IL&FS crisis: Charges are vague, no mismanagement, says Hari Sankaran

The former vice chairman lays his response to the government in an affidavit blaming macro-environment

Ousted vice-chairman of Infrastructure Leasing and Financial Services (IL&FS), Hari Sankaran, in an affidavit, denied any charge of mismanagement or compromise in corporate governance norms or risk management stating that the allegations are "general and vague with no substantiation or detail." 

He says that a foreign international agency should carry out the financial investigations into the beleaguered financial and infrastructure Goliath. 

“Such a course would avoid any hint of a conflict of interest, as over the years, the known experts/consultants having a presence in India or their associates would have done some work for [IL&FS] and its group companies, having regard to the scale and breadth of their operations,” he said. 

He strongly denied the charges framed in the government's petition in a 34-page affidavit, filed before the National Company Law Tribunal (NCLT) on Monday.  

Business Standard has seen a copy of the affidavit. 

The NCLT in Mumbai on 01 October dismissed the board which Sankaran was a part of and reconstituting it with Government nominees. The petition to take over IL&FS was moved by the Ministry of Corporate Affairs (MCA) and alleged that there was mis-management at IL&FS and its group companies. 

IL&FS has defaulted on a little over Rs 42 billion worth of various debt instruments as of October 07. The company, a systemically important non-bank finance company (NBFC), racked-up debt totalling Rs 910 billion as of 30 September 2018. 

The MCA, said in its petiton, that the holding company funnelled money,  raised either through loans or debt market instruments, to ver 169 subsidiaries, associate companies or special purpose vehicles (SPVs).

On October 7, the newly appointed board of directors of IL&FS revealed that the company in fact around 348 subsidiaries or associate companies. 

In his response, Sankaran denied all charges of “mismanagement of funds or unscrupulous acts committed” stating that “at no time have I ever taken any steps or attempted to ‘hide’ or ‘suppress’ financial accounting information. 

He further said that the petition moved by the MCA is ‘arbitrary’ and ‘not paintable’ as “The Central Government has always been fully cognizant and aware of the management, business plan, project development and financing plan of” IL&FS. 

“The possibility of defaults was known to all stakeholders and to the regulatory authorities, as also the steps taken or contemplated to avoid such defaults...” he said. 

“My remuneration from [IL&FS) was approved by the shareholders, the Board of Directors and the Nomination & Remuneration Committee and was in compliance with the provisions of the Companies Act,” he says, staying that such receipt of remuneration cannot be regarded as “siphoning of monies.”

The Central Government has a 40.25 per cent stake in IL&FS, the affidavit states, through institutions like Life Insurance Corporation (LIC) (25.34 per cent) , Central Bank of India - (7.67 per cent), State Bank of India (6.42 per cent) and UTI-UTI Linked Insurance Plan-UTI Asset Management Company Limited (0.82 per cent).  

The once famed project finance specialist, having spent 28 years at IL&FS, has been questioned by the Serious Fraud Investigations Office (SFIO) on three occasions this month October 02, 03 and 09. 

Fundamentally, problems at IL&FS Transportation Networks (ITNL) began due to issues in the macro-economic environment and the introduction of the Land Acquisition, Rehabilitation and Resettlement Act from 2013 onwards. 

The new land law caused a slowdown in the infrastructure sector, as the government could no longer acquire land for infra-projects at rapid speeds, he says.

“The nature of the business of [IL&FS ]and its group companies in relation to the high debt and the undeniable fact that infrastructure projects are developed on long term debt basis and the debt needs to be restructured at regular periods,” Sankaran notes. 

Therefore the high debt levels is not a “presumption of mismanagement or actions against the public interest,” he says. 

In November 2015 Piramal Financial Services Enterprises pulled out of a proposed merger with IL&FS which would have given the merged entity Rs 85 in investable funds. 

Sankaran says that the deal did not go through because “LIC took time to consider the proposal and ultimately did not agree with the merger valuation - with significant resultant adverse consequences on [IL&FS} as no additional finance could be raised by way of equity or debt throughout this period.”

The next attempt involved Unites States’ based private equity firm Lone Star who agreed infused Rs 63 billion as equity in ITNL in November 2017. But in March 2018 ITNL’s USD Bond for US$ 300 million issue was unsuccessful, Lone Star pulled out. 

In 2017 the company tried to sell its overseas assets but is incomplete. 

Further, he states that the old board of IL&FS in July this year had decided to issue equity shares worth Rs 45 billion by 15 September and avail a line(s) of credit from LIC worth Rs 25 billion and SBI worth Rs 10 billion, respectively. 

The board had even appointed SBI Capital Markets Limited as the merchant banker and had decided that the equity shares would be offered at Rs. 150 per share by the end of August. 

But these decisions were could not go through as the MCA had moved the NCLT to take over the company by 01 October.