IL&FS Mess: Can SFIO do Justice to the Probe with its Dwindling Staff?
The government has got the Serious Frauds Investigation Office (SFIO) to take charge of IL&FS’s servers in Mumbai and has started an audit. Unfortunately, the SFIO is a lame duck, with most of its investigations and findings unceremoniously buried by the Ministry of Corporate Affairs (MCA). Moreover, SFIO simply does not have the manpower to takeover any new investigation due to pendency of cases. Out of 186 cases assigned to SFIO during FY2018-19, it had completed investigation only in one case as on 20 July 2018 due to a 55% shortfall in staff strength, data from the Lok Sabha questions shows. 
 
Earlier, in August 2017, in response to a question in the Lok Sabha, the Union Minister of State Arjun Ram Meghwal provided summary of 233 fraudulent finance companies and chit funds that the SFIO had investigated over the previous five years. He also admitted, “No money in these cases has been restored back to the investors”. 
 
PR Senthilnathan, a member of Parliament (MP) had asked about action taken by SFIO against fraudulent companies and refund of money to victims by fraudulent companies and chits funds. As per the list, maximum number of fraudulent companies (132) were from West Bengal followed by Orissa at 31. 
 
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. But unless the SFIO is asked to work in a time-bound manner and report directly to the Prime Minister’s Office (PMO), the outcome will be no different this time.
 
What is more shocking is as against a sanctioned strength of 133 posts, SFIO has only 45% or 59 officials working on various cases and use services of external consultants. Due to this, over the past three years, SFIO was even unable to spend budget sanctioned. 
 
While during FY2018-19, its budget was increased four times to Rs62.22 crore from Rs17.37 crore past year, as on 30 June 2018, it could spend only Rs4.71 crore. This was informed by PP Chaudhary, Minister of State for Corporate Affairs while responding to a question in the Lok Sabha on 20 July 2018.
 
 
Mr Chaudhary also told the Parliament that during the past three years, 94 complaints and prosecutions were disposed of by the various courts by levying a total fine of Rs5.9 lakh or Rs6,276 per case.
 
Since its inception in 2003, SFIO had investigated 312 cases till 2016-17. According to information provided by Ministry of corporate affairs (MCA) to a Parliamentary Panel, only six convictions, including those in the Satyam and Reebok case, had fructified out of 162 investigations completed till March 2015. 
 
In short, over the past 12 years, the conviction rate of SFIO is just 3.7%. In contrast, the conviction rate of UK’s SFO on whose lines the former is modelled, was as high as 85% as per its progress report submitted on 23 June 2014.
 
Coming back to the IL&FS mess, the reconstituted board has to submit a resolution plan to the NCLT (National Company Law Tribunal) by 31 October 2018. Many Indian and international experts, point out that IL&FS has been largely and infrastructure play in the private sector and cannot be given special treatment just because it masqueraded as a quasi-government body. If the rating agencies or banks treated it as one, they ought to be hauled up. 
 
Strangely, the regulator of rating agencies, Securities and Exchange Board of India (SEBI) is silent so far. How difficult is the new board’s job? It has to first understand the modus operandi of Ravi Parthasarthy, who ran the show with his cronies for over two decades. (Read: How IL&FS Was Enriching Itself at Public Cost)
 
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.
 
Banking analyst Hemindra Hazari has written about how the complete erosion of IL&FS’s networth has been disclosed in the consolidated balance sheet for several years. 
 
In an article in The Wire he writes: “A cursory analysis of the consolidated accounts however reveals a horrifying saga: IL&FS has been an insolvent company since at least FY’2014 (no disclosure of consolidated accounts prior to FY’2014).”
 
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IL&FS Mess: Dramatic Increase in Debt in the Past 2 Years
While responding to Rahul Gandhi’s allegations that more and more financial scams are coming out under the watch of the current regime, finance minister Arun Jaitley claimed that the problem of Infrastructure Leasing & Financial Services (IL&FS) is a creation of the Congress regime. 
 
However, the debt levels in IL&FS dramatically rose in the past two years when the Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA) has been in power. 
 
Its leverage rose by 59%, from 6.1 times in March 2016 to 9.7 times by March 2018, according to REDD Intelligence, which has pieced together the total picture of assets and liabilities of the group from publicly available information. REDD stands for Risk Event-Driven and Distressed. It is a leading provider of material intelligence on emerging market event-driven special situations. Moneylife has reviewed its research on IL&FS.
 
There are massive related party transactions and inter-corporate lending, which makes it very difficult to penetrate this behemoth. IL&FS’s exposure to associates through loans and receivables was Rs5,500 crore and another Rs600 crore were given as guarantees.
 
For the year ended March 2018, IL&FS reported a loss of Rs2,200 crore, eroding 22% of the company’s book value in just one year. It was so deep in trouble that even its interest cost at Rs7,920 crore was more than earnings before interest depreciation and taxes of Rs7,200 crore. 
 
