Unravelling the IL & FS fraud: Regulatory Darkness of the finance sector

Unravelling the IL & FS fraud: Regulatory Darkness of the finance sector

Author: Karishma Moral, a student at Law Centre -II, University of Delhi


The Infrastructure Leasing & Financial Services is considered to be one of the prominent infrastructural development and financial company in India. This article delves into the reasons for the downfall of the company. The IL&FS fraud was amongst the largest corporate fraud in the country. One may question how a scam on such a level is initiated. The fraud like these consists of illegal or unethical actions committed either by the company or an individual of the company. The fraud is extremely complicated, and fabricated and therefore becomes difficult to identify. To get the fraud trapped takes an office full of forensic accountants’ months to decipher the fraud. This article throws light on the root causes of the fraud, inadequate risk management and regulatory lapses. The article further highlights the importance of robust corporate governance and transparent financial reporting. The case questions and demands the need for ethical conduct, accountability and transparency in the corporate world. 


The Infrastructure leasing and finance services is considered as core infrastructure development and financial company in India it serves as the holding company of the IL&FS group. It was formed in 1987 as an RBI-registered core investment company. It operates over more than 250 subsidiaries including IL&FS Investment Manager, IL&FS Financial Services and IL&FS Transportation Networks India Ltd. Currently, its institutional shareholders include Life Insurance Corporation of India (LIC), ORIX and Abu Dhabi investment authorities with small shareholdings by a few Indian banks. The IL&FS has various projects in different sectors ranging from Transportation, Area Development- Governance, Health Initiatives, Finance, Power, Ports, Water and wastewater, Urban infrastructure, education and Tourism. The fraud is considered one of the largest corporate frauds in India it triggered a slowdown in the economy as the company was the crucial vehicle for the infrastructure development of the country.

Working of IL&FS:

As the Infrastructure leasing and financial services serve as a bank as it funds for different projects, but it originally doesn’t form a bank, funding like this comes under the Non-Banking Financial Companies (NBFC) and IL&FS is one such company. They fund themselves in two ways referred to as Long term borrowings and Short term borrowings. In Long-term borrowings, loans are taken from large banks like the State Bank of India, Punjab National Bank, etc. Whereas under Short-term borrowings, they issue debt instruments like bonds, non-convertible debentures (NCDs), certificates of deposits, commercial papers (CPs), mortgages, leases or other agreements between a lender and a borrower.

Reasons of perpetration of fraud:

The fiasco of IL&FS started when a mismatch between asset and liability arose.  The IF&FS moved up its hand and started defaulting on the loans that it had taken from various financial institutions and investing bodies. The infrastructure lender has a total consolidated debt of close to 1 lakh crore, and it started to miss deadlines on a debt obligation beginning 27th August 2018. It has already defaulted on around rupees 450 crore worth of inter-corporate deposits to the Small Industrial Development Bank of India and more defaults were likely coming. All the bond borrowings they had taken long-term and short-term suddenly started defaulting. This was pointed out in the eyes of rating agencies. On the occurrence of defaults, ICRA a Moody’s investors service company downgraded the ratings of its short-term and long-term borrowings. These further endangered banks, mutual funds and investors associated with the company. The fraud occurred despite marquee shareholders like LIC, and SBI being the largest shareholders having representatives on board. IL&FS has the largest debt exposure of around rupees 91,000 crores.

Major push for the perpetration 

  1. Complications in land acquisition, the land acquisition law made many of its projects unviable.
  2. Lack of timely actions impacted the situations to great heights.
  3. Diversion of borrowed funds to related entities of some of the members of the top management team.
  4. Imprudent lending to parties who are not creditworthy for ulterior motives.
  5. Ever greening of loans by routing money from one group company to another through an unrelated party.
  6. Over invoicing of project costs by vendors, accounting of fake expenses etc. and difference being routed back to related entities of some of the members of the top management team.
  7. Overstatement of profits by non-provisioning of loans accounting of fake expense, inappropriate recognition of project revenue etc. 
  8. The company had an unprecedented number of subsidiaries and group companies that were used to route the above transactions.
  9. Non-disclosure of some of these companies as related parties.
  10. Non-disclosure of some of the subsidiaries, associates, and joint ventures.

