IL&FS FRAUD

IL&FS GROUP OF COMPANIES

• Infrastructure Leasing & Financial Services is a holding company that
holds various group companies ranging from infrastructure, finance,
social and environmental services.
• It was founded in 1987 with equity from Housing Development,
Finance Co, Central Bank of India and Unit trust of India to fund
infrastructure projects when other lending institutions were focused
on corporate lending.
OWNERSHIP STRUCTURE OF IL&FS
• ORIX corporations of Japan , LIC, Abu Dhabi Investment Authority
,HDFC , CBI , SBI own 23.54%, 25.34%, 12.56%, , 9.02%, 7.67%, 6.42%
respectively of the company.
• IL&FS has 169 group companies as on 2017-18, including subsidiaries,
joint venture companies and associate entities.
• The IL&FS is the largest group in infrastructure space on lending and
development front.
THE BEGINNING OF THE END FOR
IL&FS
• IL&FS Financial Services failed to meet its bank loans payment,
defaulted on its short and long term deposits and failed its
commercial paper redemption obligation due on September 14th.
• The company reported receiving notices for failing to pay its liabilities
on September 15th.
• After the Default on its payments , ICRA downgraded the short and
long term borrowing programme of the company.
SPREAD OF CONTAIGON
• After the default by IL&FS on its liability payments, fear of debt
market crisis spread when DBS mutual fund sold commercial paper of
DHFL which leads to contagion in the equity markets which crashed
nearly 1500 points.
• This caused liquidity concern with respect to other Non Banking
Financial Corporations with asset liability mismatch on their balance
sheet. Their assets in terms of loan given to customers are in long
term while liability in terms of CP papers are for short term which
cause refinance problems for a lot of them with weak balance sheet.
THE MAIN CHARGES AGAINST IL&FS
• The main charge against IL&FS is the it used borrowed capital to pay
off loans in form of evergreening of loans.
• The charge sheet brought by Special Fraud Investigation Office against
thirty individuals including the former top management of the
company revealed the report by the RBI for financial year 2016-17
which brought to light that debentures of Rs 190 crores purchased by
the IL&FS group were used to fund earlier loans given by the company
to various companies belonging to Sivashankaran's Siva group.
• The charge sheet also remarked that despite RBI inspection, IL&FS
kept on functioning.
• The charge sheet by SFIO also implicated auditors of the IL&FS group
for concealing information and falsifying the book of accounts.
• The independent directors of the company despite RBI report didn’t
speak out and remained mute negating their duties.
• SFIO has also come down hard on Deloitte for not taking action
despite knowing the evergreening of loans by IL&FS Financial
Services (IFIN).
FAILURE OF RATING AGENCIES
• One of the biggest failures in the financial crisis of 2008 was that of
rating agencies when they graded sub prime mortgage to good
investment grade.
• Similarly in case of IL&FS, the rating agencies maintained AA+
(investment grade) for long term debt facilities of IL&FS which
dropped only after the default to BB(below investment grade). This
steep and swift downgrade shows the failing of rating agencies to
detect the problem before it explodes.
THE FUNDAMENTAL STRUCTURAL
PROBLEM OF IL&FS
• Infrastructure is one the most important sector Indian Economy.
IL&FS played a important part in this sector in the past two decades.
• It built up a debt to equity ratio of 18.7 in the process of taking many
infrastructure projects.
• The group is a behemoth with at least 24 direct subsidiaries, six joint
ventures and four associate companies ,135 indirect subsidiaries, with
a total debt of about Rs 91,000 crore.
• The many of its projects became unviable after the land acquisition of
act of 2013. Cost escalations led to many incomplete projects which
increased its cash flow problems.
THE PATH AHEAD
• The serious issue of regulatory failure(criminal in some cases) on the part
of top management, independent directors, auditor's as well the various
rating and government agencies is a serious issue which should be dealt
with strictly.
• In the end it is the public tax money which ends up bailing out these
companies when some fraudulent criminal activities sink these
companies.
• In a country where farmers commit suicide in large numbers due to non
payment of their bank loans, the rich and powerful should not the
allowed to go scout free. The full force of law should be thrown upon
them.