IL&FS Scam: MCA Says DEA Raised Red Flag on 30 September 2018. Really?
Moneylife Digital Team 17 February 2020
A national news agency has credited the department of economic affairs (DEA) under the ministry of finance of flagging the problem at Infrastructure Leasing & Financial Services (IL&FS) and warning the finance ministry of its impact on 30 September 2018. This is part of a recent affidavit filed by the Ministry of Corporate Affairs before the National Company Law Appellate Tribunal (NCLAT). 
While several leading newspapers have diligently reproduced the report from Press Trust of India (PTI), it is unclear why this is even newsworthy; or why the DEA is made to sound like a whistle-blower. If anything, it suggests that it took 25 days after IL&FS defaulted on a loan to Small Industries Development Bank of India (SIDBI) for the finance ministry to understand the grave implications of the default and the contagion effect to this shady, under regulated, 347 company conglomerate. 
Remember, Moneylife was the first to break the news IL&FS defaulting on Rs1,000 crore loan from SIDBI on 4 September 2018. SIDBI, a public sector undertaking, was the first to classify IL&FS’s loan as non-performing asset (NPA); we had learnt that it had even asked one of its senior officials to resign owning responsibility for the default. (Read: IL&FS defaults on Rs1,000 Crore Short-term Loan from SIDBI?)
Surely, SIDBI’s actions would have got the attention of the ministry? It certain had the entire financial sector sit up and take notice, since Moneylife received innumerable calls seeking details and confirmation from shocked and disbelieving market intermediaries.
And yet, PTI says of the 30 September 2018 missive: “DEA had raised red signals of the likely collapse of IL&FS and had expressed its deep concern of such a collapse on the Indian economy”. That communication may have led to the finance ministry’s decision to sack the IL&FS board and appointed a new one headed by top banker Uday Kotak and a bunch of bureaucrats on 1 October 2018.
It may also be recalled that at the time when IL&FS’s board was sacked, the government was clueless about the number of companies in this group. It has put the number at just 169. It was only after the new board took charge that they realised that the mess was far bigger and even people working with it were hazy about the exact number of companies, special purpose vehicles and step-down subsidiaries which had  spawned their now multi-level subsidiaries. 
As reported by Moneylife on 4 September 2018, IL&FS had defaulted in repaying a short-term loan of Rs1,000 crore to SIDBI. At the same time, a subsidiary of IL&FS too had defaulted in repaying loan worth about Rs500 crore to the development financial institution. 
As an immediate measure, SIDBI at that time had asked Swaminathan Mallikarjun, its chief general manager in the risk management department, to resign owing to the bad debt from IL&FS.
This was followed by other defaults and a series of credit downgrades by rating agencies. The group debt at that time was estimated at Rs1.2 lakh crore. 
In a release, the government had stated, "…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. The decision to supersede the existing board was taken after careful consideration of a report received from the Regional Director, Mumbai under the MCA, which clearly brought out serious corporate related deficiencies in the IL&FS holding company and its subsidiaries," the release said. (Read: NCLT Approves Government Petition. IL&FS Gets a New Board Headed by Uday Kotak)
Last week, the MCA requested the NCLAT to give additional 270 days for completing resolution of 105 companies of the scam-hit IL&FS group. In an affidavit, the MCA also requested NCLAT to release 55 other entities from moratorium, so that they can discharge their debt obligations. 
The affidavit states, "...for the remaining 105 domestic group entities, extend the scope and operation of the order passed by this Tribunal on 15 October 2018 for an additional period of 270 days from the date on which the resolution framework is approved by this Tribunal, to enable the New Board to successfully complete the resolution of IL&FS."
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