Exclusive: Is the IL&FS Resolution Undermined by Ex-IAS Officers and Bureaucrats on the New Board?
It took just three months, in 2009, for a three-member committee, headed by Deepak Parekh with technology expert Kiran Karnik and legal expert C Achuthan, to complete the bids for Satyam Computers, after B Ramalinga Raju’s stunning confession of fraud. 
 
In an uncanny turn of fate, Infrastructure Leasing & Financial Services (IL&FS), which acquired two of the Satyam family entities (Maytas Infrastructure and Maytas Properties), turned into a more spectacular failure in less than a decade later. If Satyam was sold for Rs2,900 crore, IL&FS’s outstanding debt is nearly Rs100,000 crore. It is also far more complex, with 348 layered companies and collaborations with state and Central government entities. 
 

Unfortunately, the government’s attempt to repeat the Satyam feat of quick crisis resolution has not happened. Ten months later, there is only a glimmer of some Rs20,000 crore being recovered through the sale of wind power, roads and other assets. 
 
Uday Kotak, a dynamic banker, chairs the new board; but the rest of it is packed with retired bureaucrats (Vineet Nayyar, CS Rajan, Bijay Kumar, Dr Malini Shankar, GC Chaturvedi, Srinivasan Natarajan and Nand Kishore) who are calling the shots and also causing complications. Most of them are from the Indian Administrative Service (IAS).
 
Alarmingly, some had close connections with the discredited IL&FS cabal. They seem unwilling to dislodge other IAS officials who continue to control group entities. Here’s how they are messing up things. 
 
Conflict of Interest: On 22nd July, The Indian Express wrote that the new IL&FS board was looking for a new legal advisor after a top official complained to the ministry of corporate affairs (MCA) alleging ‘strong’ conflict of interest in the association of the law firm Cyril Amarchand Mangaldas (CAM) with IL&FS. He is also alleged to have said that removing CAM may upset Uday Kotak whose Kotak Bank is advised by CAM. 
 

CAM, as the latest forensic audit by Grant Thornton (GT) has shown, was advising Ravi Parthasarathy on ILFS Transportation Network (ITNL) in the run up to the default. 
 
Stunningly, it is Bijay Kumar, a Maharashtra cadre IAS officer appointed to the new board as a whole-time director, who filed the complaint. Even more curious is the fact that he, along with vice-chairman Vineet Nayyar and managing director (MD) CS Rajan (both former IAS officers), was empowered by the board to find a replacement for CAM as far back as February 2019!
 
 

Why would a powerful, whole-time board member complain to MCA after failing to find a replacement for CAM for four months? Why was CAM allowed to continue for the past four months? Why did the board member record a complaint only when GT’s forensic audit, which brought out emails from Ravi Parthasarathy (former chairman) seeking guidance from Cyril Shroff in May 2018 (before the eventual default), was about to go public? IL&FS’s response to my query about Bijay Kumar filing the complaint was: ‘no comments’. 
 
‘Showdown’: There is another angle to this drama that also goes back to February 2018. Almost simultaneous to the appointment of CAM, Shardul Amarchand Mangaldas (SAM) was appointed a legal advisor for ITNL in October 2018. ITNL, is one of two major IL&FS companies in deep financial trouble. Shardul Shroff had worked on the Satyam deal with the government appointed board of that time and was invited to advise the new board on ITNL at Mr Nayyar's behest. 
 

Around January 2019, the same Bijay Kumar had a ‘showdown’ with Shardul Shroff leading to SAM’s exit. I learn that the 'showdown' was over an intemperate letter that Bijay Kumar sent SAM, for which he later apologised when threatened with a defamation suit. 
 
The timing is important; because the board’s decision to replace CAM also happened soon after that. Brothers Shardul and Cyril Shroff split acrimoniously into two separate firms a few years ago. They now head large and expensive legal firms that are highly sought after by corporate India, including Kotak Bank. 
 
So why has IL&FS continued working with CAM for four months? The official response from IL&FS is as follows: “Engagement with CAM was initially done by a Committee of Directors shortly after the new Board took over. The key consideration of the appointment at that stage was the complexity at hand, to ensure continuity of operations and to enable the new board to settle down. Thereafter in February 2019 committee of the new management was appointed by the board to work on the engagement of legal advisors. It is continuing to assess and will take necessary decisions soon.” 
 
