THE IL&FS SCAM

(case study)

BY: AASHISH (21BC644) &

YASH KUMAR (21BC646)
GROUP
3 AASHISH (21BC644)

YASH KUMAR(21BC646)
CONTENTS
About IL&FS
What is MONEY LAUNDERING
How's Money Laundering Done
IL&FS Case Description
Main Highlights of the Case
Root Cause Analysis
Financial Impact
Reputational Impact
Legal Impact
Operational Impact
Change in RBI'S Policy After this Case
About
IL&FS
IL&FS ( Infrastructure leasing & financial services limited) is an Indian
state funded infrastructure development and finance company. It
was created by public sector banks and insurance companies.

It operates through more than 250 subsidiaries including IL&FS

financial services and IL&FS Transportation network India limited
(ITNL)
WHAT IS MONEY
LAUNDERING ?
Money laundering refers to conversion of money which
has been illegaly obtained, in such. a way that it appears
to have originated from a legimitate source.

In India, Money laundering is popularly known as

'HAWALA'. It is an alternative or parallel remittance
system. 'HAWALA' is an Arabic word meaning the
transfer of money or information between two persons
using a third person transactions.
PLACEMENT LAYERING INTEGRATION

Structuring deposit Multiple wire transfer Sale of real estate

into smaller accounts Material luxury investment
Currency smuggling assets bought with Use shell companies
Currency exchange cash and then sold To buy properties
Blending funds Cash converted into and resale them
False invoicing monetary would be considered
False loan instruments (In form legimitate
draft and money Invest in securities
orders) markets
IL&FS CASE DESCRIPTION
IL&FS, India’s leading infrastructure finance company, defaulted on payment to lenders,
triggering panic in the market. The dues stood at more than Rs. 91, 000 crore.

IL&FS Group, which has approximately over Rs. 91,000 crores in debt, was facing a severe
liquidity crisis. Between July 2018 and September 2018, two of the subsidiaries of IL&FS Group
reported having trouble in paying back loans and inter-corporate deposits to banks/lenders.

In July 2018, the road arm of IL&FS was facing difficulty in making repayments due on its
bonds. Further, in early September 2018, one of the subsidiaries of IL&FS Group was unable
to repay a short-term loan of Rs. 1,000 crore taken from Small Industries Development
Bank of India (SIDBI). Also, certain group companies defaulted in repayments of various
short and long-term deposits, inter-corporate deposits, and commercial papers.
IL&FS failed continuously to service its debt and the imminent possibility of a contagion effect in
the financial market led the Central Government to move an application under Sections 241 and
242 of the Companies Act, 2013 before the NCLT(National Company law Tribunal). Section 241
deals with the cases of mismanagement and oppression by company’s management.

The NCLT suspended IL&FS board members and management and restrained the suspended
members from alienating their personal assets.

A forensic report looked into the alleged irregularities into the affairs of IL&FS Transportation
Networks India Limited (ITNL) has found money laundering of over Rs 6,500 crore by the accused
erstwhile management of its parent, Infrastructure Leasing & Financial Services (IL&FS).

Identifying its former chairman Ravi Parthasarathy as the ‘prime mover’, the report also indicates
that in at least 14 special purpose vehicles (SPVs) entered into by ITNL, there were deliberate cost
overruns using a maze of shell and dummy companies to make them eventually untenable.
MAIN
HIGHLIGHTS OF
THE CASE
 SSU
USSP
PEENNSSIIOON N O
OFF G
GRRAANNT
T OOFF IIMMMMUUN NI
IT TYY T
TOO
E
EXXIIS
STTI
INNGG BBOOA ARRDD O
OFF N
NEEWW D
DIIRREECCTTOORRS S (( N
NCCL
LTT
D
DIIR
REEC
CTTOORRSS (( NNCCLLT
T OORRDDEERR ))
O
ORRDDEERR ))
By way of an order dated October 1, 2018, the NCLT In order to ensure the independent functioning of the said
invoked its powers under Sections 242, 242, 246 r/w 339 of directors individually and collectively, immunity was granted to
the Companies Act and granted the interim prayer of them. The NCLT directed that for the past actions of the
suspending the existing Board of Directors and suspended directors or any of the officers of the company, no
reconstituting the same with the six persons proposed by action should be initiated against the newly appointed directors,

the Centre. without prior approval of the Tribunal.

suspended members of
The NCLT further restrained the
the Board from alienating their
personal assets. Mr. Uday
Kotak is the chairman of the new Board of Directors. The
new Board has been tasked with the orderly resolution of
IL&FS and its group companies.

