Serious wrongdoing at IL&FS: Here’s what SFIO found after questioning 50 key people running the show

To cite ‘gross governance failure’, conflict of interest, undue enrichment of key execs

IL&FS, SFIO, NCLT, Uday Kotak, Life Insurance Corporation, Companies Act
The MCA’s petition at the NCLT said the company was “well aware of the precarious and critical financial position but it continued to present to the stakeholders a hunky-dory scenario.”

The Serious Fraud Investigation Office (SFIO) has uncovered grave irregularities across corporate governance and financial parameters that led to a default crisis at Infrastructure Leasing & Financial Services (IL&FS) and forced the government to supersede the company’s board to contain the fallout. “SFIO has gathered enough evidence to show gross failure in corporate governance, several conflicts of interest and even undue personal enrichment of some key personnel who were running the show at IL&FS,” a source privy to the findings told FE. The agency is in the process of finalising its probe report, which will soon be submitted with the government.

“The agency has questioned about 40-50 key people who were running IL&FS,” said the source. Based on its probe report, necessary and decisive action will be taken against the culprits irrespective of their status, he said, hinting the report will decide action against former directors as well. The government has already issued look-out notice for former top executives of IL&FS — such as Ravi Parthasarathy, Ramesh Bawa, Hari Shankaran and K Ramchand — for fears they might flee the country.

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The SFIO findings give credence to the government’s prima facie suspicion of a collapse in governance standards and financial wrong-doing at IL&FS (the ministry of corporate affairs had cited some of these issues at the National Company Law Tribunal to supersede the company’s board).

The charges against some of the former directors include masking the true state of the group’s financial stress, suppression and misrepresentation of key facts, siphoning off of funds via excessive executive package and gross financial mismanagement. If it’s proved that some of these were done deliberately, especially misrepresentation of facts, then that act could be defined as fraud. As per section 447 of the Companies Act, the guilty will be liable to imprisonment of up to 10 years and a fine of up to three times the amount involved, according to analysts.

The new board under Kotak Mahindra vice-chairman Uday Kotak had also decided to commission a comprehensive audit to bring to light much-needed clarity on the company’s operations and financials, after it stumbled upon the fact that IL&FS actually had a complex maze of 348 entities, more than the double of 169 arms assumed earlier.

The ministry of corporate affairs (MCA) has already informed NCLT that the risk management committee of IL&FS met only once between 2015 and 2018 even though the leverage ratio jumped to 13, against the reasonable level of 3-4. This was despite Hemant Bhargava, managing director of Life Insurance Corporation (LIC) that has the highest stake (25.3%) in IL&FS, heading the committee. Importantly, between 2014 and 2018, the infrastructure financier’s loans ballooned with the consolidated debt climbing to Rs 91,091.3 crore from Rs 48,671.3 crore.

The MCA’s petition at the NCLT said the company was “well aware of the precarious and critical financial position but it continued to present to the stakeholders a hunky-dory scenario.” It also pointed out that IL&FS “relied on good ratings” from some rating agencies to raise funds as recently as in August, when it picked up Rs 50 crore from its debt investors with a green shoe option of Rs 25 crore. “The prospectus put on record a profit of Rs 584 crore, but “gave no hint on its consolidated losses of Rs 2,400 crore”.

Interestingly, when IL&FS swung from a Rs 142-crore profit in FY17 to a loss of Rs 1,887 crore in FY18, its chairman Ravi Parthasarathy saw an 89% hike in his pay, from Rs 10.8 crore in FY17 to Rs 20.5 crore in FY18. Since the crisis came to light in September, IL&FS and some of its arms have defaulted on their payment obligations several times. The board now weighs a turn-around possibility through the monetisation of group entities, apart from other steps. IL&FS says it has received over a dozen offers for acquiring its entire 100% stake in two subsidiaries — IL&FS Securities Services and ISSL Settlement & Transaction Services — that are put on sale. The company intends to put on block another 8-10 arms on sale soon, corporate affairs secretary Injeti Srinivas said last week

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