Ousted IL&FS Managing Director Hari Sankaran’s Defence

Hari Sankaran, removed as the managing director of Infrastructure Leasing and Financial Services Ltd., denied allegations of siphoning funds and mismanagement, arguing that shareholders and the government’s nominees on the company’s board were aware of facts.

On Oct. 2, the National Company Law Tribunal allowed removal of the earlier board of the infrastructure builder and financier on a Ministry of Corporate Affairs’ petition which alleged mismanagement and suppression of facts. The takeover was aimed at pre-empting the possibility of a contagion in India’s financial markets after IL&FS and its subsidiaries, with a debt of Rs 90,000 crore, failed to repay debt multiple times.

Sankaran rejected the ministry’s contentions. “All material acts of IL&FS were performed with the sanction and knowledge of the board and key shareholders of IL&FS and as per approved processes and procedures,” Sankaran said in his 34-page reply to the government’s petition in the NCLT—BloombergQuint has reviewed a copy. He said it was wrong to “suspend his directorship on the basis of the incorrect and untenable allegations”.

Denies Siphoning Allegation

The ministry alleged that Sankaran had siphoned funds through his remuneration to create personal assets. He called the allegations “hurtful to his unblemished record of 28 years of service”.

“The majority of my investments, other than two residential apartments (which have been paid for by me from my personal funds), are only in the shares/ESOPs of IL&FS and some of its group companies,” Sankaran said in his reply. His salary was decided as per the provisions of Companies Act, 2013 and was duly approved by IL&FS’ nomination and remuneration committee, he said.

‘The Government Knew’

The ministry’s petition is not maintainable as the government through its agencies controls 40.25 percent of IL&FS, according to Sankaran.

Shareholding of state-run entities in IL&FS:

• LIC: 25.34 percent
• Central Bank of India: 7.67 percent
• State Bank of India: 6.42 percent
• UTI AMC: 0.82 percent

The central government has, therefore, always been fully cognisant, said Sankaran. Shareholders and directors have been fully aware of the financial plans, projects and approved borrowing limits of IL&FS, he said. They “participated in the approval and adoption of accounts and annual reports, wherein the full, true and complete financial picture has always been set out”.

Seeks A Foreign Probe

For a fair assessment of systems and processes, Sankaran sought a forensic audit of the group by “an independent and responsible expert body”.

The Serious Fraud and Investigations Office is examining the allegations of fund siphoning, suppression of facts mismanagement and lack of governance practices at IL&FS. So far, the agencies have questioned him thrice on Oct. 2, 3 and 9.

It would be in the interests of justice if the authorities concerned were to “appoint independent and internationally reputed agencies from outside India (Israel, Singapore, the U.K. or any other country) for this purpose”, he said. “Such a course would avoid any hint of a conflict of interest.”

Blames Industry-Wide Slowdown

Sankaran said India’s infrastructure sector was facing a considerable slowdown due a variety of factors, including changes in regulations since 2013.

These included enactment of the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013, which impacted the government’s ability to acquire land or provide right of way for grants made to infrastructure companies, he said. “This led to cost overruns.”

In fact, several infrastructure and construction companies “faced, and are still facing, severe financial difficulties, and in many cases insolvency proceedings under the Insolvency and Bankruptcy Code, 2016”, he said. “To the best of my knowledge there are already about 120 companies in this situation, including large companies like Lanco Infrastructure Ltd., Gammon India Ltd., Punj Lloyd, and several others.”

Deals That Didn’t Go Through

The outstanding consolidated debt of IL&FS Transportation Networks Ltd. alone was about Rs 35,000 crore as on March 31 this year. The failure of a number of sale and re-financing proposals resulted in IL&FS and its group companies having to step in to fund repayment obligations of ITNL, according to his reply.

Sankaran recounted that IL&FS was in talks with several players for merger or sale of assets that could have aided the company’s financial situation. In 2015, IL&FS had signed a term sheet with Piramal Financial Services Enterprises for a structured merger of the entities.

“It was anticipated that the merger, once completed, would have generated around Rs 8,500 crore by way of investible funds in the merged entity,” said Sankaran. But the deal fell through, he said, as LIC took almost nine to 10 months to consider the proposal and ultimately did not agree with the merger valuation.

In 2017, U.S.-based fund Lone Star agreed to infuse about Rs 6,300 crore as equity into IL&FS Transportation Networks. Under the term sheet, IL&FS was again subjected to “standstill obligations” up to June 30, 2018, he said. That deal didn’t go through either.

In March this year, IL&FS also failed in raising $300 million for ITNL via a bond issue.

The board of IL&FS in July decided to raise Rs 4,500 crore through a rights issue, along with availing a line of credit of Rs 2,500 crore from LIC and Rs 1,000 crore from State Bank of India.

Both these plans didn’t go through till Oct. 1 when NCLT allowed the government to take control of the IL&FS group.