Moneycontrol has reviewed a confidential report related to the IL&FS crisis which was sent to Secretary, Ministry of Corporate Affairs, from the Ministry of Finance on September 30.
The dramatic suspension of the IL&FS board Monday came about after the Ministry of Corporate Affairs put together a note that laid bare instances of mismanagement by the erstwhile board and the Finance Ministry signed off on the findings.
Moneycontrol has reviewed a confidential report sent by the Finance Ministry to the Secretary of the Ministry of Corporate Affairs. The report, based on the findings of a preliminary investigation by the MCA, clearly mentions the reasons behind the sacking of IL&FS’ board.
In the report, the Finance Ministry observed that the risk management committee of IL&FS did not meet between 2015 and 2018, except once in July 2015.
"It can be concluded that the risk management functioning of the company remained impaired and ineffective. Considering the business model of the company (taking short-term financing from the market to fund long-term projects), this is critical lapse in the functioning of board management and governance," the Finance Ministry’s Department of Economic Affairs said in the report.
The report also talked about the sordid state of financial affairs of the IL&FS Group.
"IL&FS Group has shown a loss of Rs 2,670 crore for the year 2017-18 in consolidated balance sheet. The leverage is about 13 times as the borrowing of about Rs 91,000 crore is on on the base of equity capital and reserves of about Rs 6,950 crore. The indebtedness of the IL&FS at the end of financial year 2017-18 is about Rs 16,468 crore and with debt market drying up for this company," the report said.
It was also observed that IL&FS was due to repay Rs 1,066 crore of its debt by October and around Rs 1,953 crore between September 26 and September 30.
The fall in Dewan Housing Finance’s share price, which took place on September 21, also found mention in the report.
"IFSL, which has listed its bonds on Bombay Stock Exchange, later defaulted on its non-convertible debentures, subsequent to default on commercials papers. A debt fund of DSP Mutual Fund named DSP Credit Risk Fund was holding IL&FS commercial paper. This paper was rated AAA. But IL&FS made an interest default. Hence its rating went down to D and DSP faced redemption pressure from corporate clients holding funds that have exposure to IL&FS due.
"This redemption pressure would have resulted in default by DSP and hence they had two options: Either sell government securities or sell DHFL bonds which are AAA rated investment, at a loss. Since government securities investment is already subjected to loss to due to hardening of bond yields, hence logically if the loss is same, it is better to sell corporate bonds. Thus, due to the redemption pressure on DSP Blackrock Mutual Fund (sic), the fund house had to sell DHFL Bonds at net yield of 11 percent whereas as per issue DHFL had yield of 9.1 percent," the report said.
The report also warned about repercussions due to lack of authentic information in the market about the financial status of 169 unlisted group companies of IL&FS.The Ministry of Corporate Affairs got a lookout notice issued for former directors Ravi Ramaswamy Parthasarathy and Ramesh Bawa, and serving directors Hari Sankaran, Karunakaran Ramachand. However, Ramaswamy, who is in London at the moment, said he is there for medical treatment. There is no clarity about when he will return.