Shocking revelation shows IL&FS borrowed to pay dividend, invested Rs 65 cr in Chennai Super Kings

The responsibility of collapse of IL&FS, one of the largest infrastructure lenders and operators in India, also lies with the Board. The directors of its subsidiary, IL&FS Financial Services (IFIN), overlooked the net negative cash flow of more than Rs 2,000 crore in fiscal 2018, and approved a fat dividend of Rs 130 crore for the shareholders, a DNA Money analysis shows.

Cash flow is the net amount of cash and cash-equivalents being transferred into and out of a business. A company’s ability to create value for shareholders is determined by its ability to generate positive cash flows.

IFIN’s annual report of 2018 shows that the company was effectively borrowing money to pay its shareholders. After the short amount of time, IFIN defaulted on about five maturities in the commercial paper, the latest on Wednesday - because it had no cash.

IFIN cashflow statement shows that its operating and investing activities are at record negative level, Rs 2,836.16 crore and 917.48 crore, respectively. IFIN also went for the long-term borrowing of Rs 4,025.90 crore.  

Under the investing activities head, the company declared about an investment of Rs 826.58 crore to “others” category, which means it invested outside the group. Interestingly, in contrast, IFIN invested only Rs 1.5 crore in own subsidaries, the cashflow statement shows.

An expert said that cash flow is the primary indicator for the Board of directors whether the company will be solvent or not.

Prem Sikka, professor of accounting, University of Sheffield, UK told DNA Money, “A company haemorrhaging cash and paying out dividends is shortening its own life and also damaging suppliers, employees and other stakeholders. It shows executive irresponsibility. It seems to me that this a matter that regulators need to investigate.”

Cashflow statement shows the relationship between net profit from the income statement and the actual change in cash that appears in the company’s bank accounts.

If the company has large negative cashflow then why it allowed such a huge dividend, asked an accounting and the financial investigator. “This is a typical problem with business houses that top executives or promoters are cash rich and live luxurious lifestyles whereas the company has a cashflow problem. The forensic audit, process review and compliance should be the topmost agenda, and independent directors should act more strongly in any such cases,” Sanjay Kaushik, managing director, Netrika Consulting & Investigation, told DNA Money.

IFIN has made various new investments, including Rs 65 crore in Chennai Super Kings Cricket Ltd, a franchise cricket team. These investments are under a specific investment category, where investments are under put and call options with investee company or promoters. In other words, the investor can get in and out as per his wish.

IFIN specialises in infrastructure financing transactions, along with debt syndication. IFIN has also run the international business through its wholly owned subsidiaries such as IL&FS Global Financial Services Pvt Ltd in Singapore, London, Dubai and Hong Kong.

Email and SMSes to IFIN management did not elicit any response till the time of going to press.

IL&FS is looking for the bailout from LIC and SBI, the biggest shareholders of IL&FS and IIFN. Meanwhile, IIFN on Thursday said it has defaulted on seven fresh payment obligations worth Rs 395.46 crore.

Meantime, the Reserve Bank of India has called off a scheduled meeting with shareholders of IL&FS which was scheduled for Friday to discuss the recent set of defaults.

IL&FS’s non-convertible debentures and the commercial paper have been downgraded to junk when IL&FS missed repayment of a corporate loan to Small Industries Development Bank of India Ltd.

Now, all eyes are set on Saturday when shareholders will vote on increasing the authorised share capital of IL&FS to Rs 4,500 crore.

Source: DNA Money