How IL&FS Was Enriching Itself at Public Cost
Jolted by the massive systemic risk that the defaults of Infrastructure Leasing & Financial Services (IL&FS) can create, a sleeping government has, finally, sacked a part of the board of directors of IL&FS on 1st October and injected seven new directors. It has also ordered an investigation by the SFIO (serious frauds investigation office). With many insiders starting to allege that top executives of IL&FS were gold-plating projects to create their own pot of gold, an investigation is clearly warranted. 
The reconstituted board of IL&FS has to submit a resolution plan to the NCLT (National Company Law Tribunal) by 31st October. How difficult is the new board’s job? Well, it has to first understand the enormity of the problem and the modus operandi of Ravi Parthasarathy who ran the IL&FS show with his cronies for over two decades creating 175 subsidiaries and 66 joint ventures and associates (higher than those mentioned by the finance ministry’s press release). It holds assets of around Rs1,65,000 crore of which a whopping Rs30,000 crore are at risk, according to data analysed by REDD Intelligence.
Modus Operandi
The IL&FS group switched from arranging and structuring infrastructure finance, to being a partner in projects, around 2005. Typically, it leveraged its big public sector shareholding to find acceptance with state governments. It also offered a 50:50 joint venture, where the state got to appoint a non-executive chairman while IL&FS ran the show with its own managing director (MD) and virtually owned the projects. 
Its flamboyant, high-spending ways were used to build deep contacts with bureaucrats in all state governments. It had dozens of IAS officers on its payroll and also doled out favours like houses/apartments for politically connected persons (PCPs), facilitating admission of their children to Ivy League universities abroad and other benefits. 
The bureaucracy enjoyed its lavish spending ways; it didn’t matter that the costs were passed on to the project and borne by the public. IL&FS brought project development and fund raising ability to the table, for which it extracted hefty fees, based on the project cost. So, every cost escalation only worked to its benefit. 
It also cultivated banks and other lenders assiduously. It lists over 40 domestic and international banks as lenders, apart from selling its financial paper across the spectrum. It has even managed to sell its debt to nationalised banks at a profit! 
Key to the gold-plating of projects was its template capital structure that was never questioned by pliant bureaucrats representing state governments, says a former insider who wants to remain anonymous. 
Although each project was structured as a 50:50 partnership, the equity capital was tiny (as low as 5%)—keeping risk capital minimal. Another 25%-30% would be brought in as subordinate debt which helped balance the debt-equity ratio. That was also subscribed by IL&FS, to give comfort to the government partner. The rest was raised through senior debt, raised mainly from public sector banks. According to this source, “the bloating debt problem of IL&FS can be understood if the debt profile of SPVs (special purpose vehicles) and the holding companies are analysed.”
Fees, Fees and More Fees
Typically, IL&FS charged multiple fees that allowed it to recover its entire investment even before the project got off the drawing board. IL&FS, as a group, earned project management fees, loan syndication fees, success fees, upfront fees, merchant banking fees, fees/charges for feasibility studies, environmental impact and social impact studies, etc. In fact, any cost or fee that could be pushed past the state government was loaded on to the project.
A good example is the Tirupur water project where an order of the Tamil Nadu High Court notes: “Out of the gross disbursement of Rs140 crore, IL&FS deducted a total amount of Rs41.24 crore whose break-up was (i) project management fee of Rs9.60 crore; (ii) costs of Rs15.15 crore for USAID loan; (iii) upfront fee of Rs66.50 lakh; (iv) merchant banking fees of Rs10.04 crore; and (v) out-of-pocket expenses of Rs5.79 crore.” The deductions were made before transferring the rest of the money to the project. 
This win-win structure for IL&FS was supposed to be Ravi Parthasarathy’s genius and, probably, worked in the early days, until the costs had to be passed on to users. Then, like in the Noida Toll Bridge case, public anger erupted and the Supreme Court ordered the bridge to remain toll-free. Almost every major project of IL&FS is mired such controversy and litigation. 
Now, let us look at how its dubious activities were already in the public domain, but nobody would act to cut the group to size. 
Some Examples of the Plunder
1. Noida Toll Bridge Company Ltd: This controversial company had given itself an assured return of over 20% (higher than its borrowing cost) which soared to 40% when its high-cost loans were renegotiated to 10% and the concession period dramatically extended from 30 years to 100 years. It was also given 30 acres of government land as a sweetener which it sold at a profit. No cost reduction was passed on to the toll-paying public. Instead, it was structured to ensure that the initial shortfall in toll collection was added to the project cost. This led to a 12 times cost escalation -- from Rs408 crore in early 2000 to over Rs5,000 crore when it was eventually scrapped by the courts. 
