IL&FS: Regulatory Capture or Plain Defiance?
Not a day passes without startling new information about Infrastructure Leasing & Financial Services that exposes how every regulatory organisation has failed the Indian people all over again, by sleeping on its job or failing to use the powers statutorily available to it. 
The latest of such alarming disclosures is a report in The Economic Times on 26th September which said that the Reserve Bank of India (RBI) had “expressed concerns about the operations of IL&FS Financial Services (IFIN) as long back as three years ago.” 
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.” Yet, says the paper, the IL&FS top management ‘declined to take corrective measures’.
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. 
In fact, one can pinpoint exactly when RBI would have pulled up the IL&FS board. The 2015 IL&FS annual report says a “contingency provision of Rs1,170 million has been created for the year ended March 31, 2015 in addition to the regulatory provision required by RBI.” This suggests that RBI’s inspection had already raised some questions and IL&FS pretended to take cognisance. 
The 2016 and 2017 annual reports, slip in two identical paragraphs under ‘Opportunities and Threats’ which indicate that RBI had, indeed, raised issues in its inspection report: They say, “Adequate funding at optimal cost and tenure will be critical for healthy business growth. The Reserve Bank of India continuously evaluates the market environment and systematic risks and constantly issues new regulations and / or modifies existing regulations endeavoring to balance the multiple objectives of financial stability, consumer protection and regulatory arbitrage concerns. The Company needs to be equipped to quickly adapt to the constant changes in regulations and competitive landscape. The economy is grappling with the issue of asset quality in financial market.” The next paragraphs says, “In view of the adverse market environment leading to stressed assets, the Company needs to continue with its focused efforts to monitor asset quality and take remedial action.” Further in the report, it claims that the “company’s Asset Liability Management (ALM) committee reviews funding requirements, ALM mismatch positions and implementation of liquidity strategy.” 
Under ‘Risks and Concerns’, IFIN’s director’s report says, “Risk management policies and practices were comprehensively reviewed in the year during the process of testing of internal controls for financial reporting; a few procedural were identified and have been remediated.”
The report, signed by Ravi Parthasarathy, does not say at what level these were ‘remediated’—was the audit committee or the board told about it? So wasn’t it all a lie? 
This is all the more significant, because Business Standard has this to say on 27th September: “the management has told shareholders that IL&FS was discussing its liquidity crisis with the Centre and the RBI for a long time, much before the crisis came to public light. The company was also assured that it would get support should there be a crisis.” Ironically, this explosive information is tucked away at the end of a report titled “Repeat of 2008 measures to revive IL&FS unlikely”.
If this is correct, then officials of RBI and the finance ministry who helped hide the problem from the public and, in turn, lured mutual funds and others to invest, must be identified and held culpable. In fact, the government continues to fool the people and mislead the market causing needless turmoil and panic. 
Clearly, IL&FS didn’t take RBI’s warnings seriously. But the bigger question is: What did the central bank do about it? Did it summon the chairman Ravi Parthasarathy who stepped down only this July after the IL&FS group was already on the verge of its first default?  
IFIN had paid a 50% dividend for all three years—FY14-15, FY15-16 and FY16-17—when RBI’s inspection report had apparently said that its net-owned funds were wiped out. Couldn’t RBI have objected to it? We know that RBI’s inspection reports are discussed by at the level of the deputy governor RBI with the board of IL&FS. 
In IFIN’s case, the audit committee in the relevant period included Shubbalakshmi Panse and Surinder Singh Kohli. Ms Panse was the former chairman and managing director (CMD) of Allahabad Bank who has been hand-picked by the government for the re-constituted Bank Board Bureau. So we know what to expect from it. Mr Kohli, is the former CMD of Punjab National Bank. Both, Ms Panse and Mr Kohli, with other directors, quickly resigned along with the managing director and CEO Ramesh C Bawa.  
Neither the government nor RBI has made any attempt, so far, to question Mr Bawa or the board that has deserted the sinking ship. Were they aware of RBI’s inspection report? Did Mr Parthasarathy and his core management team hide it from the audit committee and the board? If yes, this raises a new set of questions. 
RBI did not even stop the management of this private fief, masquerading as a government-owned organisation, enriching themselves while running the company down. 
According to a media report, even when the company was on the verge of a default, the entire top management team was given a massive pay hike on top of their already lavish salaries and perks. And who headed the remuneration committee? None other than SB Mathur who has been rewarded by handing him the chairmanship of the IL&FS parent company. Mr Mathur was also the director and chairman of scam-riddled National Stock Exchange (NSE) for various periods.
Consider the multiple levels at which we are being fooled by a private group that has always projected itself as a public sector entity. RBI is still not asking tough questions. As I write this column, we have reports that RBI has cancelled its meeting with the shareholders of IL&FS scheduled for Friday 28th September until they come up with a roadmap for the future. 
It is a little late; but, probably, the first step to a clean-up is to ask some tough questions on various issues such as: 
Role of the Board: Whether or not IL&FS as a group is bailed out, it is clear that the 40-odd banks, mutual funds and other entities that invested in its projects or financial papers will take a hit. Several companies have already approached the NCLT (National Company Law Tribunal) and there is talk about criminal cases being filed. In the circumstances, the public has a right to know what role, if any, the board played and how will the board members be made accountable? 
We need a separate investigation into the role of Ramesh C Bawa who has been allowed to resign along with the entire board of IFIN on 21st September. Their responsibility or culpability cannot end with a resignation, especially when Mr Bawa’s activities have, apparently, been the subject of a whistleblower’s letter. 
