Day by day, in bits and pieces, the monumental mess that is Infrastructure Leasing & Financial Services (IL&FS) is unfolding. When IL&FS first roiled the financial markets after defaulting on payment of short-term paper, some people believed that the group was only caught in a financial crunch. Its money was stuck in large infrastructure projects, while public sector banks had stopped lending, forcing it to borrow short-term. And this led to defaults. But the rot is far deeper and more dangerous.
The first shock was that nobody even knows how many companies there are in the IL&FS group. When the independent directors were sacked on October 1, the government issued a long press release that said it had 169 group companies. It was wrong. The government got its information from the Registrar of Companies, which was incorrect. Then a US-based business information agency, REDD Intelligence, put the number at 241. Uday Kotak at his first press briefing told astonished media persons there were 348 group entities. In fact, the number is not clear even today!
Meanwhile, stories of cronyism are flying thick and fast. Wives, children, brothers and sons-in-law of the top management people who have run IL&FS like their fief for 25 years, as well as those lured from the steel frame of India — the Indian Administrative Service (IAS) — were all leeching millions of rupees as perks, salaries and business contracts. It was a colossal failure of governance and management.
The IL&FS imbroglio will put the ideologues on both the right and left in an odd position. After a financial debacle involving public ownership, the right is quick to blame ownership as the reason. Often this is justified because government ownership in India is a readymade situation for netas and babus to help themselves to the spoils of these entities. They have all the incentive to do the wrong things and no incentive to pin accountability. Similarly, in a financial scam involving the private sector, the ideologues on the left are quick to blame private ownership as being rapacious and out of control. But surely, private ownership alone cannot guarantee good behaviour.
Penumbra of ownership and control
IL&FS, as I said, stumps both sides. It presents a peculiar challenge. Ravi Parthasarathy, a banker trained in the sharp, cut-and-thrust environment of Citibank, started the company in 1987. But the bulk of its money came from government-owned institutions — State Bank of India, Unit Trust of India, Central Bank and later from Life Insurance Corporation. IL&FS’s business was infrastructure, which needed coaxing out hundreds of difficult permissions from the central and state governments. For this, IL&FS made itself look like a government company that paid well, and hired many IAS officers. Inside, IL&FS was run like a private fief controlled by Mr Parthasarathy — from gold-plating projects, threatening and intimidating dissenters, to appointing cronies in key positions and doing pretty much whatever he liked. How did it come to such a pass?
IL&FS belongs to a strange set of “professionally managed” companies that are in the penumbra of public ownership and private control, such the National Stock Exchange, Stockholding Corporation of India and National Stock Depository Ltd. They enjoy all the advantages of appearing to be a government company when it comes to licences and permissions. Look at the company names. They all seem government-owned. But for all practical purposes they are run as the private fief of a few, drawing their power from a pliant board. They are all outside the purview of the Right to Information Act, the Central Vigilance Commission, and the Comptroller & Auditor General. Interestingly, all of them prefer to avoid the scrutiny of the public markets by getting listed.
National Stock Depositories Ltd often claimed high technological efficiency and managed to get the job to run the critical tax information network of the Income Tax Department. But it was caught up in a massive multiple-application scam for Initial Public Offerings. The applicants’ consolidated thousands of allotments into a few depository accounts before IPOs were listed in a complete mockery of NSDL’s database prowess. The brass of Stockholding Corporation of India Ltd (SHCIL) had hijacked a valuable subsidiary from under the nose of its directors representing Life Insurance Corporation, ICICI Bank, IDBI, Industrial Finance Corporation of India, General Insurance Corporation and Unit Trust of India, and was leeching money in the e-stamping contract with a Singapore company. The latest addition to this group is GSTN Ltd., a strategically important company that runs the GST technology infrastructure, with a minority holding by the government. That is now going to change with government acquiring 100 per cent control.
The IL&FS debacle — and scams at the NSE, NSDL and SHCIL — forces us to look beyond easy labels of “public” or “private” sector. In all these cases, the real issue was that the first principles of good governance were ignored. The boards were sleeping, the same management team was in control for decades, leading to arrogance of power, and the companies were not subjected to scrutiny of either the public (RTI) or the public markets. Finally, in every case, the regulator was squarely responsible for not only failing to detect the scams but allowing the guilty to get away. Indeed, to prevent a recurrence of such cases of egregious misgovernance, personal liability has to be affixed. Can we make a beginning with the IL&FS overlords?
The writer is the editor of www.moneylife.in