Way forward! Kotak-led board to order IL&FS forensic audit first

The new board of Infrastructure Leasing & Financial Services (IL&FS) will commission a forensic audit to get clarity on its operations and the true status of its financials, official sources said. The forensic audit will be initiated, the officials said. They added that the government is in the process of appointing independent professional entities to conduct the audit. Moreover, the Serious Fraud Investigation Office (SFIO), the officials confirmed, has begun its investigation into the IL&FS crisis and has been asked to do its job with extraordinary urgency. The SFIO could submit its findings within a month. IL&FS has already defaulted on loan obligations of close to Rs 3,500 crore and owes lenders a whopping Rs91,000 crore. Officials said IL&FS needs an estimated Rs 100 crore a month to remain afloat and the new board will soon find a way to cut expenses. There are thousands of employees across the nearly 350 companies. The first priority of the board will be to ensure IL&FS is running on going concern basis and then look at paring debt, officials explained. The board under Uday Kotak, vice-chairman and managing director, Kotak Mahindra Bank, will meet for a second time in just over a week on Friday.

We are consulting the government and making progress, Kotak told reporters on Wednesday after a meeting with Injeti Srinivas, secretary, ministry of corporate affairs (MCA). The need for a forensic audit was felt especially after it was revealed last week that IL&FS actually had a complex maze of 348 entities, more than double the 169 arms assumed earlier by the ministry. Also, the stressed company is suspected to have under-reported its liabilities and stress level If required, different agencies may be hired to complete this (audit) process within a strict time frame, the officials said. The government feels that the initial report, prepared on the basis of the information provided by the second-rung official of IL&FS doesn’t provide the full picture. Already, in its petition before the Mumbai bench of the National Company Law Tribunal (NCLT) to supersede the erstwhile board of IL&FS, the MCA had informed NCLT that the risk management committee of IL&FS met only once between 2015 and 2018 even though the leverage ratio jumped to 13, against the reasonable level of 3-4. This was despite Hemant Bhargava, managing director of Life Insurance Corporation (LIC) which has a large 25.3% equity stake in IL&FS, heading the committee. The crisis at IL&FS was triggered by a series of defaults by its group companies in the last two months on term-deposits, short-term deposits, inter-corporate deposits, and commercial paper and non-convertible debentures. The petition had said the company is well aware of the precarious and critical financial position but it continued to present to the stakeholders a hunky dory scenario.                          It also pointed out that IL&FS relied on good ratings from CARE and Icra to raise funds as recently as in August, when it picked up Rs 50 crore from its debt investors with a green shoe option of Rs 25 crore. The prospectus put on record a profit of Rs 584 crore, but gave no hint on its consolidated losses of Rs 2,400 crore. Interestingly, when IL&FS swung from a Rs 142-crore profit in FY17 to a loss of Rs 1,887 crore in FY18, its chairman Ravi Parthasarathy saw an 89% hike in his pay, from Rs 10.8 crore in FY17 to Rs 20.5 crore in FY18. In this case, SFIO has also been asked to dedicate extra personnel than it does in normal course. A team has also been deployed to look into the governance structure of the beleaguered firm. The NCLT has also empowered the new board to induct directors into the subsidiaries and the joint ventures.

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