Remove the New Chairman: The financial sector cannot possibly have any confidence in a salvage operation headed by SB Mathur. Mr Mathur has been on the boards of two discredited entities—the NSE and IL&FS. There must be a way for people to weigh in on this and express their lack of confidence in the decision by shareholders to appoint him as chairman. Life Insurance Corporation (LIC) may be the biggest shareholder of IL&FS, but it is playing with public’s savings and we need to ensure they are not misused. 
Cabal in Control: Now that it is clear that IL&FS and its group entities have been concealing RBI’s concerns and financial mess for almost three years, it is imperative that the same cabal around founder Ravi Parthasarathy cannot remain in charge. In a letter to shareholders, vice-chairman Hari Sankaran wrote that IL&FS has set up a group management board that includes him, Arun Saha, Vibhav Kapoor. All three are close buddies of Mr Parthasarathy and have played a big role in creating the massive financial mess and a crazily complex conglomerate comprising 24 direct subsidiaries, 135 indirect subsidiaries and four associate companies under an unlisted parent company with virtually no oversight. IL&FS’s debt is a staggering Rs1.2 lakh crore and its annual report lists 40 top Indian and foreign banks as its bankers, apart from all those who purchased its financial papers of different maturities. 
If RBI has issues with Rana Kapoor of Yes Bank and Shikha Sharma of Axis Bank, having refused them another term, how is it okay with SB Mathur, Hari Sankaran, Arun Saha and Vibhav Kapoor presiding over the sinking IL&FS even today? 
Clean Audits: RBI and the Institute of Chartered Accountants of India need to be questioned about how and why Deloitte Haskin & Sells LLP failed to flag problems with IFIN that were caught by RBI’s inspection. Deloitte has given IFIN a clean chit in all three years. A fact that finds specific mention in the IFIN annual report. 
If there is one lesson that the Indian government has drawn from the failure of Lehman Brothers a decade ago, it is that no banker has been punished and no government official is responsible even for a financial disaster of epic proportions. Every action, so far, in the handling of IL&FS shows this learning at work. 
5 years ago
care was careless .
Mahesh S Bhatt
5 years ago
Golmaal Return Enjoy & pay taxes Life Goes On As Usual Shame is sold off so naked donot care Alak Niranjan Mahesh Bhatt
Rajendra Ganatra
5 years ago
Very incisive and very saddening! Sucheta has not only pointed out massive non-compliances bordering on massive criminality, but also suggested proper way forward. But alas, sane voices fall on deaf years in this country because every entity wants to save its back because of all round failure. The banks failed to evaluate IL&FS and its projects, the RBI has also failed - notwithstanding the noise it made, it obviously never comprehended full picture. The result is that the same IL&FS coterie misrepresented and looted money continues in the saddle with hapless public nationalising the loot through pliable LIC. Trouble is that this lease of life will only delay and further impair recoveries of the bank's. But who cares? Whose money is it anyway?
Replied to Rajendra Ganatra comment 5 years ago
Banks never evaluate. They only copy the project report and put in their language. Please tell me how does a banker know all that comes to his table? If at all some loans have come back, it's due to borrowers honesty. Borrowers already know that bankers are high pretenders. The project themselves they know all types of business in this earth. They have some standard appraisal techniques and data copied from project reports. Between borrowers and lenders, consultants come in and make an acceptable presentation. Never think that NPAs are less than 12 per cent due to their intelligence or skill set
As for RBI, they are the high priests chanting mantras (read directives)and Wales up after the horse has escaped. Why all these happen? Board sanction (implies collective responsibility meaning again no responsibility)
Replied to K V RAO comment 5 years ago
Read "Wales" as "wakes".
5 years ago
Good article . If Reserve bank of India puts any remark ( specially non conformance to set financial guide lines on any of NBFC companies , It should be put on NSE site. This will guide the public in general to take precautionary measure at least by individuals.
RBI should have cautioned the public in general well in advance when the signal was "orange"
5 years ago
Ravi Parthasarathi, do we remember in Mahabharata, Krishna who is the sarathi to Arjuna alerts Arjuna to get down first after the war is over, and then Krishna gets down. The chariot gets burnt saving both. Likewise ILFS Ravi Parthasarathi got down from ILFS ship before its final meltdown.
For every episode, we have lessons from the history.
As for responsibilities and accountability at various levels, less said the better. There are a number of cases in the recent past (PNB, Vijay Mallya, etc.,).
The proverbial public memory being short, none gets punishment. Everything is consigned to dustbin including various committee reports, findings etc.
5 years ago
Ravi Parthasarathi, do w
Ravindra Dave
5 years ago
Every where there is a couruption after Independence nd people's of India cheated by govt, govt office nd their officer as well their regulatory officer. Completely slaviness in our own people. Very much pain to know about IL&FS scandal. Shame.
5 years ago
Excellent article, its amazing how Sucheta Dalal comes up with such a gem of an article based on resources which I assume would be much less than those available to big publishing houses
5 years ago
I think, I had mentioned earlier also. This article silent about the criminal role of the credit rating agencies which downgraded the debt papers to default grade, only a couple of days before the due date. Even a novice in finance should have examined and assessed the maturing debt obligations and confirmed cash flows in place before giving such ratings. Further, it appears the credit rating agency had not taken high leverage and low NOF of all the entities put together. Who is to punish these rating agencies?
Replied to Ravindran comment 5 years ago
First line of responsibility is he managment at IL&FS, then come the rating agencies, then the banks and finally RBI. All have a hand in this. I am willling to bet even Parthasarathy would also have enjoyed political patronage.

Amazing sarathy (in hindi it means a driver) he is, driving the company to a cliff and jumping of right before its about to roll downhill
5 years ago
All points in the scam covered in an excellent fashion. Government and Regulator needs to take action.
Free Helpline
Legal Credit