The NCLT also directed the filing of progress reports until

resolution, which is a continuous process.

Through subsequent orders, the NCLT allowed the

appointment of three additional directors, bringing the
total number of directors to nine.
 G
GRRA
ANNT
T O
OFF M
MOOR
RAAT
TOOR
RIIU
UMM (( N
NCCL
LAAT
T O
ORRD
DE R ))
ER

Further, in order to ensure a period of calm during the resolution process, a moratorium
was sought qua IL&FS and its group companies against certain creditor actions. The
reason for seeking this moratorium was the impending threat of adverse legal actions by
creditors and the absence of a legal framework to address the financial crisis of the
IL&FS Group.
The new Board would require the status quo to be preserved in respect of the business
and assets of the IL&FS Group in order to effectively implement the orders of the NCLT
and arrive at a fair resolution for the company. This was declined by the NCLT by its
order dated October 12, 2018.
However, upon appeal, the National Company Law Appellate Tribunal (NCLAT) granted a
moratorium on an interim basis until further orders.

 S
SFFI
IOO I
INNT
TEER
RIIM
M R
REEP
POOR
RTT A
ANND
D N
NCCL
LTT O
ORRD
DEER
R

The Serious Fraud Investigation Office (SFIO) submitted an interim report dated
November 30, 2018. On the basis of this interim report, the Central Government vide its
affidavit dated December 3, 2018, sought the impleadment of more persons as
respondents in the original petition.
NCLT vide its order dated December 3, 2018., granted relief to the Central Government
who filed an application for seeking orders, qua the additional respondents, to restrain
them from mortgaging or creating charge or lien or creating third party interest or in any
way alienating, the movable or immovable properties owned by them, including jointly
held properties. The same was still in operation, and as on that date, there were a total of
318 respondents in the petition before the NCLT.

 R
ROOL
LEE O
OFF I
ICCA
AII

In view of the negative impact that the IL&FS Group has had on the financial markets
at large, and there being considerable allegations in respect of the financial statements
of the said companies, the Disciplinary Directorate of the Institute of Chartered
Accountants of India (ICAI) suo motu sought to consider the performance of the
statutory auditors of the said companies.
Pursuant to an enquiry conducted in respect of the statutory auditors of the IL&FS
Group Companies, the ICAI found that there were key lapses, shortcomings, and
manipulations on the financial statements by the statutory auditors of the said
companies.

 TRIBUNAL ORDERED REOPENING OF BOOKS OF

ACCOUNT (NCLT ORDER)

In view of the prima facie findings of ICAI and the SFIO interim report dated November 30, 2018,
the Central Government filed a petition before the NCLT, Mumbai Bench under Section 130 of the
Companies Act, seeking re-opening of the books of account of IL&FS and its group companies for
the past five financial years.

N
NCCL
LAAT
T O
ORRD
DEER
R D
DAAT
TEED
D M
MAAY
Y 2
2 ,, 2
2001
199

By its order dated May 2, 2019, NCLAT allowed the banks to declare as non-performing assets the
accounts of IL&FS and its group companies that have defaulted on payments. However, the tribunal
clarified that the banks cannot initiate the recovery process and debit money.

 S
SFFI
IOO R
REEP
POOR
RTT A
ANND
D MMCCA
A M
MOOV
VEE A
AGGA
AIIN
NSST
T
A
AUUD
DIIT
TOOR
RSS

On May 30, SFIO submitted a chargesheet against 30 parties, including two auditor firms, for concealing
information by not flagging the alleged criminal conspiracy and misreporting the financial statements of the
IL&FS firms.
MCA moved against the auditors, Deloitte Haskins and Sells as well as BSR and Associates LLP and their
former auditors, under Section 140(5) of the Companies Act, for their role in “perpetuating the fraud” at
IFIN, a subsidiary of IL&FS. The Ministry sought debarment of these audit firms and their audit partners. It
also sought interim attachment of their properties, including bank accounts and lockers.

