ILFS Mess: SFIO Team Takes Charge of Server, Grills Officials. Lookout Notices at the Airports
While the media was occupied with the government’s sudden move to replace the board of Infrastructure Leasing and Financial Services (IL&FS), another drama was playing out at the swanky headquarters of the firm. 
 
The Serious Frauds Investigation Office (SFIO) was primed to spring into action, even as the government moved the NCLT (National Company Law Tribunal) at Mumbai. Sources say that an SFIO team was already hanging around the landmark IL&FS building waiting for the NCLT order. 
 
As soon as it received intimation that the NCLT had ruled in the government’s favour, SFIO officials swarmed into the building and took charge of the 9th floor which houses top management. 
 
They took control of the main server, to ensure that no documents/emails or information was destroyed or tampered with. Some insiders say that the server was shut down. 
 
While details could not be clearly ascertained, some employees believe that the SFIO team was accompanied by officials form the Reserve Bank of India. 
 
One source says that the two seniormost officials who have been with IL&FS for decades were being questioned by SFIO late in the evening. They were vice-chairman and managing director (MD) Hari Sankaran and Arun Saha, the joint MD and CEO (chief executive officer). 
 
 
Sources say that lookout notices have been put out at airports to prevent the top brass, including Mr Sankaran, Ramesh C Bawa and K Ramchand from leaving the country. Ironically, right until Saturday, when IL&FS held its board meeting, the top management and the board behaved as though it was business as usual and had put out a statement to say that key shareholders would subscribe to a rights issue to bail the company out of its difficulties. 
 
Interestingly, while IL&FS has always presented itself as a quasi-government entity, two of its largest shareholders are ORIX Corporation of Japan, which has a 23.54% stake and Abu Dhabi Investment Authority with 12.56% stake. 
 
Strangely, these large foreign shareholders do not seem to have questioned the management about its poor performance and lavish perks. While some investors have been trying to claim that top management hid issues from them, this is clearly false. 
 
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).”
 
However, senior management and the board not only put a lid on the mess, but also continued to sanction the lavish salaries, perks and high-spending ways of senior managers across the massive and diversified IL&FS group. 
 
Clearly, a lot of dirt is set to come out if the SFIO is allowed to investigate without interference. The modus operandi of IL&FS and how it gold-plated projects is already in the public domain. 
 
Former bureaucrats and executives who quit the group and attempted to expose the group have been hounded, humiliated and even arrested—the media was silenced by the confused narrative and false charges that the company put out. Others were too intimidated to speak. 
 
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. In the next few days Moneylife intends to reveal some of these inside stories. 
 
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COMMENTS

Ashok Senniappan

2 weeks ago

Make hay while sun shines. Have they given up the Indian citizen ship?

Sunil Rebello

2 weeks ago

The base problem of IL&FS is the GIFT city.
We may say that IL&FS is not a PSU but it always acted as a quasi PSU.
your article: 'Former bureaucrats and executives who quit the group and attempted to expose the group have been hounded, humiliated and even arrested'
This tactic is the clear example of our present government - shoot the messenger.
This is also exemplified in their name changing spree all over the country.
Now the whole weight of government authorities - RBI NCLT SIFO CBI ED etc etc are on IL&FS head.
But do they have expert advise or are they depending on the crap advise of the present Financial & Law team.
To change some major scam - you have to first accept that there is a scam.
IL&FS was not paid by the GOI for their work, Therefore the GOI takes it over.
who will take the haircut of 80,000 Cores+. for sure it will be us tax payers

sharafuddeen

2 weeks ago

Sucheta,appreciate your followup article(investigstion). Keep following and you will come across more childish way top brass in day to day management of IL&FS had been acting. The long & short of the story is that after reaching top of the ladder in finance industry, regulators seldom dare to scrutinise applying mind. My comments after reading your first article on this messup could not be seen(is not visible online). It was my first hand experience years ago.

JayaKumar VeeraRaghavan

2 weeks ago

How does this work , seems to be another 10000+ crore scam . Again whistle blowers silenced or ignored inspite of guvernemnt stake in it and size of likely default is so huge . Keeps happening with public money directly or indirectly

Ravindran

2 weeks ago

In all these drama, one fails to understand how the rating agencies' criminal role have been left out. Who controls the rating agencies (obviously SEBI and the RBI) and why no action is not being taken on the officials of SEBI/RBI and the rating agencies? The rating agency concerned should be debarred from assigning rating for certain years and a portion of the default amount should be recovered from it.

S Balakrishnan

2 weeks ago

What abt r p who seems to have been in the drivet's seat from the beginning resigning for 'health' reasons just when it was going to blow up.
Great timing.

SuchindranathAiyerS

2 weeks ago

IL & FS: Shutting the gate after the horses have fled. Will the investors get their money back?

