Umesh Baveja, founder-chairman of RAHI (Regional Aviation Holdings International), will never forget his milestone 50th birthday. He, and his chartered accountant, remained in Arthur Road jail (Mumbai) for 180 days from 22 September 2014 until 21 March 2015. Baveja was a victim of the vicious machinations of Infrastructure Leasing & Financial Services (IL&FS) to gain control of his company, by converting a civil dispute into a criminal matter.
This is probably the worst of the horror stories about IL&FS’s misuse of State machinery and another case study of how the legal system can be exploited by powerful corporates with malevolent intent. So, who was Umesh Baveja and how did he get embroiled in IL&FS’s machinations? A former vice-chairman of Cairn Energy, he is a lawyer, management graduate and alumnus of IIT-Delhi and counts RBI governor Raghuram Rajan and civil aviation minister Jayant Sinha among his college-mates. Baveja turned entrepreneur through a company called Comet Infra, which became RAHI in December 2009.
RAHI had the vision of developing 99 regional airports by 2025 to serve industry clusters in smaller cities. Earlier that year, Ramalinga Raju of Satyam Computers had famously confessed to India’s biggest corporate fraud and, in the resolution that followed, IL&FS acquired its infrastructure company Maytas — later renamed IL&FS Engineering and Construction Company (IECCL). Since Maytas was already developing regional airports, such as Gulbarga and Shimoga in Karnataka, IL&FS noticed Baveja’s ambitious aviation infrastructure company soon after. IL&FS sought collaboration with RAHI, and also agreed to a minority holding of 40 per cent, even though it had its own plans to develop airport infrastructure as a portfolio.
A joint venture (JV) between RAHI and IL&FS Transportation Networks (ITNL) was signed in March 2010 and the company formed by the end of the year. But ITNL and RAHI began working together on the airport projects even earlier. RAHI acquired the Shimoga and Gulbarga projects from IECCL as its first two, privately developed, greenfield airports. Several payments were made to various entities for work done prior to the formal agreement. RAHI was paid a project management fee for developing Gulbarga airport which was set up as a SPV (special purpose vehicle). These payments were made from the equity capital of Rs30 crore brought in by RAHI and Rs20 crore by ITNL.
In line with IL&FS’s template, its financial arm, IL&FS Financial Services (IFIN), was to syndicate the debt, which it did through a consortium led by Bank of Baroda (BoB), for a hefty fee. According to Baveja, the pace of development and its future potential enhanced RAHI’s value. A valuation report by SPA Capital had then valued RAHI at Rs 600 crore. While Baveja was flying high and even planned a regional airline (in 2012), his success was souring things with IL&FS which now wanted majority control. Naturally, Baveja resisted; but he didn’t realise how malicious IL&FS could get. Ramachand Karunakaran with Mukund Sapre managed the venture with RAHI.
IL&FS’s strategy was to squeeze RAHI financially while harassing it from multiple directions. Sapre, who was its nominee on the board, would not attend board meetings when the disputes began. His presence was necessary for approval of further capital injection. Eventually, things reached a point where RAHI and ITNL decided to part ways. But it wasn’t so simple. IL&FS did not plan to let the project go. It used its influence with BoB to halt the disbursement of sanctioned payments to RAHI. MD Mallya, who was the BoB chairman then, has not responded to my message seeking his comments.
IL&FS blocked RAHI’s attempt to seek arbitration against IECCL which was stalling its capital raising plans. It also lobbied with the Karnataka government to take over the projects from RAHI (with a view to getting them back later). Having starved the Gulbarga project of funds, it got Corporation Bank to declare it a wilful defaulter.
At the same time, IL&FS misused its vast resources to get IECCL to game the judicial system to block RAHI’s attempt to take the issue to arbitration, as per the contract. Its petition was dismissed by the Karnataka High Court on 23 July 2013; it approached the Supreme Court seeking a stay on the High Court’s order. The apex court dismissed it on 23 August 2013. Finally, in March 2014, ITNL initiated criminal proceedings against Baveja and others (including his chartered accountant who was also jailed) on the basis of a report commissioned by KPMG.
The role of auditors and lawyers, and their many conflicts of interest, is a matter that requires strong action by our reluctant regulators. The report questioned several approved payments made by RAHI, helped buttress IL&FS’s charges and, according to Baveja, left out several important facts. The scope and objective of the KPMG report was not told to him, or whether it was even an audit under accepted accounting principles. Baveja says, a full audit of RAHI and the two project companies from inception to March 2013 has given them a clean chit; but that report was ignored.
Stunningly, even after bail was granted, Baveja was kept in jail for two more months by rejecting his sureties on technical grounds, such as the fact that assets secured against bail were not located in Mumbai!