2. Tamil Nadu Road Development Company (TNRDC): This SPV was a 50:50 joint venture between IL&FS and the Tamil Nadu government (TNGov). It implemented the Rs205 crore IT corridor road project and east coast road-widening project. 
While both were equal equity partners, the subordinate loan of Rs41 crore from IL&FS earned a 15% return while the state provided an interest-free grant of Rs34 crore. This became the subject of a book—Evolution of IT Corridor by K Malmarugan and Sabina Narayan which exposes how IL&FS structures its deals.
In that project, says the book, TNGov got back Rs2 lakh on its Rs44 crore investment in the first seven years, while IL&FS got back Rs91.3 crore on its investment of Rs69.6 crore. It also sold its senior debt at a profit to Punjab National Bank and earned a 4% management fee.
Further, TNRDC was assigned a 4.9-acre plot at Rs1 crore which now has a market value of Rs50 crore, say sources. In this case, TNGov realised how it was being duped and ousted Ravi Parthasarathy as chairman of TNRDC. It also bought out IL&FS’s stake and converted it into a 100% government company. 
3. Tirupur Water Project: The Tirupur water project, to privatise water supply and make it available to the wealthy, hosiery-exporting town, was conceived by IL&FS in the mid-1990s and remains mired in litigation. The allegations, again, are fat fees charged by IL&FS and false promises to investors. 
Just one sentence from a hard-hitting, 2014 order by Justice V Ramasubramanian (also quoted above) encapsulates all that is wrong with this project: “The Government has pumped in money, unfortunately, only to service the debt with a pre-condition that the money will not even be used to improve the infrastructure. Investing more money just for the purpose of servicing a debt, is neither a prudent business decision nor in the interest of the public.”  
A top source in TNGov says there is an unwritten understanding in the state not to do business with IL&FS anymore. Did this never reach the ears of the former finance minister, who was from Tamil Nadu? You can draw your own conclusions.
GIFT City Gujarat: The Gujarat International Finance Tec-City, again structured as a 50:50 joint venture with the Gujarat government, was extraordinary in that the head of its audit committee filed a litigation against the project in 2016. The petition, by Dr DC Anjaria, alleged that this massive, Rs70,000-crore project had been virtually gifted away to IL&FS, leading to massive losses to the state government and the people. 
Here, too, IL&FS has extorted high fees. It got the land valued at Rs2/acre at a nominal price translating to a giveaway of Rs440 crore to IL&FS, says Dr Anjaria. This also has an expensive, ongoing arbitration with the original contractor consortium headed by Fairwood, with large claims and counter-claims on both sides. 
Gift City has been a favourite project of prime minister Narendra Modi; but not a word about it was in the public domain until I wrote about in August this year, just before IL&FS began to default on payments. 
There are similar issues with IL&FS’s ventures with the Rajasthan government, with the power project at Cuddalore and many others. But the most chilling one I have heard so far is a joint venture with RAHI Aviation to build airports at Gulbarga and Shimoga. 
When things turned sour, IL&FS accused the promoter of RAHI Aviation of forgery, and worse, and got him arrested. It ensured that he remained in Arthur Road jail (Mumbai) for six months by piling on more charges. As a direct result of that fight, the project has been taken over by the Karnataka government, which also invoked bank guarantees of Rs20+ crore. 
The details of what happened are the subject of a separate article; but IL&FS, which has now caused a systemic issue, lost the project and an investment of over Rs40 crore without anyone being held responsible. 
Well, it is time we woke up and started asking questions and ensure that this deliberately created mess is not foisted on public sector institutions and, eventually, on the people of India. 
Yedhunand Anand
5 years ago
Madam, nice connecting with you, I have one point which is the cause and effect of many ills in this country and the ILFS type frauds. I posted this as comment to ET a while ago with some edits here-

New IL&FS Board lines up fire sale, 65% staff may be fired

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Right correction / downsizing at the wrong time. That's been the case in India. I have always been advocating the theory of usurious salary packages offered by such big names for B-School grads and that too as young as 20+. So is the case with ILFS and so many more scams to be unfolded. It's a matter of pride for a premier B-School to have placed a candidate in ILFS offering packages of Rs. 50 lakh plus. While the B-School boasts of their achievement and track record, the candidate is on cloud-nine, their parents are on cloud ten. Thus recruited, their entire business model then surrounds on sustaining the growth which does not happen as anticipated without bank borrowings, then comes the defaults and then it all goes bust when the investigating agencies takeover. If this cycle has to be broken the HR community has to realise this first.. Just because 50 lakhs is spent on a course in IIT/IIM doesn't mean the candidate is one of a kind brilliant and should be placed in ILFS at 50 lakhs per annum. I don't understand why a App company like Ola/ Uber recruits candidates for 50 lakhs per annum. It would make some sense if a brick and mortar company pays high salaries. I think it's enough of this hoopla and press reports about salary packages and campus placements, it sends wrong signals to the entire younger generation. It would be wiser if candidates are paid according to their age, qualification, experience. We in India get everything wrong. Now what is the fate of the retrenched staff in ILFS, can any other corporate match their last drawn salaries?