SuchindranathAiyerS

2 weeks ago

India with far less resources is following the US trajectory to financial ruin for Non VIP citizens with more assiduity albeit indigenous " make in India" versions of Fannie May and Junk Loans / Bonds:

K V RAO

2 weeks ago

It is quite a surprise and unfortunate that eminent personalities (read R C Bhargav and Jaitheerth Rao)are part of the board.
This only confirms stuffing strong persons in the board does not guarantee governance. The best option for them was to come out of the mess. If they have noticed malfeasance as early as 2014, how come they joined the board?

V Ramesh

2 weeks ago

What was the rush. They could have waited for a few more years. What does "grill" mean? Is it like toast?
I think LIC has invested huge amounts of money (yours and mine) in several companies, and it does not look after these investments well.

Ashok Senniappan

2 weeks ago

When the companies networth is completely eroded in 2014, then what the hell the regulator doing?

Ashok Senniappan

2 weeks ago

All the senior officials of Banks/Auditors/ Civil Servants involved in scams
should not be permitted to leave the country

BV SUDHANVA

2 weeks ago

It would be interesting to see the network of the management and the involvement of the network

NCLT Approves Government Petition. IL&FS Gets a New Board Headed by Uday Kotak
The National Company Law Tribunal (NCLT), after hearing the government’s petition, has approved the takeover of the board of Infrastructure Leasing and Financial Services  (IL&FS). It has approved the appointment of a set of government nominees. 
 
The new board would comprise GC Chaturvedi, who was recently appointed chairman of ICICI Bank, former SEBI (Securities and Exchange Board of India) chairman GN Bajpai, and retired bureaucrats Vineet Nayyar, Malini Shankar and Nand Kishore, former Deputy Comptroller and Auditor General. 
 
It appears that Uday Kotak, executive vice-chairman and managing director of Kotak Bank, who would be the chairman of the new IL&FS board. 
 
It may be recalled that Moneylife has been pressing for sacking of the IL&FS board for over three weeks. https://www.moneylife.in/article/sack-ilfs-board-to-fix-the-mess/55296.html
 
However, it is not clear if this decision and the choice of nominees—who are either running competing organisations in the financial sector or are retired bureaucrats—is really the answer to IL&FS’s problems. 
 
The new board members will need to consider a forensic audit of accounts and sift through details of hundreds of subsidiary and associate companies to understand the true state of affairs.  This would have been better done by putting an independent-minded person in charge with an expert team to assist him. 
 
Sources say that the new board will probably appoint numerous consultants and accountants to get an understanding of the true financial state of the IL&FS group. Meanwhile, a lot has to be done at each subsidiary company, including a clean-up of their boards as well. Hopefully, the boards of the subsidiaries will offer their resignations after today’s decision. 
 
Some sources are also asking for lookout notices against key members of the erstwhile IL&FS management to ensure that they remain in the country for further hearings. 
 
The new board will be expected to hold a board meeting by 8th October and is expected to prepare a roadmap to NCLT by the next hearing. 
 
It further said that suspended board members shall no longer represent IL&FS in any case before the NCLT. The next hearing will be on 31st October. 
 
Here is the press release issued by the government announcing the change of IL&FS board.
 

IL&FS, incorporated in 1987, is a large Systemically Important Non-Deposit Accepting Core Investment Company (CIC-ND-SI). It has numerous infrastructure assets and has played a major role in infrastructure development and financing in the country. It has 169 group companies, as in 2017-2018, including subsidiaries, joint venture companies and associate entities. A series of defaults by IL&FS Group companies in August and September, 2018 on term-deposits, short-term deposits, inter-corporate deposits, commercial paper and non-convertible debentures and the rating downgrades in some and default on some other financial instruments has resulted into massive effect in the financial markets causing redemption pressure on the mutual funds, which held such financial instruments and has also adversely impacted the sentiments on the stock markets, money markets and debt markets. The redemption pressure on mutual funds has created a large systemic risk leading to quality papers being sold at steep discounts to meet the redemption demand. The debt market shocks got transferred to the equity market sparking sell off particularly in NBFC stocks and sectors linked with NBFC financing.

IL&FS Group, as per their latest Balance Sheet has infrastructure and financial assets exceeding Rs 115000 crore is presently facing tremendous debt pressure and struggling to service around Rs. 91000 crore in debt which is the outcome of its mismanaged borrowings in the past. The financial mismanagement of the IL&FS is apparent from its rapid debt built up and misrepresentation of true state of financial fragility, which is being reflected in unprecedented rating downgrade from highly rated to a default category.  Considering the capital base of the Group, the leverage is very high. The IL&FS Group is involved in many infrastructure projects including through equity and debt financing. Any impairment in its ability to finance and support the infrastructure projects would be quite damaging to the overall infrastructure sector, financial markets and the economy, considering its systemically important nature. The Government stands fully committed to ensure that needed liquidity is arranged for the IL& FS from the financial system so that no more defaults take place and the infrastructure projects are implemented smoothly.

