IL&FS: India’s Leading Financial Scam

IL&FS going belly up with nearly Rs 90,000 crore in debt has hit all kinds of investors, from shareholders to debenture holders to FMP holders with Mutual Funds to retirement funds, and not just banks and financial institutions. Of course, in the ultimate analysis, the stakeholders of all banks and financial institutions are individuals.

IL&FS postured itself as a professionally run, semi-government and semi-international financial behemoth of great respectability. Never mind that in its 2014-15 annual inspection report, the RBI reported that the company’s net worth had turned negative and again in 2015-16 pointed out that the company’s financial leverage (debt to equity ratio) was too high.

Never mind that about the same time, in 2014, SEBI had issued a show cause notice to five of the top executives of IL&FS, including its then chairman, charging them with stock manipulation and synchronised trading in Adani Exports.

Never mind that by August-September 2018, its bonds nose-dived from AAA to default in 45 days.

Never mind that the company’s auditors – one of the ‘Big Four’ – could not spot any ever-greening of loans by the company or the adequacy of their provisioning for bad loans and investments.

Never mind that every committee of the board (which was sacked en masse in October 2018) of IL&FS tasked with good corporate governance was chaired by the who’s who of the Indian corporate sector, who collectively had their eyes closed to all that went on in the company.

Never mind that even as the company was giving way at the seams, the board of IL&FS approved a 144% hike in the annual compensation to the company’s chairman (and possibly a few others), taking it to
Rs 26 crore. And, never mind that the powers-that-be saw it fit to allow the company, funded primarily by Indian money, to run like a private fiefdom from 1988-89 until 2018 — a run of nearly three decades.

Ah, time for stock-taking…

Is RBI’s job done merely by blowing the whistle about the net worth turning negative or the financial leverage getting dangerously high, especially when inspecting a financial behemoth? Isn’t a vigilant regulator — for RBI is a regulator, vigilant or not — supposed to do some serious follow-up on its own adverse remarks?

Is it enough for SEBI to settle serious misdemeanor of a public company’s top management with some notional financial levy (two of the executive directors, including the chairman, were fined Rs 34.42 lakh each and three of them Rs 13.77 lakh each), without admittance of guilt? (Note that for a much lesser crime, Rajat Gupta was awarded jail sentence in the US. The Securities and Exchange Commission in the US levies sums running into millions of dollars when they settle a matter without admission of guilt, because the idea is that the levy ought to be prohibitive — prohibiting the person concerned from indulging in a similar shenanigan again).

What about the responsibility of the rating agencies? Are they not supposed to dig deep into the financial situation of the companies they rate? Or, are they supposed to accept the numbers provided to them without questioning? What use is the downgrading of a bond, when the default becomes public knowledge?

What about the statutory auditors? Shouldn’t they, of all of the above, have the highest responsibility in identifying financial trickery and skullduggery in the affairs of a company? After all, if anyone has open-sesame to the records of a company, it is they, right?

What about the members of the board chairing the many committees of the board to ensure good governance? True, the independent members of the board are often the last to know of any shenanigans, just like the spouse is the last to know of the partner’s dalliance. But what, for instance, do we say of the ‘Risk Management Committee’, whose silence was louder than the prime-time ruckus that passes for debate, when it came to matters of risk in the annual report of 2018, if not earlier? How did the ‘Compensation Committee’ come to recommend 144% hike to the chairman’s salary barely weeks ahead of the company going bust with a huge bang? Why did no independent member on the board ever bring up the matter of one man presiding over the affairs of the company for well-nigh three decades, preventing all fresh air from wafting through the organisation?

I have no idea if the Serious Fraud Investigation Office, Enforcement Directorate, Vigilance Commission, CBI and all the rest of the high and mighty — who mostly specialise in closing the stable door after the horse has bolted — would succeed where RBI, SEBI, auditors, credit rating agencies and the board failed collectively, severally and abjectly. Will they have the will and competence to take matters to their logical conclusion? Will those who profited from the frauds and deliberate mismanagement be brought to book? Will their ill-gotten wealth be recovered? Or, will their families be allowed to enjoy the fruits of their sinful labour? Will they be fined prohibitively? What about those responsible in the RBI, SEBI, credit rating agencies or the board members?

We have a copybook test case here. The scale of our frauds and scams have risen so much that it is perhaps time to introduce a new unit of measurement at Rs 10,000 crore. The Vijay Mallya scam romped home at about Rs 9,000 crore, or about 1 unit; the PNB-Nirav Modi scam at about Rs 15,000 crore, or 1.5 units; and the IL&FS scam has vaulted over Rs 90,000 crore, or 9 units!

Well, as everybody was looking the other way, the NPA of the energy sector has touched about Rs 1.75 lakh crore or 17.5 units and the NPA of the Indian corporate sector as a whole is towering over Rs 5 lakh crore or 50 units!

Oh yes, our financial system must be doing really well to absorb such scams and losses.

(The writer is an academic and author)