IL & FS Corporate Fraud

Q2.

Infrastructure Leasing and Finance Services (IL&FS) is a non-banking financial company (NBFC) that
provides infrastructure development and financing services in India. It was established in 1987 by the
Central Bank of India, HDFC Limited and the Unit Trust of India. It has a large number of group
companies across various sectors such as energy, transportation, financial services, etc. IL&FS has
been accused of committing a massive corporate fraud that led to a liquidity crisis in the NBFC sector
and triggered panic in the financial market.

The IL&FS fraud case involves the following key players and allegations:

The former board of directors and top management of IL&FS: They are accused of mismanagement,
negligence, corruption, falsification of accounts, and siphoning off funds. They allegedly inflated the
revenues and assets of the group companies, hid the bad loans and defaults, and created a complex
web of subsidiaries to evade regulatory scrutiny. They also allegedly indulged in insider trading,
conflict of interest, and preferential treatment to certain borrowers. They are facing criminal charges
under various sections of the Indian Penal Code, the Companies Act, 2013, the Prevention of
Corruption Act, 1988, and the Prevention of Money Laundering Act, 2002.

The statutory auditors of IL&FS: Deloitte Haskins & Sells and BSR and Associates (a KPMG affiliate)
are accused of colluding with the IL&FS management and failing to report the irregularities and
frauds in the financial statements of the group companies. They are facing criminal charges under
Section 447 of the Companies Act, 2013, which deals with fraud.

The credit rating agencies (CRAs) of IL&FS: ICRA, CARE and India Ratings are accused of giving
favourable ratings to the debt instruments of IL&FS and its group companies despite knowing their
poor financial health and default risks. They are facing criminal charges under Section 120B (criminal
conspiracy) and Section 420 (cheating) of the Indian Penal Code.

The independent directors of IL&FS: They are accused of failing to exercise due diligence and
oversight over the affairs of the company and its group companies. They are facing criminal charges
under Section 149 (vicarious liability) and Section 447 (fraud) of the Companies Act, 2013.

The lenders and investors of IL&FS: They are accused of ignoring the red flags and continuing to lend
and invest in IL&FS and its group companies without proper assessment of their creditworthiness
and viability. They are facing losses and litigation as they try to recover their dues from the insolvent
company.
The IL&FS fraud case is one of the biggest corporate scandals in India's history. It has exposed the
loopholes and lapses in the regulatory framework, corporate governance, auditing standards, and
credit rating practices in the country. It has also raised questions about the accountability and
responsibility of the stakeholders involved in the infrastructure sector. The case is currently under
investigation by various agencies such as the Serious Fraud Investigation Office (SFIO), the
Enforcement Directorate (ED), the Central Bureau of Investigation (CBI), the National Company Law
Tribunal (NCLT), and the Securities and Exchange Board of India (SEBI). The new board of directors
appointed by the government is trying to resolve the crisis by selling off assets, restructuring debt,
and reviving projects

Q7. What were the outcomes? Punishments/Fines etc.? What was the future for the company
involved?

The government stepped in. Assumed control of IL&FS in October 2018. They removed the board of
directors. Appointed a new one led by Uday Kotak, a well known banker. The government also
blamed the board of misappropriating funds and acting against the best interests of the common
public.

Under the guidance of the new board, an investigation, was launched into the fraud. It revealed that
there were a total of 348 entities associated with IL&FS, out of which only 169 were based in India.
To further delve into this matter a forensic auditor was hired to scrutinize the transactions within the
IL&FS group.

In order to address irregularities permission was obtained from NCLT by MCA to reopen and revise
the statements of both IL&FS and its subsidiaries for the past five years.

The SFIO has filed chargesheets against 30 individuals and entities connected to IL&FS group,
including chairpersons, vice chairpersons, managing directors, auditors and rating agencies.
Additionally two former top executives have been arrested on charges related to fraud and causing
losses to both IL&FS and its creditors.

Because of their involvement in this activity SEBI has imposed penalties on individuals and entities
while temporarily barring them from participating in securities markets.

Furthermore SFIO has been granted permission by the Supreme Court to prosecute auditors
associated with IFIN – an IL&FS subsidiary – for their role, in this scheme.

The future of the company affected by the aftermath remains uncertain as it is currently undergoing
a resolution process led by the board and the NCLT. The new board has taken steps to recover funds
and repay creditors by selling off some assets belonging to IL&FS group. They have categorized the
remaining entities into three groups; green ( to pay all debts) amber ( to pay some debts) and red
(unable to pay any debts). It is estimated that around Rs. 61,000 crore of debt can be resolved
through asset sales or restructuring. However there are obstacles and operational challenges that
need to be addressed in this process. Additionally it should be noted that the term of the board is
coming to an end soon adding uncertainty, about what lies ahead for the affected company.