SFIO Says Top Executives Led IL&FS To Its Ruin

India’s serious fraud investigator accused former senior officials of IL&FS of financial irregularities that led to its ruin.

(Photographer: Victor J. Blue/Bloomberg)
(Photographer: Victor J. Blue/Bloomberg)

India’s serious fraud investigator accused former senior executives of the IL&FS group of accounting and financial irregularities that eventually led to its ruin.

The executives, including former chairman Ravi Parthasarathy, window-dressed financials of the parent, the Serious Fraud Investigation Office said in its interim report submitted to the National Company Law Tribunal on Dec. 3—BloombergQuint has reviewed a copy. The objective: to show higher profits that helped borrow more. That helped those in managerial positions to justify their pay hikes while the company doled out perks and stock options to select employees through an employee welfare trust—which owned 12 percent of IL&FS, the investigator alleged.

The slide began four years ago. The parent Infrastructure Leasing & Financial Services Ltd. and direct subsidiaries like the non-bank lender IL&FS Financial Services Ltd. and road builder IL&FS Transport Networks Ltd. borrowed short-term funds from the market and banks, based on window-dressed financials and high credit ratings, according to the white-collar crime investigator. They lent these funds for the long term at high interest rates to its project subsidiaries and group companies.

The subsidiaries used these funds to pay interest on loans taken in the past from the same set of IL&FS lenders.

That made the parent and key subsidiaries look financially healthy to borrow more. The cycle continued till it became impossible to sustain, ending in multiple defaults and spooking the credit market.

The government then took over the systemically important group to contain a contagion. The new board, led by billionaire banker Uday Kotak, is looking at asset sales and fund infusion to rescue the conglomerate now below Rs 91,000 crore debt pile. So far, it has reviewed 165 of the 348 group companies and found that close to 100 will face cash crunch till March 2019.

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Down The Rabbit Hole

Funds moved down the pyramid from the borrowing entities with high credit ratings to other loss-making subsidiaries as loans and advances, the SFIO alleged. IL&FS raised money through short-term market borrowings like commercial papers, inter-corporate deposits, and bank loans. These borrowings rose with the need for funds as the group took on new projects. But most of the funds were loaned to its group subsidiaries

IL&FS borrowed short-term funds through commercial papers worth Rs 2,007.29 crore and inter-corporate deposits worth Rs 1,100 crore in 2017-18, according to the SFIO. That was a threefold jump over the previous fiscal.

It advanced long-term loans worth Rs 2,490 crore during the period—an eightfold surge.

The parent earned 93 percent of its revenue as interest on loans and dividends from subsidiaries, besides consulting and advisory fees.

Like Father, Like Son

Subsidiaries like IL&FS Financial Services followed a similar script to borrow funds and lend to group companies. So aggressive was the fund-raising that three-quarters of the non-bank lender’s funds came from market borrowing and banks, according to the SFIO. It raised nearly Rs 3,900 crore through debentures, Rs 2,730 crore via commercial papers, Rs 980 crore worth inter-corporate deposits and nearly Rs 8,500 crore as bank loans.

IL&FS Financial Services transferred Rs 1,630 crore to another group entity, IL&FS Transport Network. The loan was channelled through eight group companies despite their negative net worth and for no stated purpose or specific project in hand. This was done in order to circumvent Reserve Bank of India’s norms that limit an entity’s credit concentration in its group companies, the SFIO alleged.

The NBFC provided debt-syndication services for funding from banks to all the group companies, and advanced about Rs 16,000 crore in a similar fashion, the report said.

The entity, led by Chief Executive Officer RC Bawa, ever-greened loans by giving additional credit to its group companies and other corporates such as Ind-Bharath Group, Gayatri Group and A2Z Group, among others, the report alleged.

That way, it continued to show interest income generated by fresh loans on its balance sheet. Considering that it was registered as a non-bank financial company, the report said the lender took advantage of relatively easier bad loan provisioning norms.

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Why Losses Piled Up

Negative cash flows from infrastructure projects was not the sole reason behind IL&FS group’s mounting losses.

The stress was also because of high fees charged by IL&FS and its direct subsidiaries as consultation, brand, project management, loan-syndication and advisory fees, according to the SFIO. These fees, deducted upfront from loans, became the main source of revenue and helped the parent and its direct subsidiaries recover large part of their investments even before a project was launched. This increased the financial burden and saddled projects with unsustainable debt, the report said.


The SFIO accused nine former senior executives of alleged financial irregularities. Besides Parthasarathy, who quit about a month before defaults started, the others named include Hari Sankaran, former vice-chairman and managing director; and Arun K Saha, joint managing director and chief executive officer. The SFIO called them the “controlling will and mind” behind the IL&FS crisis.

The SFIO blamed a separate committee of directors, which acted without the information of the board, for the debt binge and overstated profits. The committee took all key decisions about the group’s credit and investments in subsidiary firms, the SFIO alleged, to “reap personal benefits by way of high managerial remunerations”.

Overstated profits helped top executives give them steep hikes in pay, according to the SFIO. It ensured that the top management would “continue enjoying unmitigated personal gains through high remuneration, perks and through other means such as the Employee Welfare Trust and untrammelled control over the IL&FS group despite the stress”.

The average percentage increase in the managerial remuneration was 66 percent in 2017-18, according to the SFIO. Parthasarthy got the biggest hike at 144 percent. In comparison, salaries to employees other than managers rose 4.4 percent.

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