On the appointment and exit of SAM, IL&FS says: “SAM had been appointed by the Board for providing legal services pertaining to transportation sector considering their expertise in area of distress resolution. SAM resigned from ITNL in May 2019 and their resignation was noted by the Board on May 22, 2019.” The reply makes no mention of the ‘showdown’ and why it happened. Also, the reference to the likelihood of Uday Kotak being upset at CAM’s removal hints at some friction between the chairman and the board.
 
Tainted Executives: Another problem with the new board is its reliance on tainted executives who were deeply involved with the fraud and the cover-up. The argument is that they need continuity and people with knowledge about the business. But this has caused a lot of outrage among IL&FS’s employees. I have received multiple messages about the deep links between Dilip Bhatia, designated chief executive officer (CEO) and the cabal that ran IL&FS earlier.
 

GT’s forensic audit exposes Mr Bhatia’s attempt to fix the credit rating including a proposal to pay Moody’s rating agency a fee of $68,000 to buy time and keep a crucial rating private for some time. 
 
What is still unknown is that Mr Bhatia had also extracted a massive personal loan of Rs2.5 crore at a very low interest, when IL&FS as a group was already in a deep financial mess. Many employees insist that the loan was a ‘reward’ (silence money) because he knew too much. But while the key management coterie was sacked, Dilip Bhatia was made chief strategy officer and, later, promoted to CEO. He calls the shots under the new management. 
 
When asked about the Rs2.5 crore loan, IL&FS said: “Dilip Bhatia was sanctioned a loan of Rs 2.5 crore in January 2018, as approved by the competent authority, at then applicable interest. The said loan has since been fully and duly repaid by him in Feb 2019. The new Board of ITNL has already taken this on record in its Board meeting held in February 25, 2019.”
 
Did the board check how Mr Bhatia could repay such a huge loan so quickly? If he had the resources and did not need the money, why was he sanctioned such a big loan when IL&FS as a group was in financial distress? IL&FS has rewarded many former employees with apartments and cars, to ensure their silence. 
 
On asking whether it plans to act on the GT’s findings, IL&FS said: “The Board is seized of the GT report, and its findings, on CRAs and will be deliberating on the interim report findings in due course. The Board will take appropriate steps in this regard, after verifying the authenticity and veracity of the observations made in the report. We would not like to make any comments, especially on any individual or specific incident, till the report is fully considered and discussed by the Board in its entirety.” 
 
Governance at Subsidiaries: Finally, there is the issue of how IL&FS is dealing with subsidiaries headed by IAS officers. I have repeatedly written about how the institutional investor AIDQUA has been pointing to financial jugglery and mismanagement at New Tirupur Area Development Corporation (NTADC) 2010. It has been ignored and even harassed, forcing it to approach the Supreme Court and the NCLAT for redress. 
 
S Krishnan, a serving IAS officer of the Tamil Nadu cadre, has been a part-time MD of NTADC for a decade, despite objections from AIDQUA, which has a 27% stake. The appointment violates Section 203 of the Companies Act 2013, which mandates the need for a full-time MD. The government-appointed board has also done nothing. 
 
Now, on 25th June, the MCA has asked director Bijay Kumar to take ‘appropriate action’ with regard to AIDQUA’s complaints. What the new board will consider ‘appropriate’ remains to be seen. 
 
The Satyam plan worked because a lean and practical three-member group was focused on working together in minimising the pain to stakeholders and salvage the business. The IL&FS board, packed with bureaucrats (some of whom were very close to the sacked management), has no such concern, although it is headed by a highly successful banker. Clearly, the government has got the composition all wrong; but it is investors and the financial system which will pay the price. 
 
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    COMMENTS

    Prakash Bhate

    7 days ago

    These IAS guys have done more harm to the country than what has been done by Dawood Ibrahim, Masood Azhar, Hafeez Saeed and their cronies. Unless they are perceived as financial terrorists they will continue to do so with impunity while we will continue to shake our heads and carry on with life. They and their families should be publicly disgraced.

    S T PATIL

    4 weeks ago

    Thank you for exposing the conflict of interests involved, the conduct of Bijay Kumar, Dilip Bhatia, forensic report and conduct of IAS Officers who are Directors in IL&FS. In the days to come , please continue to write and speak on these aspects. The continuanceof these individuals on the Board is going to become difficult and they will have to be held accountable for their lapses. Commend the great work done and service rendered by Sucheta Dalal.