Nikhil Bhadkamkar
5 years ago
Thank You Madam, for an excellent article.
Anindya Bhattacharya
5 years ago
Great work madam! Please bring out those cheats on the roads!
Sonica Agarwal
5 years ago
As a banker, I haven't dealt much with IL&FS. But there is one thing, I would like to point out. Many of the projects which came to banks for funding were shown to be viable by twisting the calculation of bank's financial ratios. With complex financial models and of course, some greasing, no wonder they were able to raise huge debt.
Rajendra Ganatra
5 years ago
Compliments for baring these mercenaries. I have first hand experience of doing Tirupur Water project from IDBI. What is most damning is that these guys who were supposed to create standards in lowest project costs and speedy project construction did exactly opposite. Not one project from them has been without financial distress and hair cuts by the banks. The loot of three decades had to crumble some day.
Vasant Kulkarni
5 years ago
Gopalakrishnan T V
5 years ago
It reminds one of the Harhad Mehta Scam but with a difference that in Harshad Mehta scam the banks were behind Mr Mehta to provide unlimited Financial support where as in this Il&FS the company has set up several sub sidiaries in such a way that no one can reach the depth of fudging of accounts and to what extent irregularities have been perpetrated. Of course Madam Sucheta Dalal with her investigative skill and expertise in knowing the ingenuinity with which our Banks , NBFCs and the Bureaucrats collude to hoodwink the regulatory system and siphon off funds can definitely bring out as to what has gone wrong with IL&FS and bring to public notice the way how our Financial System works for the benefit of a few at the cost of large number of people and the economy. How to fix the weaknesses in our Governance system is a million doĺlar question which the people would like to have an answer .
5 years ago
First Chairman of IL&FS was late Mr Pherwani of Harshad Mehta fame. Need l say more?
5 years ago
From the newly appointed board came many revelations. One was sinister: that IL & FS has 348-you have read it right 348 -entities-and not 169 !!! That means 179 entities-yes 179- were hidden !!!! Plain and simple . That is intriguing . Even auditors did not report in their statements. Is this not a criminal conspiracy ? Another thing: many such entities are abroad. Well we Indians are crazy about America, Europe ..... Babus(ex or whatever), netas (ex or whatever ), the IL & FS gangsters .... . And do not forget their ( usually ) spoilt bachchas, , admission to those heavenly Ivy League colleges !!!! Were such people accommodated in such secret offices ? I think almost certainly. Why 179 entities were hidden completely ? Were auditors also having gala time in these safe heavens ? Moneylife Team may kindly publish the list of these 179 hidden entities ,who were their office bearers , their connections and how much money was spent on them. Of course this money has to be paid by the Govt of India (read aam aadmi ). The Mafia-Boss-in -Chief is in London for "treatment " and is reported to be in touch with Mallya, Nirav Modi etc.
B Shankaranarayan
5 years ago
Every institution in this country which does business with any Govt. - state or centre - is fraudulent. Ministers, bureaucrats, public sector banks are all in cahoots with each other. My late father in law used to say that our politicians and bureaucrats have looted our country more than the British or Mughals did. We can't even say "shame on you" coz we the people are responsible for putting these crooks in power.
5 years ago
Just set aside the IL&FS. Take our brokers contract. apart from theprice of the stck what else is added. First the broker takes his brokerage. then the STT, Transaction charges, Stampduty, Central GST, State GST.... Can we not have a simple tax just added to the brokerage and cost of the scrip value? In all money market deals, if a bill is seen deeply, no one knows where the charges goes. It just wastages paid tot the jewellers.
5 years ago
We can start Citizen Awards and start shaming politicians and bureaucrats once year.
Shankar Pachari
5 years ago
Excellent article. This is an article that will not be seen in any other media publication. Keep up the good work Moneylife team.
5 years ago
Ravi Parthasarathy and his cronies were truly white-collar criminals. We have heard of crony capitalists,crony Babus and -of course- venal politicians. IL & FS was a lethal combination of all three !!!! Just think that this behemoth was running this criminal syndicate for the last three decades !!!! Because of its size, it was holding the country's infra development to ransom. We need a Nuremberg-type trial for these criminals. The system needs clean-up.
Vaibhav Dhoka
5 years ago
There is no dearth of crooks in India. Bureaucracy has stooped to very low as seen in this case.We can expect immediate inquiry and action and take to logical end.
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