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A year of ILFS

ILFS; auditors

The mastermind of the ILFS scam is clearly Ravi Parthasarthy, its former CEO who fled India in June 2018, just before the scam was out in the open.

 

It was in September 2018, that the giant ILFS fraud exploded, sending shock waves in India’s financial and capital markets. A year has gone by and it is review time. A lot has happened since the scam broke out, triggered by the default of ILFS in repaying its loans. The government realised the gravity of the situation, disbanded the board of directors of ILFS, appointed a new one headed by the billionaire banker Uday Kotak, and ordered an investigation into its criminal state of affairs, by a slew of agencies including the CBI, SFIO, MCA, ITD, SEBI and the RBI. A lot of its dirt has come out in the open due to such probes which continue and has led to the arrest and prosecution of the directors of ILFS as also of its independent directors, auditors and rating agencies. There are frantic efforts on to sell the assets of ILFS in order to repay its loans of over Rs.130000 crores, with none of the lenders, which consist of banks, pension funds, PF funds, mutual funds etc. have received a rupee so far. It is a grim situation for the lenders, who are expected to recover a mere fraction of their dues in the best-case scenario.

 

The mastermind of the ILFS scam is clearly Ravi Parthasarthy, its former CEO who fled India in June 2018, just before the scam was out in the open and is said to be undergoing medical treatment in London. To us, the curiosity is as to how could a single person, assisted by a band of devoted associates mastermind and perpetrate such a giant fraud for over two decades, and that is our point of review today. For this, we need to go into the history of ILFS, which was set up in 1987 by the Late M. J. Pherwani, former UTI. Chairman, who used his clout to ensure that institutions like UTI, HDFC and Central Bank were its initial shareholders. The company got into the business of funding and execution of infrastructure projects, such as roads, power, ports, water utilities etc. and with the support of its deep-pocketed institutional shareholders, it started bidding for and bagging big-budget projects from the government. Soon its biggest shareholders were LIC and Orix Japan and also others like SBI. Ravi Parthasarthy took charge as its CEO in 1989 and the organisation was dominated and controlled by him at every level.

 

With his unviable ambitious plans, ILFS started incurring losses and cashflow mismatches, which were craftily hidden by Ravi Parthasarthy in the hundreds of subsidiaries and joint ventures of ILFS. This poor state of finances of the ILFS group was revealed in 2013 when the consolidated financial statements of the ILFS group were prepared for the first time. The question is that why did the shareholders, lenders etc. of ILFS not get alarmed in 2013 itself when the pathetic consolidated financial position was revealed for the first time and why did they let the size of the fraud and the debt balloon to Rs.1.34 lac crores in 2018.

 

The answer lies in the fact that ILFS very craftily and deliberately created an image of it being a government entity, or a quasi-government entity, which most persons thought it to be. This was a key part of the plan of Ravi Parthasarthy to hoodwink and fool lenders and all others. It was this wrong image that helped him raise huge funds from lenders, who took it as if they were lending to a government-owned entity with no risk and with those huge funds ILFS bagged big infra projects, while he networked and hobnobbed with all the powerful netas and babus, riding this fraudulent image. He was thus seen with the bigwigs of the country, whether in the world of banking or finance, as also in government and bureaucratic circles, thus enhancing his image and making his adversaries and all others scared of him.

 

With this false image of ILFS and his connections in the most powerful circles of India, he was able to now create a supporting façade, to be able to hoodwink its institutional shareholders,  as well as the lenders. He thus got well known senior retired bankers and bureaucrats appointed as independent directors on the board of directors of various companies of the ILFS group, who were certainly happy to be appointed and made useful in their retirement and were mute willing witness to all the misconduct and malpractices of the ILFS group. It was so in the case of auditors, rating agencies and his managers. It is said that he demanded absolute loyalty and devotion from his team and he bullied and even hounded his adversaries with bogus criminal cases, in order to keep his crime story intact. ILFS was his personal fiefdom and not on institution, where once the internal agencies ie. his top staff, directors and auditors were in his control, he then fooled the external ones ie. the rating agencies, lenders, regulators and the media, none of whom objected to his misdeeds, even when they were aware of it.

ILFS had no whistleblower, no adverse media reports, no dissenting directors, no adverse auditor reports and no rating downgrades until its debt default happened and soon it all collapsed like a pack of cards, which it was. It is surprising how there was such a collective failure and institutions were hoodwinked to believe that ILFS was a quasi-government/government institution with no risk of failure. It is a classic case of collective collusion, of being a mute witness to the misdeeds of a mastermind, for collective greed and ambition.

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