Role of Serious Fraud Investigation Office (SFIO)

Most of the mutual fund’s insurance companies and PF gratuity funds had invested large sums in its debt issuance, due to the high credit rating of the company. It was a case of negligence by reputed credit rating agencies that the rating was not downgraded despite clear signs of financial stress in the company’s rating was downgraded abruptly to the lowest level from the highest only after the company defaulted in its repayment obligations. Deloitte being the auditor of IL&FS, the sudden fall moved all the heads to the auditors. As things came out Serious Fraud Investigation Office took control over the case. It claimed Auditors and credit rating agencies to be part of contributors to the IL&FS failure. And on a forensic audit, Deloitte was found to be prima facie guilty where the auditors failed to perform the audit with due care and professional skills. Upon the findings of the audit Senior manager of IL&FS was put behind bars. Soon the government suspended the board and appointed six new directors including Uday Kotak and ICICI Banks’s G.C. Chaturvedi to restore confidence in the financial markets. 

Step by Ministry of Corporate Affairs

MCA moved NCLT to ban the auditors for five years and the SFIO charge sheet as the external auditors were guilty of fraud under section 477 of The Companies Act,2013 which could lead to imprisonment up to 10 years for individuals involved and fine up to 10 times the amount of fraud.

Impacts of IL&FS failure

  1. Financial Impact

The infrastructure leasing and financial services group operated over 100 subsidiaries and is now sitting on a debt of rupees 94 crores. The bankruptcy case wiped out rupees 8.48 lakh crore of investor’s wealth including commercial paper worth rupees 300 crore was sold at a discounted price that belonged to DHFL. The default by IL&FS led to panic in the debt market and dried liquidity in the system of 1 lakh crore, all these factors widened the fiscal deficit which has adverse repercussions on inflation, exchange rate, growth etc.

  1. Legal Impact

The rating agency ICRA has downgraded the ratings of its short-term and long-term borrowings from ‘ AAA’ to ‘D’. Upon the arrest of former vice-chairman of IL&FS, Hari Sankarn by SIFO in Mumbai, the prosecution complaint was filed in a special court of the Prevention of Money Laundering Act, charging the senior management personnel of IL&FS. In addition to this, the Enforcement Directorate conducted searches at multiple locations in connection with the crisis, it also made the provisional attachment of bank accounts and immovable property to the tone of rupees 570 crore held by the people associated with IL&FS.

Importance of Robust Corporate governance

The eminent companies of the country need a pathway to walk towards transparency, accountability, and ethical practice and this can be thrived under the shed of good corporate governance. It acts as a safeguard against risks, frauds and mismanagement creating a safe environment where investors can trust and businesses can thrive. There are three key elements of corporate governance which include stakeholder management transparency and decision making. Adhering to these elements a solid foundation for sustainable growth, and minimal risks is laid down. Strong corporate governance has various benefits which include building up shareholders’ trust, improvement in financial performance, long-term sustainability, fostering of positive corporate culture and above all positive societal impact. The companies prioritising good governance practices become responsible corporate citizens.

Steps taken for improvement

The Reserve Bank of India is vigilant and constantly monitoring NBFCs to prevent such corporate hazards. The decent-performing NBFCs can access funds from the markets at the pre-IL&FS rate. RBI understood that there is a need for liquidity in the market and therefore it is to infuse up to rupees 36,000 crore via open market bond purchases. It is also monitoring the top 50 NBFCs closely as they represent 75% of the sector. 

Above all the actions that are taking place or about to take place clean-up is the main key to avoid future scams like these. A thorough investigation is required to identify wrongs and fixed responsibility for taking actions against the existing management. 


Though years have passed but many scams at taking birth again and again. There’s a critical need to analyse and learn from this scam to avoid future disruption and slowdown of the economy. A balance at both economic and ethical levels is required as said by Sir Adrian Cadbury “Corporate governance is concerned with holding the balance between economic and social goals and between individual and communal goals, the aims to align as nearly as possible the interests of individual corporation and society.”

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