IL&FS: The Next Satyam?

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Infrastructure Leasing & Financial Services Limited (IL&FS) is an infrastructure development and finance company of India. It has 250 subsidiaries, prominent ones being – IL&FS Investment Managers, IL&FS Financial Services, IL&FS Transportation Network India Limited (ITNL).

IL&FS was formed in 1987 as a “RBI registered Core Investment Company” by three financial institutions, namely the Central Bank of India, Housing Development Finance Corporation (HDFC) and Unit Trust of India (UTI), to provide finance and loans for major infrastructure projects in the country.

Sad State of Affairs at IL&FS

IL&FS has been found guilty of at least six instances where the loans issued by the company were used to illegally transfer funds back to their promoters and directors.

The company is in deep trouble. Highlights of the crisis is below –

  • They currently have a debt of about Rs. 91,000 crore causing severe liquidity crisis.
  • They have defaulted in payment of interest on its share capital more than 7 times since last year
  • Large number of public sector banks invested in IL&FS with LIC holding the largest stake at 25.34%, putting public’s money at risk
  • Charges of irregular transactions worth Rs 13,000 crore currently being investigated.
  • Various other entities like mutual funds, Insurance and pension funds scheme also at risk of losing a lot of money.
  • The Ministry of Corporate Affairs has appointed a new board headed by Uday Kotak to understand the crisis.
  • Project Icarus headed by Graham Thorton is in-charge of conducting a thorough forensic audit of the company.

Who owns IL&FS?

The largest shareholders are LIC with 25.34% stake and Orix Corporation of Japan with 23.54%.

Minor shareholders include Abu Dhabi Investment Authority – 12.56%, HDFC – 9.02%, Central Bank of India 7.67% and SBI – 6.42%

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The reason behind this crisis

IL&FS is at the heart of one of the biggest scams in the Indian Financial Markets in the past decade and it can certainly be credited to the greediness of its board members which have since been sacked.

Here are some of the board members who played a big role in this crisis:

  1. Sunil Behari Mathur – Non-Executive Chairman, IL&FS (Independent Director)
  2. Hari Sankaran – Vice Chairman & Managing Director, IL&FS
  3. Arun K Saha – Joint Managing Director & CEO, IL&FS
  4. Praveen Kumar Molri – Nominee Director, Life Insurance Corporation Of India
  5. Kiyoshi Fushitani – Nominee Director, Orix Corporation, Japan
Sacked Members of the IL&FS Board

It is also surprising to note that the company’s auditors Deloitte Haskins & Sells LLP failed to raise any red flags about the company for the past 10 years until an interim report from the Institute of Chartered Accountants of India(ICAI) saw some issues with the large amount of debt that the company had on their books.

The report led the Ministry of Corporate Affairs to seek reopening of the last five years of the financial records of the IL&FS group, in an application filed with the National Company Law Tribunal (NCLT).

This promptly led to the National Company Law Tribunal to appoint a six member panel to take over the IL&FS board headed by Managing Director of Kotak Bank –  Uday Kotak.

The Enforcement Directorate which is responsible for enforcing economic laws and fighting economic crime in India has been conducting a thorough audit of the company and has grilled the board members of the company.

There is also a preliminary special audit conducted by Graham Thorton and majorly covers the IL&FS subsidiary IFIN. This special audit goes by the name of Project Icarus. Here are some of the anomalies from the report:

Lending Tenor Mismatch: 

The company used funds allocated for short term requirements to be utilized for the fulfillment of long-term loans of around Rs. 541 crores. This caused a gap in funding of short-term projects leading to a liquidity crisis in the company

Roundtripping of Loans:

Approximately Rs 2277 Crores worth of loans were issued to a bunch of companies who in turn would loan it back to the ILFS’s subsidiaries like IFNL or the group’s other infrastructure  based subsidiary companies.

Large parts of this money is suspected to have ended up in the pockets of promoters and directors of IL&FS.

Fudging of the Credit Approval Memorandum:

The Credit Approval Memorandum is a document based on which accompany decides whether to lend money to a company or not. Now, there are two types of documents one which is in the system of the company and then there is a manual document.

The findings reported around Rs. 411 crores worth of lending to be different in the system based document as opposed to the manual document. Now there isn’t a valid argument provided by the IL&FS board as to why these documents have different details.

Also to top it all, the loans were issued without any collateral and only personal guarantees were taken before issuing the loan. Also, the companies who got these loans were pretty notorious like the Siva Group which has been involved in various other scams.

Lending at a Loss:

There have been around 18 instances where IL&FS lent a total Rs. 2,400 crores to companies at negative spreads or very low-interest rates of around 2-3%, meaning there was inadequate charge being levied on the companies receiving the loan.

The reason behind this activity is still quite unclear and it seems that there were some political connections which led to this malpractice.

Loan to Defaulters:

Graham Thorton reported 16 cases amounting to Rs. 1,922 crores, that the management team had approved loans but were red flagged by the risk assessment team of IL&FS.

No Charge against Collateral:

It is impossible for a common man to apply for a loan from a bank without posting enough collateral.

However, these rules did not seem to be applied to companies applying for huge loans with IL&FS who offered loans based on political and personal connections, therefore collateral requirements were often relaxed.

Loans to Borrowers that was used to pay existing debt obligations:

Defaulting companies which were unable to pay their existing loans were given new loans to pay off their existing loans.

Once the new loan was issued to the defaulting company they would pay back their old loan to a subsidiary of IL&FS like IFIN. There were 29 instances found by the Graham Thorton report of such practices accumulating to Rs. 2,502 crores.

The major reason behind such a practice seems to be that the management wanted to keep the books clean of any default so that it does not affect their salaries and bonuses.

Funding of promoters and directors:

In 6 cases amounting to Rs. 94 crore, loans issued by IFIN to certain companies, a large chunk of these loans were being channeled back to the promoters and directors of the company.


These were the findings of the interim report produced Graham Thorton as of 20th Feb 2019 which roughly took about a month to be prepared and it just seems to be the tip of the iceberg as far as the entire IL&FS scam is concerned with a lot of the subsidiary companies yet to be audited properly.

Graham Thorton’s forensic report submitted to the Uday Kotak led IL&FS board

Similarities to the Satyam Scam

Satyam, a computer services company, was responsible for one biggest scam in the Indian Stock Market’s history when Satyam’s founder Mr. Ramalinga Raju on 7th January 2009 confessed that the balance sheet carried inflated Cash & Bank balances of over $1 billion.

After the news spread in the public domain Satyam’s stock tanked 78% in a couple of days and the benchmark indices Nifty and Sensex took a tumble of 7-8% causing widespread loss of investor wealth.

The key takeaway from this scam is that the Indian Government should be investigating these scams at a fast pace so that the value of the companies affected by the scams does not get wiped out. This will also help them in finding new investors in India and abroad.

However, the government still hasn’t seemed to learn the lesson from this scam and has allowed the IL&FS to thrive over a long period of time causing huge losses to investor wealth and large number of mutual funds, Insurance and pension schemes that were invested in IL&FS.

The need to keep corporate greediness in check cannot be understated in order to protect public money from these scams as in the end it’s the common man’s savings which is most at risk in such events.

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