S
SUUP
PRRE
EMME
E C
COOU
URRT
T I
INNT
TEER
RIIM
M O
ORRD
DEER
R
On June 4, the Supreme Court allowed the SFIO to reopen and recast accounts of IL&FS and two of its
subsidiary companies for the last five years.
The MCA had approached the Supreme Court seeking a vacation of the stay imposed by the Supreme
Court through its order passed on April 29.

 IL&FS hadn’t disclosed bad loans on its books for years despite a big part of its
loan book having soured.

ROOT As it was the shadow bank or NBFC company, "Unscrupulous, negligent and
dormant management decisions were the main root cause of failure.

CAUSE Poor fund management and controls :- IL&FS lent funds to insolvent entities and

ANALYSIS troubled projects.

Write
“Deficient audit” by the auditors yourHaskins
(Deloitte topic or and
& Sell) idea
KPMG’s audit partner
BSR & Co. They failed to issue warnings.

According to the ICAI, the auditors did not highlight the Reserve Bank of India’s (RBI’s)
inspection report, which had labelled IFIN as over-leveraged, besides failing to report
negative cash flows and adverse key financial ratios.
PANIC?
 The bankruptcy cases wiped out Rs.8.48 lakh crore of investor’s wealth

FINANCIAL Commercial Paper worth Rs 300 Crores was sold at a discounted price,

IMPACT
which belonged to DHFL.

Share market got affected because anxious retail investors started

selling shares of other NBFCs and redeemed from mutual funds

Sensex shed 2,000 points just in a week, sparking a bloodbath in

the market.
REPUTATIONAL
ICRA Ltd, CARE Ratings Ltd, India Ratings & Research Pvt.
Ltd, Deloitte and BSR (Part of KPMG) reputation got
affected due to major lapses in audit of the IL&FS.

IMPACT IL&FS new infrastructure projects dried up,

downgraded reputation across market.

Loss of confidence of investors.

Rating agency ICRA downgraded the ratings of its short-

term and long-term borrowing programs from “AAA” to
“D”
 LEGAL IMPACT
On April 2, 2019, former vice-chairman of IL&FS, Hari Sankaran, was arrested by Serious
Fraud Investigation Office (SFIO) in Mumbai for granting loans to entities that were not
creditworthy.

The prosecution complaint was filed in a special court of the Prevention of Money Laundering Act,
charging former senior management personnel of IL&FS — Ravi Parthasarathy, Ramesh Bawa, Hari
Sankaran, Arun Saha, and Ramchand Karunakaran along with Aircel founder C Sivasankaran.

The Enforcement Directorate (ED) conducted searches at multiple locations in connection with the
IL&FS crisis, made provisional attachment of bank accounts and immovable property to the tune of
Rs 570 crore held by these people.

SEBI in December 2019 slapped a penalty of Rs 25 lakh each on ICRA Ltd, CARE Ratings Ltd
and India Ratings & Research Pvt Ltd due to "lethargic indifference and needless
procrastination and laxity" of the rating agencies.
 OPERATIONAL IMPACT

In October 2018, the government

constituted a new board as the. Kotak
Government discontinued Mahindra Bank Executive Vice-
Chairman and Managing Director Uday
old board as it was Kotak, Tech Mahindra Vice-Chairman,
deemed to have failed to Managing Director and CEO Vineet
Nayyar, former Sebi chief G N Bajpai,
discharge its duties former ICICI Bank Chairman G C
Chaturvedi, former IAS officers Malini
Shankar and Nand Kishore were made
members of the board
 CHANGE IN RBI'S POLICY
AFTER THIS CASE
1 RBI is constantly monitoring NBFC’s to prevent systemic shocks.

2 The better-performing NBFCs are able to access funds from the market at pre IL&FS
rates.

3 RBI is monitoring top 50 NBFCs more closely. These 50 NBFCs represent 75% of
the sector.

4 RBI has allowed bank lending to registered NBFCs for on-lending to agriculture.
Thank you!