IL&FS saga tells us that the experts cannot be trusted

By now everyone knows what the initials IL&FS stand for, but I have another option: Internal Looting and Fraud Syndicate. Too strong? Financial experts would give it a more polite name, but I am only a lay citizen, not a financial expert.

What the whole sorry IL&FS saga tells us is that we can’t trust the experts. There are exceptions of course, but many use their expertise to enrich themselves, or they don’t use their expertise and let others enrich themselves. A majority of us are not financial experts, and we inexpertly pay taxes and invest in companies and buy insurance policies, and then find the money going into deep, deep holes. So here are a layman’s naïve questions: How did IL&FS run up a debt of Rs 91,000 crore (let’s spell it out: Rs 91,000,00,00,000)? Did it happen overnight? If it didn’t, as it obviously couldn’t, how did no one notice it till now? If it was noticed before, why didn’t its shareholders (LIC, SBI, Oryx Corp of Japan, Abu Dhabi Investment Authority being the major ones) call a halt and sack its management much, much earlier? If the shareholder directors were sleeping, were the independent directors Rip van Winkles too? How is it that two rating agencies, allegedly run by professionals, continued to give IL&FS an AAA rating, and in less than two months have downgraded it to D (Default)?

The unreality of it all is staggering. The government stepped in on October 1. But just two days earlier, the company’s shareholders approved a Rs 4,500-crore rights issue. And a mere month before that, the company gave out a final dividend of 10%. (In the previous year, the dividend was 42.5%). And you thought only profit-making companies gave out dividends? In the same vein, have you heard of companies facing virtual insolvency, awarding massive pay raises? IL&FS gave a 66% increase to its management staff, and chairman Ravi Parthasarathy gave himself a 144% increase, taking his salary to Rs 26.3 crore.

Given the numbers, you would think IL&FS would be a very large company. Actually, the holding company has only 131 employees; however, it has very many subsidiaries and joint venture companies whose number, depending on your source of information, is anywhere between 165 and 348. Now why would a company, which is not diversified, but involved in one basic activity, need so many subsidiaries, unless the idea was to have a large group of unlisted entities, which would therefore escape scrutiny? We thought only shady private companies do this to create a complex web of cross-holding and fudged accounts; but here’s a company whose large holding is with LIC and State Bank and therefore the government and, it follows, poor lay people like us.

More naïve questions follow. Three people ran IL&FS more or less from the start: Chairman Parthasarathy, VC and MD Hari Sankaran and Jt MD and CEO Arun Saha. Why were they allowed to run the company as a private fiefdom? Will there be an investigation into their assets now? Secondly, what were the auditors doing all these years? They raised a red flag only this year, but the company is 31 years old. Does anyone remember Satyam Computers, the only other company to have been taken over by the government? It was found that its auditors were complicit in Satyam’s fraud. Will there be an audit of IL&FS auditors?

Is the commendable idea of having independent directors mere eyewash? IL&FS had luminaries like R C Bhargava (chairman of Maruti Suzuki), Sunil Mathur (former chairman of LIC) and Jaithirth Rao (former country head of Citicorp) on the board for periods ranging from six to 28 years. Were they presented with lies, damned lies, and statistics? Or were they supplied with wool to pull over their eyes, or did they bring their own? Bhargava was also on the risk management committee, so essential in assessing infrastructure projects. Why did this committee not meet for three whole years (not two as reported)? The role of rating agencies also needs to be scrutinised. A much larger question: Is there an inherent conflict of interest in the fact that auditors and rating agencies are paid by the companies they have to assess? Sadly, the Reserve Bank of India, which has no such constraints, was also found wanting in the IL&FS case.

In short, our whole system, in spite of the safeguards which governments have tried to build into it, is susceptible to large-scale fraud. This is made worse because within the community there seems to be a reluctance to point fingers: for example, HDFC exited from the IL&FS board a year ago. If it did so in spite of having a 9% stake in the company, it must have been because it saw danger signs. Why did it not issue a quiet warning to everyone else?

Finally, that leaves the ‘watchdog’ of democracy, the media. Did it too fall asleep?