India sees the first arrest in the country’s biggest financial scandal of 2018


  • India’s Serious Fraud Investigation Office (SFIO) arrested Hari Sankaran, the former chairman and the managing director of IL&FS under Section 447 of the Companies Act, which deals with fraud.
  • The SFIO said in a statement to media outlets that it had arrested Hari Sankaran for abusing his powers in IL&FS’s financial services unit by granting loans to companies that weren’t creditworthy.
  • In early February 2019, the SFIO alleged that the company’s directors had knowingly laundered funds meant for employee benefits and sanctioned investments in projects without guarantees.

India’s Serious Fraud Investigation Office (SFIO) has made its first arrest linked to the default of IL&FS. The body remanded Hari Sankaran, the former chairman and the managing director of the infrastructure lender, under Section 447 of the Companies Act, which deals with fraud.

The SFIO said in a statement to media outlets that it had arrested Hari Sankaran for abusing his powers in IL&FS’s financial services unit by granting loans to companies that weren’t creditworthy. These loans eventually became non-performing.

The weak financial position of IL&FS came to light in July last year when one of the lender’s subsidiaries, IL&FS Transportation Networks, defaulted on a ₹4.5 billion payment on commercial paper. The crisis eventually heightened as the lender was subjected to a series of credit downgrades.

In early February 2019, the SFIO alleged that the company’s directors had knowingly laundered funds meant for employee benefits and sanctioned investments in projects without guarantees. It had previously declared that IL&FS executives had “window-dressed” the lender’s books to prove eligibility for further loans.

Furthermore, it came to light yesterday that the Indian government had arranged a sovereign guarantee on behalf of IL&FS for loans from the Asian Development Bank (ADB) and KfW, Germany’s development bank. Once IL&FS defaulted, the government was forced to pay back the loans itself but it do so quietly without disclosing the payments to the NCLAT, according to MoneyLife.

IL&FS had around ₹940 billion in outstanding loans at the end of 2017-18, ₹573 billion is in the form of loans to Indian banks - most of which are state-run.

The infrastructure lender, which invests in government projects like highways, ports, bridges and dams, reached its current state of high debt and illiquidity owing to a lack of regulatory oversight and inadequate due diligence before spending on projects.

As the prospects for the infrastructure and power sector declined following the financial crisis of 2008-0, the company’s projects were either stalled or faced huge cost overruns. Hence, the returns for IL&FS’s subsidiaries dried up and its debts continued increasing.

In a bid to pay off its debts and avoid bankruptcy, the company has been selling of a range of assets, including its renewable energy business and financial services unit. The sales are part of a resolution plan that a government-appointed committee, led by Uday Kotak, submitted to the National Company Law Tribunal (NCLT), a special insolvency court, on 31 October.


SEE ALSO:

Top IL&FS execs swindled money meant for employees, says India's Serious Fraud Investigation Office

Even British Airways and Philips stand to lose money in India's biggest financial scandal of 2018

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