The IL&FS Group, especially its subsidiary companies, IL&FS Engineering and Construction Company Limited (IL&FS Engineering) and IL&FS Transportation Networks Ltd. had got into major problems beginning 2012. This led to massive delays in execution of projects and a number of projects had become stalled infrastructure projects even before 2014. This affected their financial performance and significantly increased the leveraging as delayed projects were kept afloat by more and more debt financing. IL&FS Engineering had a series of losses beginning 2011-12 and minimal profit started after 2015-16. IL&FS Transportation Network Ltd. witnessed significant erosion of profit starting from 2012-13 and the net debt also increased more than two times from Rs. 13939 crore to Rs. 29961 crore in 2017-18. Deterioration in the financial performance and substantial leveraging of the IL&FS Group started many years ago on account of stalled projects in infrastructure sector largely owing to wrong decisions and policy paralysis before 2014.  

The restoration of confidence of the money, debt and capital markets, the banks and financial institutions in the credibility and financial solvency of the IL&FS Group is of utmost importance for the financial stability of capital and financial markets. There is an emergent need to immediately stop further financial defaults and also take measures to resolve defaulted dues to the claimants. This would require a combination of measures of asset sales, restructuring of some liabilities and fresh infusion of funds by the investors and lenders. The confidence of the financial market in the credibility of the IL& FS management and the company needs to be restored. There appears to be significant liquidity gap in the Company as estimated liabilities might not have any corresponding revenues / capital flows presently. In the circumstances, replacement of the existing management by the new management appeared to be most necessary and immediately required to be done for restoring that confidence and to avoid any suboptimal liquidation of assets.       

The Government, after analysing the emerging situation of the IL&FS Group come to the conclusion that the governance and management change in IL&FS Group is very necessary for saving the Group from financial collapse, which required an immediate change in the existing Board and management and appointment of a new management. Continuance of the present Board had become prejudicial to the interests of the company and its members and this management was affecting public interest because of its adverse impact on financial stability and making capital markets so adversely affected. Therefore, the National Company Law Tribunal (NCLT) was approached today by the Government under section 241 read with 242 of the Companies Act, 2013 to order supersession of the present Board of Directors of the IL&FS and its substitution by the new Board of Directors.

The Government was compelled to take this extraordinary step under section 241(2) of the Companies Act, 2013 to apply to the Tribunal for an order to prevent further mismanagement in order to protect public interest. The decision to supersede the existing board was taken after careful consideration of a report received from the Regional Director, Mumbai under the Ministry of Corporate, Affairs which clearly brought out serious corporate related deficiencies in the IL&FS holding company and its subsidiaries. It was noted that the consolidated financial statement of IL&FS holding company and its subsidiaries, associates and joint ventures projected a picture through highly exaggerated depiction of non-current assets in the form of intangible assets amounting to over Rs. 20,000 crores. Besides, bulk of revenue was in the form of receivables, around 50%, which was locked up in litigation and arbitration. Added to this, there has been a sharp increase in bank deposits held in lien, which rose by Rs. 1,681.59 crores in FY 2017-18. Overall, the company has negative cash flows from operations. Further the net outflow was Rs. 7,020 crores in 2017-18. From August 2018 the company has been making repeated defaults. It has been noted that there is deep-rooted mismatch in the debt-equity ratio because of excessive leveraging, which has put a question mark in its ability to continue as a going concern if allowed to continue in the hands of the present management. The high debt stress was clearly visible in the company and its main subsidiaries for the last so many years, but was camouflaged by misrepresentation of facts. Besides, the fact that the company continued to pay dividends and huge managerial pay-outs regardless of looming liquidity crisis shows that the management had lost total credibility. There have also been serious complaints on some of the companies for which an SFIO investigation has been ordered into the affairs of IL&FS and its subsidiaries.

The supersession of the existing Board and its replacement by a new Board of IL&FS is the necessary first step towards restoring the confidence of the financial market in the IL&FS Group. The Government is aware of the need to supplement this with several other measures which are required to be taken. Restoration of confidence of the financial market and to ensure solvency and orderly sale of the assets of the IL&FS Group would, inter alia, require time-bound sale of assets and realisation of receivables, fresh capital infusion, restructuring of business and ensuring continued access of the IL&FS Group to the financial market to meet its present and future financing needs. The Government is committed to ensuring the financial solvency of the IL&FS Group with a view to maintaining the financial stability in the country. Towards this end, the Government is committed to ensure that ILFS Group receive much needed temporary liquidity support.  It is hoped that financial institutions would be supportive for providing urgent liquidity. The Government would also take all necessary steps to ensure that the infrastructure and other productive sectors of the economy continue to get financial resources to maintain the growth momentum of the Indian Economy, the fastest growing economies in the world.  

