Shouldn't IL&FS ex-directors be penalized? PDF Print E-mail
Monday, 08 October 2018 04:23
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It’s not just IL&FS, if directors don't have to pay a price for sleeping on the job, there is no deterrent to ensure they won't do this again


Hindsight is 20:20, but given the large number of big companies, from Satyam to IL&FS, where even star-studded boards with the required number of independent directors failed to flag gross mismanagement, it is clear the system is not working; and in cases like ICICI Bank, where there are no such charges of mismanagement, the board was supine enough to back the managing director without even basic due diligence in the face of serious charges of cronyism.

In which case, you wonder whether the directive of a minimum number of independent directors needs to be revisited. Also, given how rating agencies continue to get it wrong, and change ratings near or after a default, it is also clear the excessive dependence on them is wholly unwarranted. In this case, too, the government needs to review its stance and look at the possibility of imposing stiff penalties on rating agencies that don’t do their job well.


Indeed, as the government said in its petition asking for the IL&FS board to be superseded, the board never even conducted basic checks. So, as IL&FS group debt rose 87% over four years and its leverage rose to a frightening 13, the risk management committee headed by LIC’s managing director met just once—in July 2015—in four years (bit.ly/2QykFdn).

In fact, as the government petition pointed out, and as is evident from the IL&FS annual report, IL&FS accounts are so opaque, it is not possible to know just how bad things are in terms of the mismatches between inflows and outflows as also the actual value of assets backing the borrowing. IL&FS’s modus operandi, it is clear, was to park a lot of borrowing in joint ventures, but to keep the parent balance sheets clean, and this is something the board did nothing about.

So, as the government told NCLT, IL&FS raised Rs 75 crore as recently as August by stating it had earned Rs 584 crore of profits in FY18; it kept quiet about the fact that, however, the IL&FS Group’s losses were Rs 2,400 crore (the annual report talks of the losses being Rs 1,887 crore). The liabilities of IL&FS at a standalone basis were Rs 17,757 crore (see graphic), as a result of which the leverage was a reasonable 2.6; once you look at the IL&FS Groups, however, the liabilities rise to Rs 116,447 crore and the leverage to over 13!

Indeed, while these numbers are disclosed in the annual report, what comes as a real shocker is the statement by Uday Kotak, three days after he took over as chairman of the board, that, at 348, IL&FS had double the number of entities that most thought it had! Indeed, its annual report gives data on 176 entities at one point and 251 in another.

Since IL&FS’s board seems to have made no attempt to ensure the company presented transparent accounts, it is now up to the new board to present clean accounts; while there is talk of the roads ministry buying out IL&FS’s roads company ITNL, the government would be well advised to avoid this, especially since there is no clarity on the actual state of affairs there either.

The second page of ITNL’s annual report talks of a Rs 8,717 crore revenue from operations and a net profit of Rs 176 crore while the eighth page talks of a Rs 9,779 crore (this includes non-operational revenues) revenue, but puts net profits at Rs 65 crore! There is no explanation for the Rs 176 crore profit except for a line in the consolidated accounts that says “profits … attributable to owners of the company”; how this is arrived at is not clear. In this case too, the leverage changes dramatically between the standalone or consolidated ITNL—liabilities are Rs 16,318 crore on a standalone basis and Rs 42,371 crore for the consolidated entity.

Based on the evidence so far, it is clear the ousted board is not guilty of any siphoning off of funds or fudging of accounts—how much of this happened will now be determined by the new board, but it will be the management that will be held responsible. But if the board members—and this includes the nominated members as well, not just the independent ones—are allowed to get away with just their reputations bruised for a bit, what incentive is there for boards to ever perform? In which case, the government needs to look at what works better, clawing back of sitting fees the directors earned or banning them from holding board positions for a certain number of years. For punishment to work, it has to be swift and proportionate to the crime/neglect.

Indeed, going by a recent interview by a member of the sacked IL&FS board in a pink paper, the directors were aware of the need for infusing capital more than three years ago and tried to work on various deals, but these failed; if the directors knew of the serious problem, but kept this under wraps, this is more than benign neglect.

Also, it may be a good idea to tighten norms for the number of directorships a person can hold since, at the very least, 3-4 days of preparation needs to go into every board meeting. While communications between the management and the board have to be confidential, maybe records need to be maintained of, for instance, whether the management ever revealed the true picture to the board or whether the board ever asked the relevant questions—in times of an investigation, as now for IL&FS, these documents will be very useful. Whatever the solution, allowing the sacked IL&FS board—and this includes the nominee directors—to walk away seems a travesty of justice.


Last Updated ( Monday, 08 October 2018 04:55 )

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