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Autumn marks the changeover from summer to winter and the temperature drops considerably, making the Indian climate pleasant. Unfortunately the autumn of 2018 did not bring any pleasant moments in the life of Infrastructure Leasing and Financial Services (IL&FS), an Indian infrastructure development and finance company. And even after six months, the situation remains an unanswered paradox.

Autumn 2018 was a brainstorming time for money market experts in India. They sat together in boardrooms to decide the destiny of distressed financier IL&FS and the revival planning began. The challenge was as threatening as the Lehman Brothers crisis when the US Treasury stepped in to rescue America’s mortgage lending market in the autumn of 2008.

Although the government did not assure any bailout measure, it replaced the management of IL&FS with a new board in October 2018 and The Mumbai bench of National Company Law Tribunal (NCLT) upheld government’s decision to banish the existing board and to appoint the managing director of Kotak Mahindra Bank, Uday Kotak as the non-executive chairman of the troubled infrastructure development and finance company.

IL&FS has an aggregate debt pile of around Rs. 94,300 crore; out of which the company owes approximately Rs. 57,000 crore to banks only, most of which are public sector banks. On the other hand, out of the Rs. 18,800 crore loans advanced by IL&FS, 90% have become non-performing asset and the management was successful in recovering only 10% of the doubtful exposure. Now, even six months later, the IL&FS dispute remains an unresolved puzzle and due to an unhealthy match of asset-liability, the consolidated debt-equity ratio has become 10:1. Notwithstanding IL&FS reporting a loss of Rs. 1,887 crore in FY18 from a profit of Rs. 142 crore in FY 17, the salary of then chairman Ravi Parthasarathy was raised from Rs. 10.8 crore to Rs. 20.5 crore, boosting him to the 47th rank on Fortune India’s list of 50 highest paid executives. This highlights the deep incompetence of the previous management.

Dry days for banks

Banks have reported an exposure of nearly Rs. 20,000 crore to debt-ridden IL&FS in their quarterly results. State Bank of India, Bank of India and Bank of Baroda announced the highest exposure in their third-quarter results. As per the results, the State bank of India and Bank of India have an exposure of Rs. 3100 crore and Rs. 3400 crore respectively. Private sector lenders, HDFC Bank, ICICI Bank and Kotak Mahindra Bank have negligible exposure, but Axis Bank and Yes Bank have exposures around Rs. 800 crore and Rs. 2530 crore respectively.

However, not all loans have been branded as ‘non-performing assets’, despite the fact the majority of banks will experience grief in the fourth quarter results. This will definitely force them to seek one more relaxation from the Reserve Bank of India to postpone the provisioning obligations. Much will depend on the resolution plan and high credit cost will definitely put pressure on profitability if the plan drags on.

Where were the chowkidaars?

While the mystifying debacle of series of defaults by IL&FS on commercial papers, short-term deposits, inter-corporate deposits were unearthed in August last year, many experts were flooding their heads with queries like ‘how was the worsening condition of the group remained as secret for so long’ and ‘how did it get way from the attention of chowkidaars such as external and internal auditors, audit committees, credit rating agencies and members of the Board comprising of Life Insurance Corporation, State Bank of India, Abu Dhabi Investment Company and Japan’s ORIX Corporation.’

Many experts are of the opinion that the complicated configuration of the entity with many holding and co-holding corporations, subsidiaries, joint ventures, associate subsidiaries helped the IL&FS to stay below the radar of authorities. They have also pointed that there was an influential group of people at its helm, who enjoyed a lot of privileges and pleasures that went unchecked.

An unidentified whistleblower, who claims to be part of the ‘senior management team at Deloitte, Haskins and Sells LLP (Deloitte)’ has raised the flag about how the audit firm helped IL&FS to fudge its accounts year after year. Soon after, a complaint has been lodged with the Serious Fraud Investigation Office (SFIO) and the probe agency has initiated investigations and decided to summon its top officials to know whether several irregularities have been intentionally ignored by the group auditor. The complaint letter has also been sent to the Reserve Bank of India, Securities and Exchange Board of India, Ministry of Corporate Affairs and Grant Thornton who are conducting a special audit of group of the IL&FS. The whistleblower alleged that Deloitte has audited the group over a period of 10 years and senior leadership of the firm was aware of the fiscal malpractice and offensiveness of the IL&FS group.

Immediately after rejection of his petition by the Supreme Court, the SFIO arrested the CEO of IL&FS Ramesh Bawa in a case related to enormous loan defaults. Section 447 of the Companies Act enables SFIO to arrest a person for committing fraud and Ramesh Bawa was arrested on that ground. Earlier, former Managing Director and Vice-Chairman of IL&FS, Hari Sankaranwas arrested by the SIFO in connection with on-going interrogations. The agency indicated Sankaran of advancing loans to entities that were not credit-worthy and thereby triggering gigantic losses to the company and its creditors.

A decade ago, when a mega fraud in the software company, namely Satyam Computer Services was detected, the government had decided to make the entity’s all former top executives and board members, including the independent directors, company secretary and Price Waterhouse auditors answerable and accountable for the fraud. The government also greeted the CBI probe into the crisis. PwC audit firm dismissed S. Goplakrishnan and SrinivasTalluri, who were the statuary auditors of Satyam and they were detained by the police department of Andhra Pradesh. Tech Mahindra’s acquisition of Satyam Computer ended the story.

Rescue plan on

According to the sources, the initial stage of solving the IL&FS mess will happen in next few months. Already 50% of the injured group’s assets had been put on the block and the group companies will be labeled as high or medium risk corporations on the basis of risk-based classification. This indicates the progression being made. The Apex Court has also rectified grey areas pertaining to defaulting promoters or their relatives bidding for assets with reference to the provisions of Insolvency and Bankruptcy Code.

To conclude, ten years from now, it is doubtful that the general public will remember Infrastructure Leasing & Financial Services (IL&FS) and the puzzle. But India should, by then, have the resistance power to fight with similar tremors that not only terrorize the nation’s financial markets and its economy, but compel the taxpayer to pay for someone else’s blunders.

The author is a financial adviser, public speaker and author.