IL&FS is a big black hole, LIC should not throw public money into it

It was noted that the consolidated financial statement of IL&FS holding company and its subsidiaries, associates 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. Besides, bulk of revenue was in the form of receivables, around 50%, was locked up in litigation and arbitration”, the Regional Director, Mumbai, Ministry of Corporate Affairs pointed out of a possible fudging of accounts by IL&FS in a damning report submitted by him.

His report also states that IL&FS management continued to pay dividends to shareholders and huge managerial remunerations to its senior managers in spite of being fully aware of the financial stress prevailing in the behemoth. On Monday, October 1, Sanjay Shorey, joint legal director in the ministry of corporate affairs, argued in the National Company Law Tribunal (NCLT) that Ravi Parthasarathy, along with CEOs and CFOs, were painting “a rosy picture of the company deliberately despite knowing the truth”.

Most of vice-presidents, CEO’s and CXO’s in the holding company or subsidiaries of IL&FS draw annual salaries ranging between ₹2 crore and 20 crore with stock options thrown in additionally. The failed senior management of IL&FS had a dream run in the organisation, much better than the so called American dream, for the last 2 to 3 decades, only to bring the organisation to the brink.

However the report of Regional Director, Mumbai, Ministry of Corporate Affairs, does not touch upon some other equally worrying aspects of the functioning of the organisation. Many of the infrastructure projects of IL&FS are gold plated projects with inflated costs. IL&FS Transportation Networks Ltd (ITNL), by leveraging its balance sheet, bids for large road projects and then sub contracts these projects to road builders on back- to -back basis (B2B) with at least 10% of project cost loaded as various kinds of fee to be paid for the services rendered by ITNL. IL&FS Investment Managers Ltd (IIML) makes or arranges private equity (PE) investments in many infrastructure companies in India. Senior managerial personnel of IIML are appointed as nominee directors of IL&FS in such investee companies. These nominee directors of IL&FS turn their head away from the fudging of accounts, unhealthy related party transactions or siphoning of funds by promoters practised in such investee companies. IIML functionaries solely work to present a hyped up rosy picture of investee company so that they can exit their investments at a good return and pocket attractive incentives in the process. IIML functionaries on the boards of such infrastructure companies never bother to bring in good practices in such investee companies.

The central government superseded the existing board and constituted a new six-member Board to be headed by Uday Kotak, for the debt-ridden Infrastructure Leasing & Financial Services (IL&FS) after the National Company Law Tribunal (NCLT) allowed it to take over the company in an emergency court hearing. The government also ordered an inquiry by Serious Fraud Investigation Office (SFIO) into the books of the company. The government also moved an application against the senior officials of IL&FS. A separate investigation will also be carried out against the top officials of the company, who will have to respond to queries of the government by October 15. These actions taken by the government against the company, board and managerial personnel are welcome, though the government could not prevent the rot much earlier.

But what is bothering the public is a possible bailout of this mismanaged, corrupt and crony behemoth by Life Insurance Corporation of India ( LIC ), by dipping into the savings of its 32 crore policy holders. All most all Indians trust LIC and millions of uneducated and educated citizens, be it a housemaid or an auto-rickshaw driver or a petty shop owner or a farmer or a corporate professional or a government employee, have parked their hard earned lifetime savings with LIC. In spite of media hype about the huge returns earned by LIC on its equity investments, LIC distributes a modest 6 per cent or lesser rate of bonus on most of its endowment and money back policies. Any ill thought out, adventurous and patriotic sort of bail out of the sinking ship of IL&FS by LIC will adversely affect the lives of crores of ordinary Indians.

Any more public or tax payers money contemplated to be pumped into IL&FS will be akin to throwing it into a big black hole. As per the audited balance sheet for Financial Year 2017-18 , IL&FS has a consolidated debt of ₹91,000 crore as on 31.03.2018 against which it has consolidated assets of ₹1,15,000 crore. But many of these assets are either fictitious assets like the ₹20,000 crore intangible assets pointed out in Ministry of Corporate Affairs report, or disputed receivables stuck in arbitration proceedings/litigation and gold plated project assets. Hence the realisable value of IL&FS assets may be much lower than its debt. IL&FS business model is also not robust as it is incurring losses and generating negative cash flows from operations. Its leverage (debt equity ratio) is very high at about 18 times, against the normative 5 to 10 times for financial institutions. The normal course should be that all the lenders should proportionately take the hit. IL&FS being a systemically important institution does not give it any divine right to be rescued with the public money of LIC or SBI. Like any other big default case, IL&FS should also be resolved under Insolvency and Bankruptcy Code (IBC) or liquidated.

(The author is former Managing Director of Ahmedabad Stock Exchange and a retired Chief Financial Officer in the infrastructure industry)