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Men in Suits


Infrastructure Leasing & Financial Services Ltd (ILFS) was incorporated in 1987 as a Non-Banking Financial Company (NBFC) to provide funds to infrastructure projects in India in the form of loans and advances. It aimed to aid the development of world-class infrastructure in India and bring it on par with developed countries. The company’s early promoters saw the inclusion of prominent names such as HDFC (Housing Development Finance Corporation Limited), CBI (Central Bank of India) and UTI (Unit Trust of India). Later with time, other entities such as SBI (State Bank of India), LIC (Life Insurance Corporation of India), ADIA (Abu Dhabi Investment Authority) and ORIX Corporation Japan too became a part of the company’s shareholding.

It soon became a leading infrastructure investment company due to its strategic ties with the Central Government and State governments. The company was termed the pioneer of the Public-Private Partnership in India. It had more than 250 subsidiaries and associate companies collectively which indicates the company’s complex corporate structure which magnified its problems.

Unfolding the ILFS crisis

Defaulted loan repayments

ILFS had obtained loans from several investors and financial institutions. The ILFS became the cynosure of the investors’ and regulators’ eyes when it started defaulting on loans, commercial papers and bonds repayment. It was reeling under the situation of cash shortage and could not fulfil its debt obligations.

Asset-liability mismatch

It was observed that the banks were hesitant in providing loans to ILFS since 2016. Due to such denial, the company raised a series of short-term loans to serve its debts. The company along with its subsidiaries, joint ventures and associated companies were debt-laden with ₹91,000 crore. When the company’s debts rose up to this level, the level of assets could no longer match its liabilities creating a fearsome situation for ILFS. The company’s debt to net worth ratio had reached 13:1.

A noteworthy observation here is the presence of a number of intangible assets on the balance sheet. The artificial boost in the assets is also reflective of the corrupt intentions of the management.

Complicated land acquisitions

A primary reason which accounted for the company going bust was the complexity of land acquisition deals. The law in force in India along with the financial crisis of 2008 and rising inflation rendered numerous of its projects infeasible. This precipitated incomplete projects in the company’s quota. It drastically affected a significant income window for the company.

Management failure

The SFIO accused the management members of ILFS of having formed a coterie with independent directors and auditors. SFIO pointed out multiple corporate governance failures backed by evidence. According to its report, there existed many instances of conflict of interest in several transactions, deliberate concealment of the financial status of the company, siphoning off funds and procurement of illicit gains by many of the company’s key managerial personnel.

Board of Directors (BOD)

One of the primary responsibilities of the BOD is to keep an eye on business operations as to whether they are conducted in the company’s interests. However, in this case, they were seen acting contrary to their basic fiduciary duties. The superficial expectations of the board that the Chairman, Ravi Parthasarathy, could raise unending credit lines in a bad situation were extremely immature on their part. Despite being the best in business, they failed to foresee the risks and operate the business diligently. The independent directors on the board were completely inefficient and lacked the necessary skills and experience.

Moreover, it appears that the BOD did not care about the company in arrears. Despite the company facing a severe cash crunch, the BOD served itself with pretty good salaries and commissions. In addition, they also declared a 60% dividend amounting to ₹93 crore to the company shareholders. The attitude of BOD was criticised as being irresponsible.

Failure of the Risk Management Committee (RMC)

RMC, which mostly comprises independent directors, is constituted in a company for a crucial purpose. Its role is to evaluate the company’s significant risk exposures, advise measures to mitigate such risks and ultimately minimise the company’s probability to land in such a crisis. Shockingly, the RMC in ILFS acted irresponsibly all the while when the company went under. In spite of the company having important risks to be addressed, the RMC did not even hold a single meeting since 2013. This is evident from the company’s annual reports. Thus, it can be concluded that RMC completely failed in its duty. It also stresses the fact that only having independent directors on the board does not only represent good corporate governance but to ensure the same, independent directors should also be sufficiently skilled and able with the necessary expertise.

Role of an Auditor

The company was audited by the well-known Deloitte since 2008. Later, even KPMG and BSR and Co joined hands. But well-known auditors do not always guarantee work of integrity and this case is evidence of this. The SFIO (Serious Fraud Investigation Office) revealed that auditors played a significant role in the crisis as they failed to perform the audit with diligence and failed to bring out the true visuals of their financial statement. Grant Thornton, who performed a forensic audit for ILFS also opined the same regarding the auditors. It pointed out financial irregularities to the tune of US $1.9 billion. There were a lot of transactions in which loans disbursed to borrowers were in reality being diverted to their group companies to fulfil their debt obligations. It was also observed that the company’s subsidiary sanctioned unsecured loans worth thousands of crores of rupees to borrower entities possessing stressed assets and bad credit ratings. Additionally, it wrote off several loans. The external auditors failed to point out irregularities which were being accumulated over several years.

The Ministry of Corporate Affairs (MCA) moved to NCLT against these external auditors seeking a five-year ban on them.

Role of rating agencies

For a long time after the company started showing numerous red flags, the rating agencies were falsely rating the company with A4, which represents the highest safety. It was much later when they started giving thumbs down to the borrowing programmes of the company, which they technically should have given long ago. Thus, the credit rating agencies were grossly criticised by the MCA. According to the Grant Thornton report, the rating agencies colluded with the key officials of the company to paint a false rosy picture of ILFS by giving the best ratings to the company. The report states that company officials gifted smart watches and football match tickets to the agency officials in return for the ratings.


The SFIO probe resulted in the imprisonment of the senior management of the company including its chairman. The ED (Enforcement Directorate) filed a charge sheet for money laundering under the PMLA (Prevention of Money Laundering Act). It revealed that the company, through fake work orders, siphoned off around US $43 million. It also attached immovable assets and bank accounts to the extent of ₹570 crore held by the company’s management officials. The Economic offences wing of Delhi police filed an FIR against the company in December 2018.

The government had put its best foot forward to try to revive the company. A new board was appointed by the government. The new board was chaired by Uday Kotak, chair of Kotak bank and included IAS officers Malini Shankar and Nand Kishore, former chair of ICICI bank G C Chaturvedi, MD and CEO of Tech Mahindra Vineet Nayyar and former SEBI chief G N Bajpai. They all worked collectively to create a resolution plan. The government also approached NCLAT (National Company Law Appellate Tribunal) and successfully obtained a moratorium (* a stay on all legal proceedings against ILFS) to conduct the revival process smoothly. The newly appointed board further appointed Arpwood Capital, JM Financial Ltd and Alvarez & Marsal as financial and restructuring advisors, respectively.


It was clearly a systematic business and corporate governance failure on part of ILFS which could have been avoided. The crisis was a shocker for the entire NBFC industry as it had serious implications in the debt market, capital market, mutual fund houses and housing financiers. The scam severely affected lakhs of investors. The banks, NBFCs and mutual funds associated with the company suffered heavily. The quality of the assets they held was being questioned. The panic-stricken market, due to this crisis, lost faith in the industry and the banks and mutual funds started punishing other NBFCs by refusing to lend. This created a liquidity crisis in the market.

Time and again, it has been observed that a crisis of this scale impacts not only the concerned company but also the economy of an entire nation. It was a wake-up call for the regulators to come up with a stringent regulatory landscape for the NBFC industry to reduce the probability of such fiascos.

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