Solving The Puzzle

How top managers at il&fs not only looted the group to enrich themselves, but also hoodwinked auditors, credit rating agencies, and the board.

- Ashish Gupta & Jui Mukherjee

RAMPANT MISREPORTING OF INCOME, dubious transactions, conflict of interest, ever-greening of loans and personal enrichment of key personnel—for the past 10 years or so, IL&FS has been running in complete violation of good management practices. The outcome was grave—the policies and actions virtually decimated IL&FS, which is No. 83 on the Fortune India 500 list (its subsidiaries, IL&FS Transportation Network or ITNL, and IL&FS Engineering & Construction have been regulars on the list since 2014). The shock waves also froze the credit market, with banks and mutual funds refusing to finance even blue chip non-banking financial companies (NBFCs), sending the entire financial sector into a tizzy. And its reverberations were felt in countries as far off as Ethiopia, Botswana, and Singapore, among others.

The house of cards started crumbling with a series of defaults by IL&FS group firms in August and September on commercial papers, short-term deposits, inter-corporate deposits and the like. This, and the resulting downgrades by rating agencies, led to serious redemption pressure on mutual funds and impacted sentiment on the stock, money, and debt markets. The debt market shocks were passed on to the equity market, sparking sell-offs, particularly in NBFC stocks and sectors linked with NBFC financing. The sudden discovery of a bankrupt IL&FS, with debts of 91,000 crore, was difficult for the Indian financial markets to handle.

The government was forced to step in. It disbanded the existing board, replacing it with a new one headed by billionaire banker Uday Kotak. “Continuance of the present board,’’ said the government in a statement, “had become prejudicial to the interests of the company and its members… and their continuation was having an adverse impact on financial stability and capital markets.”