The new board of Infrastructure Leasing & Financial Services, or IL&FS, has submitted a report on the way forward for the beleaguered non-banking financial company (NBFC) to the National Company Law Tribunal (NCLT). It is naturally important to understand what resolution the new board has proposed; an early, time-bound resolution would be welcome, given the stresses that IL&FS’ troubles have caused the systemically important NBFC sector. The board’s proposal includes both internal belt tightening and some infusion of capital from the promoters. This is good news for IL&FS. This newspaper has questioned the willingness to use policyholders’ money in Life Insurance Corporation of India, for example, to bail out companies in risky sectors. What is most important immediately, however, is that IL&FS’ assets are monetised as soon as possible, and that asset sales are monitored and supervised closely. The additional question, however, is how to ensure that the mistakes of the past are not repeated. A similar crisis could recur unless there are major changes made to both the regulatory environment and how the company and its shareholders behave.
From this point of view, there are some revealing aspects of the report that the IL&FS board has now submitted. The report is quite clear on what the errors of omission up and down the line were, but it stays silent about others. For example, the report does not mention the behaviour of shareholders such as Life Insurance Corporation, HDFC, and State Bank of India (SBI) and of their nominee directors on the board. Shareholders in an unlisted company have an even greater responsibility, and that is relevant, given the complex holding structure that IL&FS surrounded itself with. There is also no mention of the laxity of credit rating agencies. After all, IL&FS was given AAA ratings right up to its first default. What went wrong and what needs to be fixed? The report does point, however, to some failures. For example, the new board complains that there is “no central repository of bank accounts” as is essential for formulating a recovery plan. The question then is: What were the auditors doing? Or the old board, which had an audit committee? The new board even mentions that IL&FS companies were in the habit of “leasing properties owned by select employees (or their relatives) as guest houses”. This would have been a related-party transaction: Was it scrutinised and approved by the board?
There are larger regulatory questions that have become evident. The report makes clear that IL&FS’ activities were all over the place — it was a private equity firm, an NBFC, a mutual fund, and a portfolio manager all at once. Who regulates such an entity? If there are multiple regulators, which one serves as the lead regulator? What should be an ideal regulatory framework for such entities? The many joint ventures of IL&FS and its subsidiaries with the central and state governments also reveal that the government itself bears ultimate responsibility. The public-private partnership (PPP) structure allowed IL&FS to claim quasi-state status when it was nothing of the sort. IL&FS was responsible for many high-profile and politically sensitive projects: All these require investigation. Finally, where did the Reserve Bank of India as the regulator fail? And could the Securities and Exchange Board of India have done better in its supervision of a listed entity?