Bankruptcy of IL&FS

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About ILFS

IL&FS is a public limited Indian company which deals in Indian infrastructure development and providing financial assistance. IL&FS has 250 subsidiaries, out of which 23 are direct subsidiaries, 141 indirect subsidiaries, 6 joint ventures and 4 associate companies, providing and fulfilling the objectives of IL&FS. IL&FS was incorporated in the year 1987 as a “Core Investment Company” with equity from Central bank of India, Union Trust of India and Housing Development Finance Co. to fund their Infrastructural projects worldwide.[1] IL&FS also got institutional shareholding from many institutions like SBI, LIC, ORIS Corporation of Japan and Abu Dhabi Investment Authority (hereinafter referred as ADIA). LIC and ORIX Corporation are the largest shareholders as per March 31, 2018 with shareholding of 25.34 percent and 23.54 percent respectively. Other prominent shareholders of IL&FS include HDFC, CBI, SBI etc. IL&FS have also been listed as “systematically important” by the Reserve Bank of India (hereinafter referred as ‘ the RBI’) which hold assets worth Rs. 1,15,000 crores and debts worth Rs. 91,000 crores.[2]

In the recent years IL&FS has shifted its services from project sponsorship to project advisory and project facilitators for development and implementation of project.[3]IL&FS has great number of stakeholders and IL&FS seems to be growing at a nominal rate. It is also estimated that if there is any kind of failure in IL&FS then there will be impact on other fields also like agriculture, education, health, sanitation etc.

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Non-Repayment of Loan

IL&FS which once pioneered the infrastructure sector has now come under the radar of a lot of regulators in concerns with bankruptcy, defaults and corporate governance. A major issue in hand is default of debt by IL&FS Transportation Networks (hereinafter referred as ‘ITNL’), a subsidiary of IL&FS, which was incorporated in the year 2000 by IL&FS. This subsidiary had huge projects undertaken which were normally funded through debt. It further resulted into increase in debt-equity ratio of IL&FS. IL&FS has also faced problems in monetizing the on-going projects, due to which it faced delay in settlement of claims.[4] In June and July subsidiary companies reported irregularities in debt servicing. It was also pointed out that the commercial papers of another subsidiary i.e. ILFS Financial Services (hereinafter referred as ‘IFIN’) smoothly shifted from A1+ (having very degree of safety and low risk) to A4 (having very high risk of default).[5] The whole issue came into light when the group companies started defaulting in payments in September, 2018. IL&FS has defaulted on the loan obtained by it from SIDBI and the total liability of IL&FS is 91,000 crores.

Causes of crisis

The major reasons for the aforementioned crisis are enlisted below:

  1. Lack of Regulators – The rating agencies initially ranked IL&FS as AAA but now ranked it as junk. In such circumstances, the rating agencies fail to depict a clear picture of IL&FS to the investors which results in incurring of losses for the investors. The major shareholders also fail to monitor IL&FS in which they have invested in huge amounts. Further, the RBI has also failed to monitor the crisis before it unfolded. Coming to the government of India, it has also failed to appoint any appropriate regulator to look into the issue.
  2. Use of funds – The loans that were taken by IL&FS were majorly short term while the loans granted by IL&FS were long term. IL&FS’s finances lacked transparency and it also granted loans to its subsidiaries. Further there was no difference that was acknowledged between public and private company.
  3. Complex structure- Further it has been pointed out that since IL&FS has a complex structure with almost 250 subsidiaries it becomes difficult for any auditing firm to regulate and monitor the finances and books of accounts of all the companies.

Modus Operandi

It all started in the year 2005, when IL&FS switched from arranging and structuring infrastructure projects to being partners in the projects. Through this IL&FS got State Government’s approval and also attained 50:50 joint venture, which allowed the state to appoint a director while the managing director was of IL&FS’s which ran the entire show. IL&FS through this process virtually owned the projects.[6] IL&FS also had a lot of government officials to whom it had said to provide various facilities and a lavish lifestyle. All the expenses were ultimately incurred by the public and also IL&FS had over 40 international and domestic banks as lenders. IL&FS applied the strategy wherein the investment of IL&FS was almost recovered by IL&FS even before the project got off the drawing board and this was done by charging more and more fees. This kept on working in earlier days but later on, in every project there occurred controversies. One such controversy that came to light was Noida Toll Bridge case, where the public anger ranged to a decision by the Hon’ble Supreme Court wherein it was held that the bridge shall remain toll free. Various major projects of IL&FS landed in litigations and controversies which made them unsuccessful.

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Application against the Auditors of IL&FS