    Arumugaraja

    4 weeks ago

    Satyam Raju confessed to his crime and cooperated but ILFS gang wants to escape with their loot.
    Raju ban gaya Gentleman.

    Girish Mittal

    4 weeks ago

    I wonder where Ravi Parthsarthy is and what is preventing from him being interrogated/investigated. He has been at helm of ILFS for long long time and there is no reason why he should not be questioned when some of his colleagues were questioned too !!!

    Godavari Joshi

    1 month ago

    1-ILFS scam is too complex than the Satyam case, in terms of modus operandi, the tenure over which the wrongdoings were perpetrated and probably everybody in the System has contributed to it. The biggest obstacle to unearth the whole web of this scam is the fact that ILFS has used ambiguity ( giving impression that it's a govt affiliated/backed organisation ) and used it's proximity to govt/ bureaucracy to its utmost advantage. Probably, Mr Ravi Parthsarathy sensed that he could no longer keep the lid on it and he quietly left the organisation !
    2- agree with Money Life that why do we need so many IAS officers on the Board. They have no skin in the game.
    Mr Kotak has an uphill task as expectations from him run high as he is a renowned and successful entreprenuer, an astute banker and most visible public face of the new Board. Why don't we have more of experts, and proven entrepreneurs and other people /organisations who are distanced from Govt agency ? This may allow unbiased and unhindered functioning to establish the facts, the quantification of the damage, fixing of accountability and possibility of salvaging the losses to all those affected by this scam.
    3- As it is, the wheels of justice move so slow in our country...don't know if and when the guilty shall face the music and whether all those who bear the financial brunt of this scam will get compensated, the damage done on macro levels notwithstanding.

    B. Yerram Raju

    1 month ago

    Exemplary revelation. Civil Service officials could kill public sector with impunity. IAS can'be hanged as they are protected under Article 12 of the Constitution. It is time that new rule fixes come in place to make such persons account for whatever they do. This calls for Administrative Reforms. Who should bell this cat? Again a bureaucrat; why will he do it?

    Anil Kumar

    1 month ago

    Great. Articles like these will put pressure of accountability on IL&FS to gets its act fast. If no one else, it is Uday Kotak whose reputation is now at stake here. Keep it up.

    Veeresh

    1 month ago

    Sitting here in Delhi getting gossip about our typical 200 to 2000 crores kind of scams is like big time till I read an article like this where the numbers range from 20000 crore and upwards towards 1 lakh crores. This gives some of us a huge inferiority complex. Please have some mercy.

    On a serious note, thank you for this article, and a reference point to what could be achieved with 20000 crores is relevant.

    India's complete primary school budget, public sector and private, is a shade above 20000 crores. Secondary school budget, similar. High School and Higher Education together get about 38000 crores.

    Mohan Krishnan

    1 month ago

    These Superbugs has infested the body of India's political and economic system. No hope for India.

    CHATHANTARA GOPALAN PRADEEP KUMAR

    1 month ago

    The reportage by Moneylife/Sucheta Dalal on ILFS is truly exemplary.

    Independent directors lose sheen, 2,000 quit last year
    The incessant unravelling of corporate frauds and misappropriations in India over the past few weeks have opened up a Pandoras Box on the critical gaps in the countrys corporate rescue framework.
     
    The key message is that effective corporate governance must separate ownership and control in a listed company. Aiming at every shareholder's voice being heard, the Companies Act of 2013 introduced many a mechanism for protecting minority shareholders, including resolutions that require a majority of the minority to pass. 
     
    One of the key elements in this framework is that of independent directors, which used to be a coveted position a decade ago. The present corporate governance structure hinges on the independent directors who are supposed to bring objectivity to the functioning of a board and improve its effectiveness. Stakeholders place high expectations on them. 
     
    However, since 2008, when the Satyam scam was unveiled, independent directors have been the subject of ire of the stakeholders, who accuse them of not doing adequate due diligence.
     
    Unnat Sharma, Managing Partner at AIM Corporate Services LLP, said: "In 2018-19, close to 2,000 independent directors resigned and more are in the pipeline. At one point, this position had prestige. Over the last decade, there is no charm left in the role. In fact, in the Nirav Modi case, the assets of the independent directors too have been attached by the Enforcement Directorate (ED)." 
     