 

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COMMENTS

Ashok Senniappan

2 weeks ago

The Directorts responsible for this mess should be held responsible for the mess
created. .How long the Government can step in to stem the rot with tax payers
money.
India a perinially ill on the ventilator support India?
Resignation is not the answer

jaideep shirali

3 weeks ago

If you appoint a Board with only babus, all that will happen is that the rot will be swept under the carpet. Nobody will be held accountable, nobody jailed. Even the credit rating agencies who were snoring away and woke up only after the default deserve harsh punishment, doubt that. The Govt itself owed ILFS money, who has been taken to task for that ?

SURAJIT SOM

3 weeks ago

Finally the Govt has acted. Certainly it was prompted by UTI and Satyam episodes. The action today was easier and less controversial due to precedent set by Satyam ( happened under UPA ,2009 ) . The media has played a sterling role. It was led by Moneylife Team. Well done. Now also we need media to follow up relentlessly till the issue is solved satisfactorily like Satyam. Just now we read that the balance sheet was inflated showing in an intangible asset of Rs 20,000 cr !!!! Smell of Vijay Mallya ghotala ? This may just be the tip of the iceberg. Quite honestly some former board members need to be sent to jail. Ramalinga Raju was. The current one is much much bigger.

Mohan Krishnan

3 weeks ago

Socialise losses, Privatise gains.

Govt moves NCLT for change in management at IL&FS: Report
UPDATED 1.04pm on 1 Oct 2018
 
The Indian government has finally decided to intervene in the Infrastructure Leasing & Financial Services Ltd (IL&FS) issue by moving to the National Company Law Tribunal (NCLT) for changing management at debt-ridden conglomerate, says media report.
 
R report from CNBC-TV18 says, the government has proposed to dissolve entire board of IL&FS and appoint 10 new directors with Uday Kotak as its non-executive chairman.

Quoting sources, the report, says, "Foreign shareholders are hesitant in putting more money unless there is a change in the management. Domestic shareholders have also expressed their concerns in lending to the same management at the helm and the government is looking to supersede the IL&FS board."

Sources from the company told the news channel that IL&FS will support and co-operate with the government and the NCLT application will help the company in an early resolution of its pending issues.
 
Moneylife’s editor Debashis Basu, in his column in the Business Standard has expressed the need for a three-point surgical strike in the IL&FS scam. This includes, immediately getting a new leadership, start selling assets through competitive bids and dismantling IL&FS, he wrote.
 
 
Last month, Moneylife had pointed out the need to sack incumbent board at IL&FS. "Equity infusion by shareholders is unlikely to be enough to address the problem it faces.
 
The government needs to have a strong team in place to take charge of IL&FS and make an honest assessment of the situation," Sucheta Dalal, managing editor of Moneylife, wrote last month. (Read: Sack IL&FS Board To Fix the Mess
 
The Reserve Bank of India (RBI), which classifies IL&FS as a systemically important non-banking finance company, has ordered a special audit, only after it began to default. 
 
RBI’s inspection report pointed out “that the net-owned funds of the finance company had been wiped out and that it was over-leveraged.” 
 
RBI is the banking regulator and IL&FS is designated a systemically important finance company. Yet, we are told that it ‘declined to take corrective measures’.
 
The word ‘declined’ smacks of defiance and is actually borne out by publicly available information. (Read: IL&FS: Regulatory Capture or Plain Defiance?
 
At IL&FS, things started unravelling rapidly after Moneylife first reported its Rs1,000-crore default to SIDBI (Small Industries Development Bank of India) on 4th September. (Read: IL&FS defaults on Rs1,000 Crore Short-term Loan from SIDBI?)
 
This was followed by other defaults and a series of credit downgrades by rating agencies. The group debt is currently estimated at Rs1.2 lakh crore and what we have seen so far are tiny ineffectual steps by the board. It is nowhere up to the task of resolving a giant problem that is, once again, likely to need a bailout by the public through the exchequer.
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COMMENTS

rajee

2 weeks ago

this country indebted to sucheta dalal & her team

Mohan Krishnan

3 weeks ago

When there is a political will things move at supersonic speed.
Having digested hard earned capital of common people now Govt. is giving slap in the wrist for Ex Management, Ex Board, Credit rating agencies, Politicians and Bureaucrats hands in glove, Banksters etc. This is implicit guarantee given by the Govt.
Gainers: Japanese heavy equipment manufacturers, Abu Dhabi, Banksters and Politicians/Bureaucracy.
Losers: As usual, Retirees, Insurance policy holders, Pension Funds, Bank Depositors, poor people who have been denied inflation beating returns (reserved for the rich and FIIs). Truly banana republic.

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