Business & Finance

The Satyam that was not

“With almost every bank and institutional lender having exposure to ILFS, its dangerous contagion effect would destabilise the entire banking and finance sector of India, calling for immediate measures”


It was a year ago, that the then AAA-rated ILFS shocked the financial markets by defaulting on payments to its lenders. As the defaults cascaded, it was soon very clear that the so-called AAA rating was junk and that ILFS was a crumbling pack of cards. With a group debt exceeding Rs.1.34 lac crores, it was evident that ILFS will collapse under the deadweight of this humongous debt. With almost every bank and institutional lender having exposure to ILFS, its dangerous contagion effect would destabilise the entire banking and finance sector of India and thus that called for immediate fire fighting measures.

The government swung into action and disbanded the board of directors, appointing a new one headed by the billionaire banker Uday Kotak, in order to rescue, revive ILFS and protect its stakeholder wealth.

The task before the new Board of directors was to stem the panic in the financial markets, control the repeated debt repayment defaults of ILFS, avoid collapse of the NBFC sector, restore confidence and preserve shareholder value. A detailed presentation was made by the management of ILFS to the new Board, about its business, financial difficulties and group structure consisting of 348 subsidiaries spanning from Spain to China.

It was soon clear to the new Board that the gravity of the ILFS crisis had been grossly underestimated. The new directors appointed advisors to look into sale and monetisation of the assets of ILFS and to counsel regarding management of the scammy group. Since the audited financial statements of the ILFS Group entities were found to be false and misleading, a forensic auditor was appointed to investigate the state of affairs.

While the new Board hit the ground running, a parallel investigation into the affairs of ILFS was started by criminal agencies and authorities like the SFIO, CBI, ITD, ED, RBI and the MCA. It was soon found that ILFS was not a case of a giant corporate default, but was actually a giant corporate fraud of shocking proportions.

Everything about it was bogus, except the liabilities and losses that had been concealed. It was a case of bogus financial statements, bogus capital, bogus networth, bogus assets, fraudulent siphoning of funds, money laundering, tax evasion and regulatory violations, caused by the participation and collusion of the top directors headed by Ravi Parthasarthy, Hari Sankaran and Ramesh Bava, independent directors, auditors and rating agencies too. And they are all under investigation, arrest and prosecution in some form or the other.

ILFS has been a criminal fraud of shocking magnitude and collusion, where every watchdog compromised its integrity failed to bark. The manner in which its board of directors were superseded and disbanded reminded one of the Satyam case, where a Deepak Parekh led board took over the company, stabilised it and sold it to the Mahindra Group, thus protecting the enterprise and its wealth. But it would be wholly incorrect to compare the ILFS case with that of Satyam, though in each case the Board was disbanded by the government with a common objective.

Satyam was not as complex as ILFS is in terms of its corporate structure, nature of business, number of subsidiaries, sheer size of fraud and geographical spread. It had no debt and thus had no lenders or depositor claims and its financial size was small compared to the Rs.134000 crore loan base of ILFS.

Satyam’s operations were also not mired in government debt, corruption, kickbacks and money laundering and nor did it have government and financial institutions as its promoters/shareholders. It also did not have powerful directors as in the case of ILFS, who could interfere/influence investigation to save their skin. It was not a fraud concealed in a AAA bogus rating and it had genuine business, though exaggerated. And the most important, it had a detailed confession letter revealing the whole scam, unlike the kingpin of ILFS, Ravi Parthasarthy, who is missing since day one, claiming sickness.

Thus while the takeover and change of management of Satyam was a quick and resounding success, it has not been so in the case of ILFS, where after months of investigation by numerous agencies and auditors, one is not yet even aware of the entire fraud and its modus operandi.

Falsified information and concealed facts have meant very slow progress in the ILFS case and its present state of affairs is that nobody has been paid anything so far, a closure and liquidation of the company is imminent, and wealth and value have not been protected, unlike in Satyam ‘s case.

A year has passed by and the present report card is that investigation and prosecution continues, the entire saga has not yet been unravelled, lenders stare at huge losses, so do shareholders, the enterprise and business has collapsed with little chance of revival, the NBFC sector remains fragile, and no resolution is in sight as we witness prosecution of its directors, auditors rating agencies etc.

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