The new board of Infrastructure Leasing and Financial Services Ltd (IL&FS) has reportedly sent show-cause notices to as many as 14 former directors of IL&FS Financial Services Ltd (IFIN), asking why criminal action should not be taken against them in the light of an interim report submitted by Grant Thornton. The accounting firm had conducted a forensic audit of 12 companies, including IL&FS Ltd and IFIN, for the review period April 2013 to September 2018. The former directors have been charged with “facilitating money laundering,” sanctioning loans without any security and “conspiracy and getting unlawful gains,” among others. In its 166-page interim report, the accounting firm has flagged transactions worth around Rs 9,000 crore as being linked to irregularities.
The report lays bare several irregularities in the way IL&FS group companies functioned. In all, the report found 29 instances of loans disbursed to borrowers which were in turn used by group companies to repay the existing debt obligations of IFIN. For instance, SKIL Infrastructure’s Gujarat-Dwarka Portwest Ltd borrowed Rs 253 crore in 2015-16 and in the year it also repaid Rs 230 crore to IFIN. Similarly, IFIN distributed Rs 365 crore to the Flemingo Group between 2017 and 2019; during the same period, the group companies of Flemingo repaid Rs 407 crore to IFIN. In total, such episodes alone cost the group over Rs 2,500 crore. There were 18 episodes — in all amounting to another Rs 2,400 crore — where loans were given to borrowers against the advice of the teams concerned. Then, there were eight instances, involving Rs 541 crore, where short-term loans were used for long-term lending. The auditing firm also found that many financial transactions amounted to a conflict of interest because of the executive relationships involved.
This is terrible news for the IL&FS group, which operates over a hundred subsidiaries and is sitting on a debt of Rs 94,000 crore. The report provides an understanding of the work culture in IL&FS under the earlier dispensation and how it landed up in the mess it finds itself in. Though the report is interim, it provides several pointers to the collapse of governance norms in the IL&FS group. The fact that this was allowed to go on for so long is worrying. IL&FS did have a risk management committee as per the Reserve Bank of India’s guidelines, but it is obvious that it was just an ornamental body and was not doing its primary job, which is to identify risks arising out of the business, assess them and to devise a strategy to resolve them. The forensic audit report has made it clear that none of that was happening. The IL&FS board had independent directors with wide industry experience, and it is difficult to believe that they did not appreciate the need for a robust risk management practice. As reported earlier, the committee never met after July 2015, even as the company’s finances kept tumbling. This must be construed as a gross dereliction of duty by the independent directors. The IL&FS episode is also a wake-up call for the regulators, as it is by now obvious that conventional corporate governance norms on paper may not be sufficient to address specific concerns involving large financial institutions.