OPINION | How IL&FS Directors Failed And Why Govt Takeover is a Good Thing

Ramalinga Raju, the founder of Satyam Computer Services and the prime accused in India’s biggest ever accounting fraud, was quoted as saying, “It was like riding a tiger, not knowing how to get off without being eaten”.

Raju’s words have an ominous ring as the mess at Infrastructure Leasing & Finance Services (IL&FS) appears to be a fraud of massive proportions. The well-heeled board members of IL&FS did not know how to dismount the tiger without being harmed by the animal.

In 2009, when the large scale accounting fraud and cooking of books came to light at Satyam, the government was left with no option but to step in by superseding the company’s board and appointing its own trusted lieutenants. It was just an year after the global economic crisis due to the Lehman fallout in 2008 and the Indian economy was still picking up the pieces of the previous year’s devastating effects on the IT industry – which had bulk of its business coming in from the US and the UK, two markets majorly impacted by the Lehman crisis.

The Satyam bombshell was the last thing India needed that year.

It became clear as the magnitude of the fraud came to light that Satyam was a company too big to fail. Had it collapsed, a number of related entities would have too, leading to a domino effect which the Indian economy, being in an already fragile state, would have found quite hard to sustain. That is why the government put its own trusted men on the board of this company and patiently steered it away from collapse.

Something similar is being contemplated by the government in the IL&FS saga, which has moved on from being a case of wilful neglect and board apathy to massive fraud. According to reports, the government has said it has no faith in the board of directors of IL&FS and may appoint its own directors on the company’s board, led by Uday Kotak.

It is also contemplating referring the entire case of IL&FS to the Serious Frauds Investigation Office (SFIO).

The government’s proposals are still to be approved by the National Company Law Tribunal. But one thing cannot be stressed enough: the government could not have remained a bystander when there is growing likelihood of an NBFC (Non banking finance company) behemoth like IL&FS collapsing. Just like Satyam was in 2009, IL&FS today is too big to fail. The shock and tremors in the case of any such eventuality will be felt far and wide: by the NBFC industry, by the aam aadmi who is an investor in mutual funds which buy into such NBFCs, and the stock markets.

So if the government does manage to sack the IL&FS board, place its own trusted men at the helm, conduct a serious investigation into the fraud and prevent the imminent collapse of a company which has over Rs 90,000 crore in debt, it will be doing just the right thing, though a bit late in the day.

Taking over the affairs of IL&FS and selling off assets to claim moneys is the only way to protect the vast number of employees, stakeholders, small investors and others who would be impacted by a collapse. It is a far better way ahead that asking state insurer LIC – which is a shareholder - or some of the state-owned bank shareholders to fund the IL&FS mess. The government could have moved sooner over IL&FS.

Less than a week back, the Economic Affairs Secretary was quoted saying IL&FS is capable of handling its own issues since it has an independent board of directors. Perhaps increasing pressure from investors as markets got roiled, a sharp political rhetoric from the Opposition and the growing realisation that the IL&FS saga is deeper than mere wilful neglect has spurred the government to act finally.

The first indication of something being wrong at IL&FS came when one of the subsidiaries defaulted on debt repayment and this was followed by others.

IL&FS Ltd is a core investment company and the holding company of the IL&FS Group, which has subsidiaries across infrastructure and financial services. As on March 31, LIC and Japan’s ORIX Corporation were the largest shareholders at 25.34% and 23.54%, respectively. Other prominent shareholders included ADIA (12.56%), HDFC (9.02%), CBI (7.67%) and SBI (6.42% ). At an AGM held late last week, the foreign shareholders have reportedly showed reluctance to infuse more money into the company, putting any revival plans in limbo.

(The author is a senior journalist. Views expressed are personal.)