Infrastructure Leasing & Financial Services (IL&FS) Crisis

Infrastructure Leasing & Financial Services Limited (IL&FS) is an Indian infrastructure development and finance company.

IL&FS was formed in 1987 as an “RBI registered Core Investment Company“ Currently, its institutional shareholders include Life Insurance Corporation of India (LIC), ORIX and Abu Dhabi Investment Authority, with small shareholdings by a few Indian banks.

IL&FS has several projects in different sectors. IL&FS was the principal lender behind the construction of the 9.28 km long Chenani-Nashri Tunnel, located on the route of NH 44 in Jammu and Kashmir.

The infrastructure lender has a total consolidated debt of close to Rs 1 lakh crore, and it started to miss deadlines on its debt obligations beginning August 27, 2018.
It has already defaulted on around Rs 450 crore worth of inter-corporate deposits to Small Industries Development Bank of India (SIDBI).

Every time there is corporate scam, audit firms and auditors are the first ones to be blamed. In IL&FS crisis, the auditors, especially the “big three"—EY, Deloitte and KPMG were questioned for integrity, professional skeptism.

The affiliates of Deloitte Haskin and Sells Llc, KPMG India, and EY India Ltd were auditors of IL&FS and its subsidiaries—IL&FS Financial Services Ltd (IFIN) and IL&FS Transportation Networks Ltd (ITNL).

Separately, the ICAI, the accounting regulator, initiated action against a KPMG affiliate, BSR and Co. Llp, for professional misconduct under the Chartered Accountants Act, 1949.

The IL&FS crisis is all about trust concerning auditors and regulators, as well as the corporate entity.

With the NFRA(National Financial Reporting Authority) coming into existence last year, the government wants to use the watchdog and its powers to not just penalize individuals involved in the audit, but also audit firms. There were questions about who should examine the role of auditors, but now it is more or less settled that it should be NFRA.

The NFRA has the powers to penalize individual auditors and firms, under the Companies Act, 2013, a provision that is missing in the Chartered Accountants Act. The penalty for an individual auditor is ₹1 lakh to five times the audit fee. For firms, it is ₹10 lakh to 10 times the audit fee.

There are a host of allegations against the auditors, for not highlighting the asset-liability mismatch on the company’s books, inappropriate valuation of assets, poor recognition of non-performing assets (NPAs), and non-detection of circular rotation of funds between group entities.

The number of subsidiaries at IL&FS (348) was much higher than the reported 169. Many of these additional subsidiaries are special purpose vehicles (SPVs) in the manufacturing and road building sector.

The findings of a forensic analysis of IL&FS by Grant Thornton India LLP confirms this. The forensic audit, submitted to IL&FS board, also found 107 instances of loans without collateral security.

The Reserve Bank of India (RBI) barred S.R. Batliboi & Co, an EY firm, from conducting statutory audit assignments in commercial banks until April 2020, citing lapses identified in its work.