Auditor BDO flags rule violations in Educomp deals

NEW DELHI: Auditor BDO has flagged certain “preferential” dealings between Educomp Solutions and its counter parties, during an audit of the company that is currently facing bankruptcy proceedings.

Last month, Educomp lenders had unanimously cleared a proposal for its sale to Nasdaq-listed Ebix Inc at close to a 90% discount to the value of loans due to them. The National Company Law Tribunal (NCLT) has yet to approve the sale. The auditor cited transactions in its report that it said were in contravention of Insolvency and Bankruptcy Code (IBC).

ET has reviewed the contents of the report. Educomp, once a poster boy of investors, was one of the leading private education companies in the country. BDO flagged nine transactions in its report where it either found instances of payments to related parties of Educomp ahead of secured creditors or noted instances of deviations from standard accounting practices.


The report was commissioned by Educomp’s insolvency resolution professional, Mahender Khandelwal, and was shared with 23 lenders as well as the insolvency and bankruptcy board of India. Educomp owes Rs 3,000 crore to a consortium of lenders led by State Bank of India.

The report also noted that Educomp invested in India Education Fund (IEF) in 2011, with an objective to promote education. The fund in turn invested around Rs 40 crore in Beacon Learning Pvt Ltd on February 22, 2011.

Units of the fund were later redeemed by the company at a value of Rs 15 crore. BDO’s report noted that IEF’s registered address was the same as that of Educomp’s company secretary Sanjay Grover & Associates. It also noted that Beacon Learning was engaged in the business of ‘construction and support services’ as per its filings with the registrar of companies. “Educomp invested in IEF as an anchor investor.

The redemption of the units by Educomp was approved by the joint lenders forum after a proper valuation was carried out for this purpose,” Educomp founder Shantanu Prakash told ET. Khandelwal and spokespeople for SBI and BDO declined to comment.

The report also cited an instance where Educomp’s subsidiary, Edu Smart Services, paid Rational Business Corporation, a vendor of the parent company. The report noted that this was a ‘knockoff ’ entry resulting in a ‘setoff ’ between Educomp’s debtor with an operational creditor on the company’s books, an accounting practice usually frowned upon.

The report highlighted transactions where Educomp reversed sales to its subsidiary, Edu Smart Services. “Wherever there was a case of an installation of hardware that was put on hold, or a customer had turned delinquent, Edu Smart would return the hardware to Educomp which in turn would use it to service its customers,” Prakash told ET.

The joint lenders forum constituted for the company’s corporate debt restructuring five years ago had tasked Grant Thornton to conduct a forensic audit of the company in March 2016. The forensic audit report, which ET has reviewed, did not cite any adverse observations.

Two creditors, Standard Chartered Bank and Proparco that initially raised objections about Educomp’s dealings with distributor Smart Class Education, had also later approved the sale to Ebix.