Management of crisis-hit IL&FS put up a massive cover-up, alleges ministry

Public money was mismanaged, said MCA petition

The petition by the Ministry of Corporate Affairs (MCA) has held IL&FS’ board members responsible for the mess the financial institution is in. 

The MCA petition states that directors of IL&FS have failed to discharge their fiduciary duties which is based on mutual trust and confidence.

“The unscrupulous manner in which public money has been mismanaged and stuck in projects indicate that management of IL&FS has not only failed to manage but were involved in operation cover up till the end, and wilfully created financial mess of IL&FS is astonishing,” the petition alleged. 

“It is also interesting to highlight that the present board is neither the promoter directors nor hold any equity. They are merely parasite on public funds which they have mis-utilised by drawing hefty packages,” it added. 

The company was well aware of the precarious and critical financial position but it continued to present to the stakeholders a hunky-dory scenario which was just a mirage while reality was otherwise, says the government petition. 

It further alleged IL&FS “is left with no assets to raise funds, no credibility to bank, no takers to buy its promises and nothing to offer to the stakeholders in particular and public at large in general to assure its continuation”. The petition states that IL&FS started with defaulting on commercial papers (CPs) it had issued, and then on short-term inter-corporate deposits (ICDs) to the extent of Rs 4.5 billion. 

These ICDs were owed to the government-backed lender Small Industries Development Bank of India (SIDBI). 

Thereafter, due to negative cash flows stemming from its operations, cash facilities of the company were blocked in ‘rights under service concession arrangements’. The company for some time funded most of its operations and investment activity through long-term borrowings. 

Its auditor SRBC & Co alerted the company’s board of directors that there was an “existence of material uncertainty on the company’s ability to continue as a going concern” and the “management plan to raise funds.”

When the company defaulted on its CPs, credit rating agencies downgraded the credit quality of group companies of IL&FS. 

Submissions made to the NCLT revealed that the holding company IL&FS, since April 2016, had provided financial assistance through shareholder loans and/or share capital to various subsidiaries to the extent of Rs 230 billion. 

As of March 2018, the holding company’s entire exposure to its five key subsidiaries accounted for 72.79 per cent of the lending and investment book. This created a systemic risk problem as mutual funds and pension funds had purchased IL&FS’ debt instruments.  The company raised a total of Rs 910.2 billion of debt which was “funnelled” into financing long-term assets. These assets were owned by IL&FS-linked companies.  IL&FS in its submission said the liquidity crunch in most of its key companies led to a ‘short term’ inability to service the debt obligations.

The MCA petition, seeking to dismiss IL&FS’ plea for restructuring under the Companies Act, stated that “such an application is merely a sham and disguised way to further dupe the stakeholders in particular and misguide the general public as in the garb of Compromise and Arrangement”.

“Legally, such an application has no merit and deserves to be dismissed at threshold,” the petition said. 

The total debt of the IL&FS group stands at around Rs 910 billion as of date from around Rs 486.7 billion in 2014. Of the Rs 910 billion in debt, around Rs 570 billion was borrowed from public sector banks. 

However, the company also seeks further financial assistance from intuitional investors like State Bank of India and Life Insurance Corporation by way of a proposed rights issue. 

The petition also blasted the rating agencies CARE and ICRA for showing profit for the standalone company, while ignoring huge losses on a consolidated basis.  The rating agencies gave AAA rating to IL&FS as the company showed a profit of Rs 5.84 billion, whereas, on a consolidated basis, the loss of the entire group was pegged at Rs 24 billion