The fourth and fifth progress reports on the resolution of Infrastructure Leasing & Financial Services (IL&FS) mess, submitted by the government-appointed IL&FS board to the National Company Law Appellate Tribunal (NCLAT) on 14th August, contain the Reserve Bank of India’s (RBI’s) inspection report on IL&FS. They have a scathing indictment of the erstwhile board of directors headed by founder Ravi Parthasarathy and his trusted ‘coterie’ of senior managers and friendly directors.
RBI’s observations have been widely reported by the business press; but what, probably, went unnoticed is that the RBI report dates back to 22 March 2019, that is, it is at least four months old. And, yet, there is no indication of any follow-up action by the new board, as directed by RBI.
We have no clarity on why the IL&FS board has been treating the resolution and reporting process with shocking carelessness. Very little seems to have happened since January 2019 until August 2019, as is evident from the disclosures in the 4th and 5th progress reports.
Consider this. The third progress report was submitted on 17 December 2018. Then, on 14 August 2019, we were told that the IL&FS board has submitted: i) an addendum to the 3rd report that is dated 15 January 2019; ii) the 4th progress report is also dated 15th January but submitted on 14 August 2019; iii) the 5th progress report is also submitted on 14th August. Hopefully, NCLAT will ask for an explanation for the long delay and confused submissions.
Remember, this is not a bunch of retired government officials struggling to unravel a 347-company conglomerate, on their own. They have fairly expensive help from five separate entities. In October 2018, it appointed Alvarez and Marsal as restructuring advisers with the mandate to evolve a resolution plan, manage stakeholders as well as maintain strict controls and manage day-to-day liquidity. It appointed Arpwood Capital and JM Financial as financial and transaction advisers. Grant Thornton has been commissioned for forensic audits and it has Cyril Amarchand Mangaldas as legal adviser (until May 2019, it also had the firm of Shardul Amarchand Mangaldas as legal adviser for IL&FS Transportation Network Ltd (ITNL) -- the largest of the four holding companies in the group).
Had IL&FS still been operational, each of these companies would have shortly held an annual general meeting (AGM), where shareholders would want an update of activities over the year. Since IL&FS is under resolution, one would expect the progress report to provide this information to NCLAT with clearly delineated reports from all the consultants and advisers along with the fees paid to them (after all, auditors’ fees and directors’ fees are not a secret).
A financial expert points out, “any genuine update would provide material information since the last update.” Why are IL&FS progress reports so confused about the date, sequence and time of submission? How many times has the government-appointed board met from January to August 2019? What were the decisions taken at these board meetings? Shouldn’t the minutes of board meetings of a government-appointed board be disclosed, when it has been appointed specifically to ensure quick resolution?
Now, consider the fact that the RBI report was submitted in March 2019. RBI, as banking regulator, had asked for its inspection report to be placed before the IL&FS board and for an action taken report to be submitted to it. The 5th progress report from IL&FS has no mention of the inspection report having been discussed by the board, let alone any action taken in response to RBI’s directives. RBI’s key observations are:
- IL&FS has not disclosed any non-performing assets (NPAs) for the past four years;
- Wide divergences were observed between reported and assessed position of assets classification and provisions;
- The board failed to exercise oversight over the functions of the entity;
- The board did not monitor the affairs of the downstream entities;
- The board did not provide any rationale for funding of ITNL and other loss-making subsidiaries on an on-going basis, leading to the liquidity crunch at IL&FS;
- There were serious deficiencies observed in credit appraisal. Fresh loans were sanctioned and disbursed to repay earlier loans;
- There was no mechanism for monitoring end use of funds; there was no board-approved investment policy;
- ‘Unscrupulous, negligent and dormant management decisions’, involving huge sums of public money indicate that the (erstwhile) board was completely incompetent;
- A significant number of IL&FS's borrowers were either unrated or had poor credit ratings and, in certain cases, funds were lent to insolvent entities or those already in trouble (much of this was already known through the Grant Thornton reports);
- IL&FS’s risk management committee and investment review committee had not met for three years and decisions were taken by the committee of directors comprising a coterie of senior management;
- Conflict of interest was rife and there were plenty of self-serving decisions which benefited individual directors/top management such as “renting out their properties as guest houses, providing high end vehicles and making numerous foreign trips etc”;
- Systems and controls were lacking and the annual report disclosed only 169 companies whereas the new board discovered 348 entities;
- Credit appraisal was deficient; loans were given to repay old loans, significant number of borrowers were unrated, had a poor rating and, in some cases, were even insolvent.
But the moot question is: Did RBI’s annual inspection reports, over the past four years, note these lapses? If yes, why wasn't strict action initiated, given that IL&FS is a systemically important company subjected to stricter regulatory oversight? Did RBI reports in the past four years have to be placed before the board and submitted to the auditors? Did RBI check compliance? If not, did its officers collude with IL&FS to suppress facts?
Let’s not forget that RBI is just as responsible for the huge IL&FS debacle along with the compromised auditors and credit rating companies.