The Ministry of Corporate Affairs (hereinafter referred as ‘MCA’) filed an application under Section 140(5) of the Companies Act, 2013 with the NCLT for debarring the auditors of the firm. The officials have also stated that they do not expect auditors to find a needle in the haystack but given their qualification they cannot even stay aloof and silent when an elephant is in the room. MCA has contended to bar the auditors for five years for collusion with IFIN, contravention of other corporate governance concepts and their failure in management. The auditors of IL&FS include Deloitte, BSR & Associates which is an accounting branch of KPMG. The ministry has taken this step after evaluation and confirmation by the Serious Fraud Investigating Officer (hereinafter referred as ‘SFIO’), which stated that there have been fraudulent acts by accountants in connivance with IL&FS. It also stated that the auditors aided in concealing the wrong doings of IL&FS despite having full knowledge of their fraudulent acts.[7] MCA has further sought for the appointment of new auditors in IL&FS. MCA in their application has also included Institute of Chartered Accountants of India (hereinafter referred as ‘ICAI’), RBI and Securities Exchange Board of India (hereinafter referred as ‘SEBI’) in order to move the application swiftly in case the application is dismissed. The MCA also alleged that the auditors have failed to verify the end-use of loans and also the money raised through Non-Convertible Debentures (also known as NCDs) despite this all being a regulatory mandate. The SFIO complaint also pointed out that IL&FS’s accounts have been falsified from Financial year 2014 to 2018 which the accountants have failed to acknowledge and report. SFIO further went on to state that the accountants have collided with company’s top managerial officials in contravening the accounting principles and standards. It is also contended by the MCA that the auditor’s job is to endow a true and clear picture of company’s accounts and failing in doing so shall be in contravention to their professional code of conduct. The auditors in particular are accused of failing to identify the mis-match of assets and liabilities of IL&FS, poor recognition of rising NPAs, inappropriate valuation of assets and missing out on non-circulation of funds amongst group entities.

Money Laundering Probe

The Enforcement Director has initiated fresh search in Mumbai in concern with Money Laundering Acts of the multi-national company and has also raided the houses and residences of four directors of IL&FS.[8] The searches were first initiated by the Central Agency in February after filing of criminal case under the Prevention of Money Laundering Act (hereinafter referred as ‘PMLA’). The searches were carried out with the intent to obtain additional evidences and documents. The money laundering probe was initiated on the basis of complaints filed by Enso Infrastructure Private Limited (hereinafter referred as ‘IEPL’) for allegedly causing 70 crores of loss to them.[9]  IEPL urged in its complaint that IL&FS was acting with malice and fraudulently misusing the funds of IL&FS. 

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National Company Law Appellant Tribunal’s (NCLAT) Order

Many jurists and law practitioners opined that the Hon’ble NCLAT’s orders in the concern with bankruptcy of IL&FS have been bizarre and the Tribunal seems to have exceeded in exercising its powers. It ruled out that all the loans of IL&FS shall not be considered as Non- Performing Assets (hereinafter referred as ‘NPA’), which is believed to put companies in such situation in the very first place. The objection raised is that the Court is not empowered to determine the manner in which the companies shall treat their assets. Further the order uses the term “all financial institutions” which makes it ambiguous that whether IL&FS was an intervening application in the order passed. Some also urge the RBI to oppose this order on the grounds of unreasonableness and authority. The biggest reason for objecting such order of the NCLAT is for protecting the interest of Indian depositors.[10] The NCLAT had fixed the next hearing to be in December, 2018 as IL&FS has been granted a 90-day moratorium period, which is vehemently opposed by the lenders as they are not allowed to state the loans as NPAs. The Government has further submitted a revival plan for the giant infrastructure company which is estimated to take shape in six to nine months. The Government urges that the 90 days moratorium period shall be necessary and sufficient to give shape to the proposed resolution plan. In May, 2019 the NCLAT reversed its order and declared that IL&FS’s loans shall be declared NPAs by banks.[11] The Government has also appointed a new board of directors for IL&FS for smooth functioning of judicial proceedings. This move has been considered to be akin to the strategy undertaken by the government during the time of Satyam scandal.


This article covers all the aspects of the controversy arose by the non-payment and making default of debts by the infrastructure company. IL&FS in this case has been accused of various fraudulent charges and all such charges are being scrutinized by the authorities concerned in this manner. But the main question that arises herein is that whether it was possible to prevent such defaults. The answer lies in the corporate structure of IL&FS and with the auditors of IL&FS. In this case as well, the top accounting companies such as EY, Deloitte and BSR Associates are alleged to have acted in contravention with their professional code of conduct and which is a major reason for such acts and circumstances. These protracted charges on the company’s top officials and accountants show the gravity of the issue. The initial default also came as a shock to investors considering the size and profits company was making. It was completely unpredictable and unforeseeable for the investors and the fallout will majorly affect the investors.. Further, the Government being completely active in this case wants NFRA to act as a watchdog on these accountant firms and wants to increase the scope of its powers by not only penalizing the persons involved in the audit but also the auditing firms.[12] The scandals like these are a big indication that the country needs more stringent laws and also there is a dire need of making accountants and auditing firms familiar with their code of conduct and their non-compliances thereof.

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[1]IL&FS: The crisis that has India in panic mode, Economic times,

[2] Rescuing IL&FS, The Hindu,

[3] Infrastructure Leasing & Financial Services Limited, ICRA,

[4] Ira Dugal, The Rise and Stumble of IL&FS,

[5] Radhika Merwin, IL&FS crisis could have been avoided, The Hindu,

[6]SuchetaDalal, How IL&FS Was Enriching Itself at Public Cost,

[7]Subrata Panda & Sundar Sethuraman, Govt moves NCLT for 5-year ban on IL&FS Financial Services auditors,

[8]IL&FS money-laundering case: ED conducts fresh raids in Mumbai,


[10]AparnaIyer, NCLAT order on IL&FS rewards imprudence, ignorance at banks, Live Mint,

[11] RBI withdraws mandate on IL&FS NPAs, The Hindu,

[12]Jayshree P. Upadhyay, Inside the audit lapses that led to IL&FS crisis,