IL&FS Management Misrepresented Facts, Has Lost Total Credibility, Says Government

As of today beleaguered infrastructure finance company Infrastructure Leasing & Financial Services Ltd. has a new board. Six members, including two bankers, a former regulator, two veteran bureaucrats and a corporate leader, who closely witnessed a similar rescue not ten years ago.

In moving court to replace the IL&FS board the government has sought to restore “confidence of the financial market in the credibility of the IL&FS management and the company”.

A statement from the Finance Ministry pulls no punches when outlining what went wrong at IL&FS.

• It was noted that the consolidated financial statement of IL&FS holding company and its subsidiaries, associates and joint ventures projected a picture through highly exaggerated depiction of non-current assets in the form of intangible assets amounting to over Rs 20,000 crore.
• Besides, bulk of revenue was in the form of receivables, around 50 percent, which was locked up in litigation and arbitration.
• Added to this, there has been a sharp increase in bank deposits held in lien, which rose by Rs 1,681.59 crore in the year ended March 2018.
• Overall, the company has negative cash flows from operations. Further the net outflow was Rs 7,020 crore in 2017-18.
• It has been noted that there is deep-rooted mismatch in the debt-equity ratio because of excessive leveraging, which has put a question mark on its ability to continue as a going concern if allowed to continue in the hands of the present management.
• The high debt stress was clearly visible in the company and its main subsidiaries for the last so many years, but was camouflaged by misrepresentation of facts.
• Besides, the fact that the company continued to pay dividends and huge managerial pay-outs regardless of looming liquidity crisis shows that the management had lost total credibility.
• There have also been serious complaints on some of the companies for which an Serious Fraud Investigation Office investigation has been ordered into the affairs of IL&FS and its subsidiaries.

(Emphasis added)

Negligence, Incompetence And Number Fudging?

When arguing its petition to supersede the board, the government told the National Company Law Tribunal on Monday, Oct. 1, that the company’s incumbent directors “failed to discharge their fiduciary duties” and the management is “responsible for negligence and incompetence”.

The NCLT order stated the government said that IL&FS’ auditor, SRBC & Company, an EY network firm, had in its limited review report pointed to “the existence of material uncertainty on the company’s ability to continue as a going concern”. While the order doesn’t clarify, this most likely refers to the going concern status of key subsidiary IL&FS Transportation Networks Ltd., which was highlighted by auditor SRBC & Company (also auditor for ITNL) in its limited review at the end of the June quarter. IL&FS, being an unlisted company does not publish quarterly earnings reports.

The government also expressed doubts about the “correctness” of the company’s financial statements, according to the NCLT order.

Interestingly, the lawyer representing IL&FS in the NCLT neither opposed nor supported the government’s petition.

This description of the company’s affairs by the government, and that IL&FS and its subsidiaries are being investigated by the Serious Fraud Investigation Office, is bound to add to the challenges facing the new board.

In case the affairs of IL&FS were being run in a manner prejudicial to public interest as argued by the government, it will be interesting to see how accounting regulator, the Institute of Chartered Accountants of India, and other agencies proceed against auditors of ILFS, said former ICAI President Amarjit Chopra.

A senior corporate lawyer who spoke on the condition of anonymity noted that the government’s allegations of mismanagement at IL&FS seem to extend to the Chief Financial Officer MM Wagle and Company Secretary Varsha Sawant, both who have been named as respondents in the petition along with eight directors—Hari Sankaran, Arun Saha, SB Mathur, RC Bhargava, Michael Pinto, Jaithirth Rao, Rina Kamat and erstwhile whole time director Ravi Parthasarathy.

While the new board at IL&FS will first seek to fix the liquidity situation that has symbolised the crisis, the next steps will involve determining the true financial situation of the company and its subsidiaries and how it came to this. The new directors are expected to present a roadmap to the NCLT by Oct. 31.