What happens when the unequivocal recitation of truth birthed by avarice, human fragility and error becomes a festering sore? In the cathedral of greed, also an echo chamber, a compelling story is laminated with half —truths and sold to one and all. The management chants a mantra that all is well, even as the blood begins to coagulate. At IL&FS, this became the norm. A closed user group (CUG) enjoyed the fruits of a poisoned tree for 30 years as all oversight mechanisms failed to nail the malfeasance. Finally, when the government woke up to the rot, courtesy an alert media, realising that a grave contagion could take the burning house down with it, it is now imperative that a few fingerlings are not caught while the blue whale gets away. Each and every member of this CUG which ran IL&FS into the ground has to be brought to book. The happy cabal went about its merry ways spending public money at will. For years we heard rumours of excesses, but the improprieties stayed under the radar. Actually, it is only after the new Land Acquisition Bill was notified on January 1, 2014 that the cracks appeared and then widened into fissures. As concessions went awry, and the government woke up to the ticking time bomb and liquidity crunch facing the company, it was obvious that the imminent defaults would have a cascading effect on the entire banking system and larger financial markets, not limited to the mutual fund industry and money markets.
Finance minister Arun Jaitley personally supervised operation takeover knowing fully well what the doom of such an institution would mean for the economy. That is why after the takeover, he said last week, since IL&FS is an “internal factor to India, it should be contained so no adverse impact is felt”. In an election year, an entity called the Titanic in the Union government petition to the NCLT capsising would have meant catastrophe. Mr Jaitley had come under pressure to act after receiving formal letters, including one from Opposition leader K.V. Thomas, raising concerns about operations at IL&FS. Jaitley’s team sent a confidential note to the ministry of corporate affairs recommending that the NCLT be approached for the “reconstitution and supersession” of the over geared IL&FS board.
The sheer negligence and incompetence of the board of directors had brought the company to ruin. The holding company IL&FS alone has a mountain of debt staring at its face, in the vicinity of Rs 57,000 crores, out of the total group debt of Rs 91,091 crores. This Rs 57,000-crore debt is from public sector banks and institutions. And if nothing had been done, this would turn into NPAs. Even now, one doesn’t know how much of it will turn into bad loans. Moreover, the majority of the capital invested in the holding company is by public financial institutions like LIC, SBI, CBI, besides UTI AMC. Which means it has linkages across the Indian economy, and perhaps that is why that it was too big to fail and the government stepped in to avert a cataclysmic situation. The current management had to be superseded because it was completely unforgiving in showing its incompetence while managing the affairs of the holding company even as group companies were a party to major infrastructure and financial projects and as such accountable for their misdeeds.
A list of all the entities of the holding company IL&FS is nothing short of surreal. There are as many as 334 entities, which include domestic and foreign entities. The losses of the key subsidiaries are a tale of woe. The group debt shot up to Rs 91,091 crores in 2018 from Rs 48,671 crores in 2014, virtually doubling itself. The worst part was that interest outgo rose to Rs 7,922 crores from Rs 3,907 crores during the same period. Then came the ultimate denouement by 2018, it was unable to meet its debt-servicing obligations. In this cosy club of silence, a code not dissimilar to Omerta, the management, auditors and rating agencies were all complicit. This collusion at the highest level carried on till as recently as August 1, 2018 when IL&FS in its private placement prospectus announced that it would be declaring a dividend of Rs 6 per share to its equity shareholders and the company is current on all its debt obligations. This way IL&FS was able to raise Rs 50 crores from its debt investors with a green shoe option of Rs 25 crores. The said issue closed on August 27, 2018, with IL&FS relying on good ratings from CARE and ICRA to market the issue that took on record the standalone financial numbers for the financial year 2018, which showed a profit of Rs 584 crores, but gave no hint of the consolidated losses of Rs 2,400 crores. The blind, deaf and dumb show continued unhindered till August 30, 2018 after the issue closed, when IL&FS declared that it had slashed dividend payout to Rs 1 per share and by September 27, 2018, two days before the AGM, the company actually went ahead and scrapped the entire dividend payout. Lies and more lies had been nailed. This too after the debenture trustee Centbank Financial Services not granting permission to the company to offer dividend to its shareholders.
Domino one has fallen. These acts of misrepresentation and falsehoods about the financial state of affairs at IL&FS jeopardised and imperiled the nation’s fiscal health. The unscrupulous manner in which public money was frittered away with utter and complete disdain came to such a sorry pass that that it was no longer in a position to service its debt, no assets left to raise funds, no credibility with banks, no takers for its promises and nothing to offer to its stakeholders and the public at large to assure its continuation. A debt obligation storm had hit the front door. The sheer enormity of the situation can be best summed up in this manner — On a consolidated basis, the borrowing of IL&FS from banks and financial institutions (debentures, loans, cash credit and commercial paper) comes to about Rs 63,000 crores as per the 2017-18 balance sheet. If the exposure on banks is assumed to be Rs 57,000 crores, then considering that the exposure of the entire banking sector to all NBFCs is about Rs 3.3 lakh crore, IL&FS is not inconsequential, but critical to financial stability as its share in the total exposure of the banks to the NBFCs is about 16 per cent. The gravity of public interest in ensuring financial solvency and good governance and prudent management of this group was vital. The IL&FS Group has shown a loss of Rs 2,670 crores for 2017-18 in the consolidated balance sheet, which is a leverage of about 13 times, as the borrowing of approximately Rs 91,000 crores is on the base of equity capital and reserves of about Rs 6,950 crores. The indebtedness of IL&FS was approximately Rs 16,468 crores, with the debt market drying up for this company. Any future debt assimilation would be impossible as leverage levels were already extremely elevated.
As the process of untangling the knots begins, it will be long and arduous. The independent directors who were party to this carnage and should have been the first to red flag the murky goings on in this secret society are equally culpable. Instead, they dashed off a missive to the government-appointed non-executive chairman Uday Kotak trying to distance themselves from this mess. The letter stated. “Despite several attempts during our tenure, IL&FS was unable to raise additional equity directly or at the level of its subsidiaries. It was also unable to complete a merger with a strategic party which failed to consummate in the final stretch. With its mounting counter-party receivables and the need to continue with existing projects and the absence of long-term financial support in the markets, the asset-liability mismatch continued to aggravate almost inexorably... we believe that this structural conundrum needs to addressed for all infrastructure financing in the country.” This explanation simply doesn’t wash. The Government had argued earlier: “The financial mismanagement of IL&FS is apparent from its rapid debt built up and misrepresentation of the true state of financial fragility, which is being reflected in unprecedented rating downgrade from highly rated to a default category,” What were these pre-eminent worthies doing all this while? Did they raise Cain over the gross mismanagement? No. They chose to follow the code of silence.
