They said Bawa, who had served as managing director and CEO, was arrested on the grounds of abusing his powers at the company through fraudulent conduct. He also granted loans to entities which were not creditworthy and caused wrongful loss to the company and its creditors, they added.
Earlier this month, the probe agency arrested former IL&FS vice chairman Hari Sankaran.
The sources said IL&FS Financial Services Ltd had borrowings of around Rs 17,500 crore through debt instruments and bank loans.
Provident funds, pension funds, gratuity funds, mutual funds as well as public and private sector banks are among the entities that have invested in these debt instruments.
The alleged financial irregularities at IL&FS came to light last year after some group entities defaulted on debt repayments. The government, which superseded the company's board, is working on a resolution plan.
The SFIO is probing the affairs of IL&FS and its group entities.