    AIM Corporate Services is a boutique forensic firm with rich experience and a leader in fraud detection, prevention and response -- aspects that threaten the very existence of organisations.
     
    The waning charm and influence of independent directors is due to multiple factors:
     
    * The main reason is that minority shareholders don't exercise their voting rights; effectively it is the promoters who select the independent directors.
     
    * Independent directors don't participate in meetings where contentious and unethical decisions are discussed. They are not in the know of sensitive documents and emails.
     
    Market regulator Sebi has been aiming to change this by accepting the key recommendations of the Uday Kotak Committee on corporate governance.
     
    Among other things, the Committee had proposed "compulsory webcast of AGMs of top 100 entities by market capitalisation from FY 2018-19."
     
    It is also expected that Sebi will increase the minimum public shareholding limit to 35 per cent from 25 per cent currently. However, the only way independent directors can stop wrong decisions is by being informed and acting collectively. 
     
    Reena Wadhwani, Co-Founder and Partner at AIM Corporate Services LLP, said: "As the corporate rescue framework evolves, a few changes would help empower the minority shareholders and independent directors immediately and immensely. Then:
     
    * Sebi has to not only insist that the Board must address queries raised by the independent directors, but also within a timeframe because the independent directors who are genuinely vested in their role end up going to the media when nothing else works.
     
    * The wheels of corporate governance have to be strengthened, particularly in liquidation proceedings, where the bidders who will be taking over the company can buy out the majority stakeholders without providing clarity to the minority stakeholders.
     
    * In the case of IL&FS, more independent directors have been appointed. This is not enough unless and until the board is committed to offering them genuine information, unfiltered by self-interest.
     
    Given this situation, in recent times, it is the minority shareholder who seems to be taking up the role of the whistleblower. Brands like Sun Pharma, Indigo and IL&FS would've never come under the scanner if not for a minority shareholder whistleblower. Their money is at stake and they can see that someone is mismanaging the funds.
     
    Going forward, the effectiveness of independent directors depends significantly on the independence and effectiveness of forensic auditors, legal counsel as well as internal audit. 
     
    Independent directors may not be in a position to stop management fraud perpetrated at the highest level but with a high level of commitment and due diligence, they should be able to identify the signals that indicate potential for fraud.
     
    Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
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    COMMENTS

    B. Yerram Raju

    1 month ago

    If the choice of independent directors is through a statement of intent that latter becomes a performance measurement tool, the true independence can be maintained. Independent Directors should also chair some of the key Board Committees like the Management Committee, HR Committee, Risk Management Committee when accountability naturally devolves on them. They would also have the interest to perform the watchdog function for the minority share holders and regulators.

    Mohan Krishnan

    1 month ago

    Khayaa, Peeyaa and Bhag gaya.

    REPLY

    B. Yerram Raju

    In Reply to Mohan Krishnan 1 month ago

    When the mouth is full how do you expect them to talk? The Board should leave enough time for them to talk!

    SAT directs Sebi to probe Cairn India
    The Securities Appellate Tribunal (SAT) has directed regulator Sebi to probe Cairn India for alleged violation of the Companies Act.
     
    In the order dated July 19, SAT directed the regulator to inquire into the alleged violation which was pointed out by Cairn UK Holdings.
     
    "... if the company, namely, Cairn India had violated the provisions of the Companies Act in not releasing the dividend when there was no embargo upon it, it is SEBI's duty to inquire into the alleged violation and if it exists take action against the said company and, if necessary, under Section 124 of the Companies Act," SAT said in its order.
     
    "This aspect has not been considered by SEBI." 
     
    Cairn UK Holdings had earlier approached Sebi in 2017 in connection with non-payment of dividend which was due to it by Cairn India amounting to Rs 340.64 crore. 
     
    On its part, Sebi by the impugned order disposed of the complaint on the ground that the unpaid dividend of over Rs 660.63 crore was handed over by Cairn India to the income tax authorities and, therefore, it would not be appropriate for the regulator to take any further action. 
     
    Consequently, the appellant moved SAT and in its complaint said that Cairn India be directed to pay the dividend to the appellant along with interest at the rate of 18 per cent p.a. and to initiate proceedings under "Section 127 of the Companies Act against every director of the Cairn India who were knowingly a party to the non-payment of the said dividend". 
     
    Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
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