Exclusive|Did IL&FS take loans to pay dividends long after it had run into losses?

IL&FS Transportation Networks | The company defaulted on the interest on non-convertible debentures due on August 25, 2020. (Image: Reuters)

The newly constituted auditors’ watchdog, National Financial Reporting Authority (NFRA) is examining how Infrastructure Leasing & Financial Services (IL&FS) continued to pay dividend even long after it had slipped into a liquidity crisis.

A company usually pays dividend to its shareholders from its earnings when it clocks profit, which also indicates that the organization is financially sound.

In this case, the infrastructure lending major continued to pay dividends despite the massive debt on its books led by mismatched borrowings. Sources said that there is a possibility that IL&FS continued to pay dividend by taking loans, instead of giving it out from its profit.

Also read: 'No question of government bailout for IL&FS'

“Besides, the fact that the company continued to pay dividends and huge managerial pay-outs regardless of looming liquidity crisis shows that the management had lost total credibility,” the finance ministry had said in a statement earlier this month.

In March, NFRA was set up as an independent regulator for the chartered accountants, empowered to enforce accounting and auditing standards, aimed at enhancing investor and public confidence in the financial disclosures of companies.

The role of an auditor is crucial as it is supposed to provide a fair view of companies’ annual accounts and its financial position, according to Companies Act, 2013.

It also has the right to access records of all the subsidiaries of a particular company, and whether the financial statements comply with the accounting standards.

Read here: NCLAT grants interim relief to IL&FS against lenders' claims

A probe by the ministry of corporate affairs (MCA) revealed that the consolidated financial statement of IL&FS had negative cash flows from operations and projected a picture through ‘highly exaggerated’ depiction of non-current assets in the form of intangible assets over Rs 20,000 crore.

Over the past two-three months, IL&FS has defaulted on payments and is sitting on total liabilities of Rs 91,000 crore. The crisis at IL&FS spilled over to bond and stock markets, with yields rising and stock prices tumbling.

On October 1, National Company Law Tribunal (NCLT) approved the takeover of IL&FS board by government nominees, saying mismanagement at the crisis-ridden financier makes it a fit case of supersession of the board.