On Monday, the government sacked six independent directors and appoint new directors on IL&FS board after it appeared that this massive institution had become a threat to the financial system when it started defaulting on its short-term debt obligations.
 
It has never been clear what are the total assets and liabilities camouflaged in the holding company, IL&FS, and hundreds of subsidiaries and associate companies. 
 
Indeed, even the government did not know how many entities there are in the group. In a press release issued on 1st October the ministry of finance said that IL&FS “has 169 group companies, as in 2017-2018, including subsidiaries, joint venture companies and associate entities.” 
 
Well, this figure is way off the mark. In a press conference on Thursday, Uday Kotak, the new chairman of IL&FS disclosed that there are 348 entities in the group.
 
There is so little information in public domain that despite its painstaking effort, even REDD did not have complete visibility about this sprawling hydra-headed conglomerate. According to REDD, IL&FS group has 175 subsidiaries and 66 associates – in all 242 entities – far more than 169 companies according to the ministry of finance but far less than what the Mr Kotak revealed. 
 
According to REDD, the group holds assets of around Rs1,65,000 crore. The corresponding total liabilities is around Rs1,32,000 crore. The reported consolidated liabilities at IL&FS (holding company), is around Rs1,06,500 crore and inter-group liabilities is around Rs25,500 crore. Similarly, inter-group assets comes around Rs49,000 crore, indicating an equity of Rs23,500 among the group companies.
 
According to the data compiled by REDD, IL&FS has total assets of over Rs1,00,000 crore in its operating subsidiaries. Of this, around Rs25,000 crore is in financial assets and the remaining is in non-financial assets, spread across energy, road, international, maritime, rail, township, educational and other assets.
 
In a report dated 27th September, REDD states that the consolidated debt on the IL&FS books stands at around Rs91,080 crore. Out of this Rs68,070 crore is secured and remaining Rs23,024 crore is unsecured. Total loans, which are secured against the cash flows of the company, is around Rs40,000 crore.
 
The IL&FS story started unravelling after Moneylife first wrote about its default to SIDBI. (Read: IL&FS defaults on Rs1,000 Crore Short-term Loan from SIDBI?)
 
Despite running scores of different projects and businesses, IL&FS has reported a loss or meagre profit over the past three years for which data is available.
 
Over the past 10 days, many of these victims have begun to speak out, especially after the gold-plating of the GIFT City project was exposed by Moneylife.
 
You may also want to read…
 
 
 
 
 
 
 
 
 
 
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COMMENTS

arun k Dasgupta

2 months ago

ILFS mess was created over a period with the support and connivance of
so called eminent board members
and the auditors/CA firms. Let there
be a forensic audit and the role of both internal/ nominee/
independent directors and the audit
firms be critically examined because
it is very much possible that these

people decided to look aside and their silence/ approvals were
purchased at a cost. The truth should come before the nation as these
tainted directors are spreading their tentacles in many other companies
and are playing with the public trust.

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. 
 
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COMMENTS

Yedhunand Anand

2 weeks 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

Read more at:
//economictimes.indiatimes.com/articleshow/66946480.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

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

2 months ago

Thank You Madam, for an excellent article.

Anindya Bhattacharya

2 months ago

Great work madam! Please bring out those cheats on the roads!

Sonica Agarwal

2 months 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

2 months 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

2 months ago

A STORY IS TOLD. A FARMER OBTAINED A LOAN OF RS.100/-( in1948).TO GET THIS LOAN HE SPENT RS.80/- ON VARIOUS INTERMEDIARIES,(PEON, CLERK, ACCT., TALATHI ETC). HE WAS LEFT WITH RS. 20/-.
HE WENT TO THE COLLECTOR AND PUT RS.20/- BEFORE HIM. AND SAYS, SIR ONLY YOU ARE NOT GIVEN ANY MONEY PL. TAKE THIS REMAINING MONEY. THE COLLECTOR WAS FURIOUS. BUT LATER REGRETTED AND PAID HIM RS. 100/- AS HE FELT SYMPATHY FOR THE FARMER.
WILL THIS HAPPEN?

Gopalakrishnan T V

2 months 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 .

DR SATI PRASAD SINHA

2 months ago

First Chairman of IL&FS was late Mr Pherwani of Harshad Mehta fame. Need l say more?

SURAJIT SOM

2 months 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

2 months 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.

V.Krishnamoorthy

2 months 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.
v.krishnamoorthy

Kannan

2 months ago

We can start Citizen Awards and start shaming politicians and bureaucrats once year.

Shankar Pachari

2 months ago

Excellent article. This is an article that will not be seen in any other media publication. Keep up the good work Moneylife team.

SURAJIT SOM

2 months 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

2 months 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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