IL&FS crisis: This subsidiary ran business without capital for 3 years

IL&FS Financial Services (IFIN), the lending arm of IL&FS, seems to have run operations without a capital base for three financial years — FY16, FY17, and FY18, according to preliminary assessment by the new board of the beleaguered company.

IFIN had outstanding loans and investments to companies in the IL&FS Group of Rs 57.28 billion (FY16), Rs 51.27 billion (FY17), and Rs 54.9 billion (FY18). Prima facie, these appear to be significantly in excess of permissible norms for all the years.

“If this is applied for calculation of capital adequacy, IFIN would have significant negative capital adequacy in each of these three years,” according to the IL&FS board’s filing with the National Company Law Tribunal (NCLT).

IFIN, a systemically non-banking financial company formed in 2006, is involved in providing financing solutions and has capabilities in funding infrastructure projects, including public-private partnerships.

The IL&FS board said loans to one of the companies in the group in excess of Rs 15 billion had been routed through eight other subsidiaries. It reflected the adoption of circuitous transactions to circumvent regulatory prescriptions.

Investigative bodies are probing the affairs of the IL&FS Group.

The new board continues its efforts in unravelling the intra-group borrowings. The large parts of the IL&FS Group were, in the past, operated as a single enterprise with no boundaries of legal entities and separate managements.

This appears to be one of the key governance shortcomings that have led to a large contagion impact on creditors of the IL&FS Group, the filing said.

There are certain entities which, in practice but not necessarily legally, may have been considered part of the IL&FS Group for the purposes of funding.

For instance, IFIN has an exposure in excess of Rs 9 billion to companies which are subsidiaries of associates/joint ventures of IL&FS and IL&FS Employee Welfare Trust.

These did not get consolidated into the accounts of IL&FS and at the same time, have been treated by the previous management as “internal debt”, the report said.