IL&FS Debacle: Scrutiny of Key Managerial Heads is Crucial

One month after the government appointed a new board of directors replacing the earlier one in shadow lender Infrastructure Leasing & Financial Services Ltd (IL&FS), the financial irregularities practiced by the group’s management at multiple layers are yet to be unearthed. 

The new board under Uday Kotak’s chairmanship was granted a moratorium by the National Company Law Tribunal (NCLT) and will most likely continue for another three months so that the board can roll out a turnaround plan in this “calm period”.

As on October 26, 2018, over 130 creditors had issued notices to IL&FS Group entities, which are now on stay with the grant of moratorium. However, NCLT has asked IL&FS creditors to respond on this on November 13.

It is significant to note that discrepancies in the functioning of the IL&FS group came to the limelight only in September this year when the group’s entities repeatedly failed in repayment of debt. It has emerged that several directors of the IL&FS group have a record of threatening insiders whenever they are posed with questions.

Also Read: Fantastic Beasts of The IL&FS Zoo

It has been reported that S Bhat, IL&FS nominee director, had threatened a foreign director of arrest when he pointed out uncomfortable issues concerning the functioning of the group. Nonetheless,  IL&FS group spent Rs 216 crore as legal and consultancy costs during 2017-18 alone. Not to be forgotten that numerous key managerial personnel of the group, namely, Arun Saha, Hari Sankaran, Mr. Ramesh Bawa and Vibhav Kapoor, stepped down from their positions without giving any concrete reason, just months before the group was exposed as cash-trapped, threatening of having a  cascading effect on Indian economy.

Role of auditors

Another important question that remains unanswered is that the role of auditors of IL&FS group.The Serious Fraud Investigation Office (SFIO)has also begun its probe into the internal affairs of the group. Recently, SFIO sent notices to three auditor companies - -EY, Deloitte and KPMG, who have undertaken the audit of IL&FS and its entities during the last five years -- seeking response on their role in the financial debacle of the group.

Meanwhile, the new board has shortlisted Indian arms of Belgium-based BDO and Chicago-headquartered Grant Thornton to investigate alleged irregularities in audit reports.

IL&FS Group Entities

The operations of the IL&FS Group are understood to be conducted through a complex maze of various direct and indirect holding companies, subsidiaries, associate companies as well as unincorporated entities (including where the IL&FS Group has non-controlling stakes),  which is further complicated by a multi-layered structure.

It was only after the new board took over the IL&FS group that it sought confirmation by the statutory auditor, SRBC & Company LLP, of the number of entities that formed part of the group, which was revealed to be a total of 347 entities against 169 entities specified in the consolidated balance sheet of the group for 2017-18. However, the new board is yet to reconcile the difference in assessments of all these entities forming part of the IL&FS group.

Also Read: IL&FS Crisis: It's the Rating Agencies That Really Need Some Fixing

As per the new board’s report submitted to NCLT, the IL&FS group has total outstanding debt of Rs 9,42,156 million, including Rs 3,53,820 million obtained from nationalised banks, Rs 2,57,670 million from non-convertible debentures (NCDs) and Rs 91,377 million from financial institutions. This suggests the urgent need for financial solvency, as public money is at stake.

Apart from the challenges arising from multiple layers and types of holding structures and interests within the IL&FS group (ranging across subsidiaries, associates, joint ventures to unincorporated entities) through which diverse businesses (ranging from roads to information technology to financial services) are being undertaken, the new board is additionally facing a significant challenge of lack of reliable information and gaps in the data in working towards a resolution.

Considering the above, the crucial task ahead of the new board and SFIO is to bring all the key managerial heads of IL&FS group under immediate scrutiny to unravel the layers of discrepancies that have led to this crisis.