New Delhi have now summoned the statutory auditors of PTC India Financial Services (PFS) with regard to their probe in the corporate governance fraud in the company. As per sources, Gaurav Lodha, a partner at Lodha & Co. was summoned by the ROC, which said it had noticed various discrepancies in the accounts, contraventions and non-compliances. The ROC would be recording the statement of Lodha, the sources said. The severe governance lapse at PFS, an NBFC and subsidiary of Power Trading Corporation, could be just another potboiler. From hiding fraud in loan accounts to keeping the board in dark on crucial forensic audit reports and not filling up crucial vacancies, a show cause notice (SCN) by market regulator Sebi to PFS chairman Rajib Mishra and MD and CEO Pawan Singh had revealed a complete breakdown of the company's management. Singh was the MD and CEO who is currently on a forced leave while Mishra the former chairman is now the CMD of the company. Both are accused by SEBI of grave mis-management.
It is learned from the sources that the Reserve Bank of India (RBI) is also looking into the conduct of PFS Chairman Rajib Kumar Mishra. The company's MD and CEO Pawan Singh, whose role was also under the scanner was replaced recently. A SEBI notice to Mishra had called him and Singh as the “steering wheel” in the company and held them responsible for the failure of corporate governance.
A notice to Gaurav Lodha said that it had become necessary to record his statement / defense to take the probe to the logical conclusion. ROC had been examining various financial records and documents of PFS that were signed by the auditors, the sources said.
Unfolding of Drama AT PFS
Six independent directors (IDs) resigned from PFS board in 2022 under Mishra and Singh. Issues raised by the audit committee chairman were not recorded accurately in the minutes of the meeting and both failed to objectively look into the concerns raised by resigning IDs, Sebi SCN had alleged.
Sebi's charges
Intriguingly, Singh did not allow one Ratnesh Kumar to join PFS as a whole time director even though his appointment was cleared by the board and various committees. After waiting for months, Kumar re-joined NTPC from where he had come. Singh had opposed Kumar's appointment on the grounds that he lacked experience for working in an NBFC.
Singh and Mishra allegedly delayed for two years the disclosure of a crucial forensic audit report that revealed fraud in the loan account of Nagapatnam Power and Infratech Pvt. Ltd. (NPL) and also made unilateral changes in conditions of loan granted to Patel Darah-Jhalawar Highway Pvt. Ltd., without board approvals. SEBI says both had no concern for issues highlighted by former PFS chairman Deepak Amitabh and ignored any communication by the IDs and shared no information about it with the board.
Forensic audit had indicated diversion and mis-utilisation of funds disbursed under the bridge loan to NPL, which raised clear suspicion of fraudulent activities in the account. Audit report had noted that PFS did not disclose this to RBI. Eventhough, suh non-disclosure or non-compliance may not have involved deliberate or malafide intent but was due to negligence, weak systems and lack of controls - a total management failure.
NPL had turned into a non performing asset in 2017 and the first forensic audit report came in 2018 but the PFS board was made aware about it only in December 2020. Another audit report of 2022 says the main security of the loan (the project land mortgaged to PFS by NPL) was legally not enforceable as NOC was not obtained from the state government, a key requirement for the loan deed. The loan monitoring team headed by Singh never tracked the utilization of funds to NPL for 18 months post disbursement of money.
Sebi says PFS IDs were treated as impediments and their authority was undermined by Mishra and Singh.
Unbecoming of a chairman
"Mishra has consistently thwarted the efforts of IDs to function in an independent and responsible manner. He failed to discharge his responsibilities as a chairman and frequently speaks a lot about the way the chairman has been conducting the board meetings. It also poorly reflects in effectiveness on the part of chairman to provide conducive environment to the IDs, so that they work unfettered as to bring about balance in functioning of the board or to act as a mitigating factor towards any conflict of interest on the functioning of the board," SEBI has said about Mishra.
In Sebi's view, Mishra did not work in the interest of the shareholders by not questioning the management or implementing the board decision in spite of the same being brought to his notice. Mishra brushed aside and failed to act on the suggestions/concerns raised by the IDs or even to act as a reconciliatory element in the event of conflict among the board members.
Observations on Singh
Sebi quotes forensic audit, which says Singh as Director Finance had been unilaterally changing the terms of loan disbursement and also disbursing loans to entities who had delayed or defaulted on their payments. Singh did not inform the board and RBI about a suspected fraud by NSL loan account.
"Singh refrained from acting judiciously and objectively and flouted the board decisions multiple times. Blatantly ignored and neglected good governance practices, resorted to wrong practices to have his own way and acted contrary to what is desired from an MD and CEO. Singh, as Director (Finance) failed to act in a prudent manner as NSL defaulted on the very first repayment and turned an NPA in 2017," the SCN says.
Multiple email requests for appointment of a woman ID, constitution of nomination and remuneration committee (NRC), convening the NRC meetings and ignoring the IDs seeking legal were blatantly ignored. No action was taken by both and eventually all Ds resigned effective January 19, 2022.
