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Will Nirav Modi be brought back?

Akhilesh Bhargava

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Business Tit-Bits

The Borrowing Spree Of ILFS

Akhilesh Bhargava

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As the ILFS Group threatens to collapse like a pack of cards, more and more instances of its mismanagement and reckless financial policies are coming out in the open. The spate of resignations of its top honchos, starting from its CEO of 30 years, Shri Ravi Parthasarthy is only confirming the chronic malpractices and financial mismanagement of ILFS, which engineered its collapse. It now turns out that with loans of over Rs.90000 crores, ILFS had heavily borrowed, far beyond its sustainable capacity and its failure was imminent.

Prudence is the key to good financial management and careful borrowing is its essence. A primary parameter that bankers/lenders adhere to when they lend, is to maintain a safe proportion of promoters equity versus borrowing in any project. The more the capital that a borrower invests in a project, the more is his skin in the game, which improves the viability of the project and gives safety to the lender. The chances of failure of a project where the promoters capital in the project is very low are always very high, thus putting a lender at risk. As a general tendency, borrowers prefer to invest the least in a project, which puts the lender, borrower, as well as the project at risk. The story of the failed projects in power, infrastructure and the real estate sector in India, is one where the borrower put in very little equity capital and most of the project fund came by way of loans. Such projects were doomed to fail at the very inception and they did. Moreover, in those projects where the borrower has invested little, in case of failure, the borrower becomes indifferent to the project, making it what Raghuram Rajan calls a zombie project or otherwise like in the case of Nirav Modi/Mehul Chokshi, the borrower chooses to run away.

The saga of failure of the ILFS and its shocking flock of 169 subsidiaries is also that of over borrowings. ILFS operated in the infrastructure segment, where a maximum borrowing of up to five times of borrower’s equity is considered to be safe. Any borrowing beyond that is considered to be financially dangerous. As against a safe multiple of 5 times, ILFS it turns out borrowed up to 17 times its equity. In other words, against a borrowing of Rs.90000 crore, by ILFS, its own capital was just about Rs. 5000 crores. No wonder, the entire ILFS edifice is in danger of collapse. This parlous financial mismanagement of ILFS raises serious doubts about the intent and ability of its top management, led by its founder CEO Ravi Parthsarthy, who has resigned on health grounds. It also raises questions on the conduct of the lenders, who recklessly lent to ILFS, ignoring sense and prudence. ILFS having been promoted by the likes of LIC and other institutions, operated as a quasi-government entity, with no checks and balances. But it was not so. Its top three executives were given a combined salary of Rs.47 crores last year, more than what the private sector would pay and their performance were worse than a public sector employee.

As ILFS sinks lower into a collapse, its financial mismanagement stares in the face. It calls for an investigation by agencies like SFIO, MCA etc. to find out whether such mismanagement also has angles of fraud, misfeasance and corruption to it.

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Lena Dena Maaf

Akhilesh Bhargava

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The bankrupt Dena Bank is being merged into Vijaya Bank and Bank of Baroda. So huge are the losses in the Bank that it needed two healthy banks to be able to absorb and withstand its losses. Its carcass of mismanagement is so heavy that it needed more than one bank to be able to carry it. But these are the privileges of being a government-owned entity, where accountability and answerability are not enforced even in a case of blatant misconduct and criminal misfeasance, which is the true story of Dena Bank.


If the utterly mismanaged and bankrupt Dena Bank was a private sector organization, it would not have been revived by merger as we are seeing, but would have been closed down and would have been sent to the courts for liquidation. Its depositors and investors would have lost tens of thousands of crores, due to the fraud and mismanagement perpetrated by its top management not just in giving bad loans, but in also thereafter showing indulgent leniency to the wilful defaulters.  Their deliberate forbearance added to the success of the frauds and the scot-free escape of the fraudsters. During the liquidation of the bank, a mandatory forensic audit would have revealed the criminal saga of bad loans, outrageous siphoning of funds, the deliberate unwillingness of the Bank to recognize cases of frauds and going soft on the recovery of loans.

Upon such findings, a criminal prosecution would have been launched against the erstwhile top management of the Bank, by agencies like CBI, SFIO, ED etc. and the entire chain of its complicit officers to bring the wrongdoers to the task. The investigation by multiple agencies and regulators would have brought out/unearthed the criminal nexus that led to the bad loans and their nonrecovery and action would have been initiated against them all. So corrupt was known to be Dena Bank, that not only did its credit officers, who sanctioned /disbursed loans make money, but so did its recovery officers, who happily let the defaulters subvert the judicial recovery process for a bribe.

But then Dena is a government-owned bank, where the rot started from the top because its topmost management was eagerly willing to take orders from their political masters, for their personal gains. They cared little for appraisals, due diligence, credit verification and processes and happily gave large loans on telephone instructions, to those who had influence and reach. They were fully aware while conducting such crimes that is a government-owned bank, they will not be allowed to fail and capital wasted/duped away by them, will ultimately be replenished by the government. They had no scare that if Dena Bank went bankrupt, they would have to face the wrath of its depositors, whose money was looted due to their misconduct and malpractices. These rotten top managers of Dena Bank were clear, that they are following the instructions of the system, and the system will itself look after them, which it has. Dena Bank is being merged, with no criminal investigation or punishment of those who looted it. None have been investigated, prosecuted, punished or arrested for its bankruptcy. It is a case of Lena Dena maaf (forgiven).  

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Sensex drops over 200 points; Nifty below 11,100

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Sensex

Mumbai | The BSE Sensex dropped over 200 points in early trade Monday on increased selling of realty, consumer durables, auto and banking stocks, amid weak Asian cues and surging global crude oil prices. The depreciating rupee also dampened investor sentiment.

The 30-share index, after opening positive at 36,924.72, quickly succumbed to selling pressure and fell by 210.22 points, or 0.57 percent, to 36,631.38 in early trade. The gauge has lost 1,249.04 points in the previous four sessions.

Similarly, the NSE Nifty declined by 65.50 points, or 0.59 percent, to 11,077.60 after a touching a high of 11,170.15. Sectoral indices led by realty, consumer durables, auto, banking and healthcare were trading in the negative zone, falling up to 1.66 percent.

Major losers were Bharti Airtel, Maruti Suzuki, Hero MotoCorp, M&M, Kotak Bank, Adani Ports, HDFC, ICICI Bank, Yes Bank, Axis Bank, PowerGrid and IndusInd Bank, shedding up to 2.32 percent.

Shares of Dewan Housing Finance Corporation rebounded nearly 25 percent to Rs 438.75 after the company stated that it had not defaulted on any bonds or repayment nor had there been any single instance of delay on any of its repayment of any liability. The company’s shares had tumbled 42.43 percent in the previous session on Friday following massive selling over fears of a liquidity crisis.

Brokers said market sentiment remained weak in the absence of any encouraging factor and fresh weakness in the rupee, coupled with rising global crude oil prices, which again went past the USD 79 per barrel mark. The rupee depreciated 29 paise to 72.49 against the US dollar at the interbank forex market.

Foreign portfolio investors (FPIs) bought shares worth a net of Rs 760.70 crore, while domestic institutional investors (DIIs) made purchases to the tune of Rs 497.03 crore on Friday, provisional data showed. Elsewhere in Asia, while Japan and Chinese markets were shut Monday on account of a public holiday, Hong Kong’s Hang Seng fell 1.29 percent. The Dow Jones Industrial Average, however, gained 0.32 percent to end at record high Friday.

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