Financial Regulations

Assignment: Infrastructure Leasing and financial services

Finance Batch 1 Roll No-92

Q1) Discuss the failure of key market players, Regulators, Rating Agencies, Auditors,
Investment Bankers.

Regulators:
 RBI regulations regarding calculation of Net Owned Funds were not followed by
IL&FS. This led the company to lend much more than it should have.
 RBI's advice to discontinue lending to group companies was also not adhered to.
 Overall, regulators failed to detect the issues in a timely manner.
Rating Agencies:
 Rating agencies are alleged to have assigned favorable ratings to IL&FS companies in
return for kickbacks.
 This amounts to compromised integrity.
 They failed to raise any concerns despite the company's worsening financial situation.
Auditors:
 External auditors failed to point out violations of regulations over years of audits.
 The audit reports and financial statements did not reflect the true picture of the
company's financial health.
 There are conflicts of interest with a questionable spike in auditor fees paid.
Investment Bankers:
 As key facilitators and intermediaries, investment bankers also failed to detect any
issues with IL&FS despite its complex corporate structure and operations.
 In summary, regulators, rating agencies and auditors - who are responsible for
monitoring, assessing and validating companies' overall governance and finances -
were unable to discharge their duties effectively.

Q2) Suggest areas of improvement for the above parties.

Regulators:
 Strengthen regulations and oversight over systemically important NBFCs like ILFS.
 Conduct more frequent inspections.
 Enforce stricter norms for calculation of net owned funds, asset classification and
provisioning at NBFCs.
 Impose heavier penalties and stricter action for non-compliance with regulations.
Rating Agencies:
 Enhance rating methodologies to reduce over-reliance on management forecasts and
projections.
 Conduct more in-depth due diligence.
 Strengthen internal controls and code of conduct to prevent conflicts of interest and
quid pro quo relationships with company management.
  Impose cooling off periods between rating agency executives working on a client
account and then joining the client organization.

Auditors:
 Enhance audit procedures and quality control checks to prevent audit failures
especially for large complex business groups.
 Institute stronger safeguards against excessive dependence on few large audit clients
to ensure independence and objectivity.
 Rotate audit partners more frequently for large clients to bring in fresh perspective.
Investment Bankers:
 Conduct more in-depth due diligence on companies before aiding capital raising
through IPOs and bond issuances.
 Ensure communications like offer documents and investment memos contain adequate
and accurate disclosures.
 Maintain clear segregation between investment banking and proprietary investment
activities to prevent conflicts of interest