Serious fraud probe body to investigate IL&FS, units

Government cites corporate deficiencies, loss of credibility as reasons for initiating the investigation

Union government Monday ordered an investigation by the Serious Fraud Investigation Office (SFIO) into Infrastructure Leasing & Financial Services (IL&FS) and its subsidiaries, as serial debt defaults by the infrastructure lender damaged confidence and send shockwaves through the financial system.

On the same day, the National Company Law Tribunal (NCLT) approved a government proposal to supercede the firm’s board.

Replacing the board with a state-selected one prevents the earlier management from interfering in the investigation. The new management will craft a turnaround plan, for which the government has committed support including financial assistance. A similar strategy was followed in the case of scandalplagued Satyam Computer Services Ltd in 2009 when the government replaced its board of directors and SFIO investigated the affairs of the company. A state-selected management restores confidence in a crisis-hit company and reassures its business partners.

An official statement said the government has noted corporate deficiencies, misrepresentation of the lender’s financial fragility and loss of credibility by its former management. A report from the corporate affairs ministry’s Mumbai regional director has “clearly brought out serious corporate related deficiencies in the IL&FS holding company and its subsidiaries,” said the statement. It also said the consolidated financial statement of IL&FS holding company and its arms and joint ventures “projected a picture through highly exaggerated depiction of non-current assets in the form of intangible assets amounting to over ₹20,000 crore,” said the statement.

“There have also been serious complaints on some of the companies for which an SFIO investigation has been ordered into the affairs of IL&FS and its subsidiaries,” said the statement.

The group’s executive pay too has come under lens.

“That the firm continued to pay dividends and huge managerial pay-outs regardless of the looming liquidity crisis shows that the management had lost total credibility,” the Centre said.

The government statement also hinted that the fragile financial health of the lender had its origins in the previous Congress party led United Progressive Alliance (UPA) era. “Substantial leveraging of IL&FS Group and deterioration in its financial health started many years ago on account of stalled projects in infrastructure sector largely owing to wrong decisions and policy paralysis before 2014,” said the statement.

The government has pledged liquidity for IL&FS from the financial system so that no more defaults take place. The turnaround plan will include orderly sale of the assets of IL&FS group, recovery of receivables, fresh capital infusion, business restructuring and ensuring the company’s continued access to financial market.