IL&FS Management Misrepresented Facts, Has Lost Total Credibility, Says Government

As of today beleaguered infrastructure finance company Infrastructure Leasing & Financial Services Ltd. has a new board. Six members, including two bankers, a former regulator, two veteran bureaucrats and a corporate leader, who closely witnessed a similar rescue not ten years ago.

Negligence, Incompetence And Number Fudging?

When arguing its petition to supersede the board, the government told the National Company Law Tribunal on Monday, Oct. 1, that the company’s incumbent directors “failed to discharge their fiduciary duties” and the management is “responsible for negligence and incompetence”.

The NCLT order stated the government said that IL&FS’ auditor, SRBC & Company, an EY network firm, had in its limited review report pointed to “the existence of material uncertainty on the company’s ability to continue as a going concern”. While the order doesn’t clarify, this most likely refers to the going concern status of key subsidiary IL&FS Transportation Networks Ltd., which was highlighted by auditor SRBC & Company (also auditor for ITNL) in its limited review at the end of the June quarter. IL&FS, being an unlisted company does not publish quarterly earnings reports.

The government also expressed doubts about the “correctness” of the company’s financial statements, according to the NCLT order.

Interestingly, the lawyer representing IL&FS in the NCLT neither opposed nor supported the government’s petition.

This description of the company’s affairs by the government, and that IL&FS and its subsidiaries are being investigated by the Serious Fraud Investigation Office, is bound to add to the challenges facing the new board.

In case the affairs of IL&FS were being run in a manner prejudicial to public interest as argued by the government, it will be interesting to see how accounting regulator, the Institute of Chartered Accountants of India, and other agencies proceed against auditors of ILFS, said former ICAI President Amarjit Chopra.

A senior corporate lawyer who spoke on the condition of anonymity noted that the government’s allegations of mismanagement at IL&FS seem to extend to the Chief Financial Officer MM Wagle and Company Secretary Varsha Sawant, both who have been named as respondents in the petition along with eight directors—Hari Sankaran, Arun Saha, SB Mathur, RC Bhargava, Michael Pinto, Jaithirth Rao, Rina Kamat and erstwhile whole time director Ravi Parthasarathy.

While the new board at IL&FS will first seek to fix the liquidity situation that has symbolised the crisis, the next steps will involve determining the true financial situation of the company and its subsidiaries and how it came to this. The new directors are expected to present a roadmap to the NCLT by Oct. 31.