Table of Contents
A Dream Gone Sour
Once upon a time, IL&FS was India’s pride.
A company that promised to build roads, bridges, ports — the arteries of a new India. Founded in 1987, Infrastructure Leasing & Financial Services Ltd (IL&FS) became synonymous with infrastructure dreams and innovation in finance. It was the institution everyone trusted — a quasi-government entity backed by powerful shareholders like LIC, SBI, HDFC, and Orix.
But in 2018, the unthinkable happened.
The company that once fueled India’s development suddenly ran out of cash.
Creditors were not paid.
Employees were in shock.
The markets panicked.
And the question echoed across boardrooms and Parliament alike —
“How could a company this big, this reputed, just… collapse?”
The Mirage of Success
IL&FS had built an empire of over 300 subsidiaries and associate companies.
Each of them working on projects that seemed noble — highways, ports, renewable energy, and smart cities. But behind this façade was a tangled web of debt, cross-loans, and creative accounting.
On paper, IL&FS looked healthy. Rating agencies showered it with AAA ratings, auditors signed off on clean reports, and the board appeared illustrious.
But the truth was rotting inside.
The company was borrowing short-term money to fund long-term projects — a classic asset-liability mismatch. Infrastructure projects often take 10–15 years to generate cash flows, but IL&FS had to repay its borrowings in 6–12 months.
When new borrowing stopped, the cash dried up.
When the cash dried up, the façade cracked.
And when the façade cracked, India witnessed one of its worst financial governance failures ever.
The Moment the Music Stopped
The first tremors appeared in June 2018, when IL&FS Transportation defaulted on ₹450 crore worth of inter-corporate deposits.
Then came another default. And another.
By September 2018, the group had defaulted on over ₹1,000 crore of short-term loans. Panic spread in financial markets. Mutual funds, banks, and NBFCs that had lent to IL&FS realized their exposure could turn toxic.
Rating agencies — which had called IL&FS a “safe bet” just weeks earlier — suddenly downgraded it from AAA to junk.
Auditors were silent.
Directors were clueless.
And investors were furious.
By October, the Indian government had no choice but to step in.
The entire board was sacked, and a new team led by Uday Kotak took over to clean up the ruins.
A House of Cards Built on Weak Governance
Let’s dissect what really went wrong — because IL&FS wasn’t just a liquidity problem. It was a governance problem at scale.
🧩 1. A Board That Looked Prestigious but Acted Powerless
The IL&FS board included celebrated bureaucrats, ex-CEOs, and eminent names — but most had little experience in infrastructure finance or risk management.
Meetings were formalities; oversight was missing. The risk management committee hadn’t met for nearly three years before the collapse.
The directors trusted management blindly, even when red flags were visible.
Their failure wasn’t ignorance — it was complacency wrapped in reputation.
💰 2. Evergreening and Creative Accounting
Instead of fixing problems, IL&FS often lent more money to struggling subsidiaries to make their books look better.
This circular funding created an illusion of stability — profits on one side, losses buried on another.
In reality, cash was hemorrhaging.
The group borrowed from one arm to pay another — much like moving money from one pocket to another while pretending to be rich.
Forensic audits later revealed round-tripping of funds, fake project advances, and related-party loans that violated every principle of prudence.
⚖️ 3. Auditor and Rating Agency Blindness
The external auditors, instead of being the watchdogs, turned into sleeping partners in silence.
Despite negative cash flows, ballooning debt, and opaque structures, audit reports painted a rosy picture.
Rating agencies too failed spectacularly.
Even a month before default, IL&FS and its key arms were rated AAA — the safest rating possible. Only after the default did they scramble to downgrade — a classic case of too little, too late.
🏛️ 4. Regulator Oversight and Systemic Complacency
IL&FS wasn’t a small firm — it was a systemically important NBFC, which means it was supposed to be under the RBI and SEBI’s radar.
But in practice, no regulator truly had a complete view of the group.
Different arms of IL&FS operated under different regulators, and no one saw the full picture.
By the time concerns reached the top, the group had accumulated over ₹91,000 crore of debt.
It was, quite literally, too big to ignore and too late to fix.
The Emotional Fallout: The Cost of Broken Trust
For thousands of employees, this collapse wasn’t just a financial loss — it was heartbreak.
Many had built their careers, reputations, and futures on the IL&FS brand.
For investors, it shattered faith in India’s financial oversight system.
For regulators, it was a rude awakening.
And for ordinary citizens, it raised haunting questions:
“If a company backed by the government, rated AAA, and audited by top firms can fall — who can we really trust?”
Forensic Red Flags That Were Missed
In hindsight, the IL&FS story reads like a textbook in missed red flags — signs that any forensic accountant or risk analyst should have caught earlier:
- Cash Flow vs. Profit Mismatch – Reported profits but negative operating cash flows for multiple years.
- Frequent Related-Party Loans – Funds flowing between group entities without clear commercial purpose.
- Rapid Debt Expansion – Debt ballooning without proportional increase in asset productivity.
- Inactive Committees – Audit and risk management committees not meeting regularly or not minuted properly.
- Too Many Subsidiaries – Over 300 entities — an ideal breeding ground for obfuscation.
- Management Compensation Rising Amid Stress – Top executives rewarded even during financial strain.
- Delayed Audit Reports and Disclosures – Gaps in financial reporting timelines.
- Lack of Consolidated Transparency – Investors and regulators focused on individual entities, not the whole group risk.
Investor Cautions: What We Can Learn
For investors and analysts, IL&FS is not just a scandal from the past — it’s a mirror for the future.
Here are lessons every investor should internalize:
🔍 1. Don’t Trust Ratings Blindly
Ratings agencies work with the information they get — often from the company itself. Treat them as opinions, not guarantees.
🧾 2. Follow the Cash
Profits can be manipulated; cash flows rarely lie.
If a company shows profits but consistently negative operating cash flow — that’s a red flag.
👀 3. Check Related Party Transactions
Loans or advances between group companies may be hiding real problems. Always look at disclosures in annual reports or forensic filings.
🧠 4. Diversify Exposure
Never have concentrated exposure to one corporate group or sector, however “reputed” it looks. IL&FS was backed by marquee names, yet failed.
🧭 5. Demand Accountability
Boards and independent directors must be held accountable. Corporate governance isn’t a checkbox — it’s a moral duty to protect stakeholders.
The Aftermath: Reforms Born from Ruins
Post-collapse, IL&FS became a turning point for India’s financial governance:
- Government Interventions: The Ministry of Corporate Affairs replaced the board and initiated forensic investigations by Grant Thornton.
- Auditor Accountability: The role of Deloitte and BSR was examined for lapses; the National Financial Reporting Authority (NFRA) pushed for stronger auditor accountability.
- Rating Reforms: SEBI introduced stricter norms for credit rating agencies to disclose methodologies and respond faster to distress signals.
- NBFC Regulation: RBI strengthened liquidity coverage requirements and stress testing for large NBFCs.
In other words, IL&FS became India’s wake-up call — the costliest lesson in governance complacency.
🧩 Post-Mortem Insight — When One Default Becomes a Domino
In most cases, a single default doesn’t kill a company.
There’s time to refinance, restructure, rebuild trust.
But IL&FS was different — its first default was a spark in a room full of dry paper.
It wasn’t one bad loan — it was a fragile system built on inter-company debt, hidden guarantees, and blind faith.
When one entity defaulted, 340 subsidiaries shook together.
Banks froze exposure.
Rating agencies slashed grades from “AAA” to “junk” in days.
Liquidity dried up overnight.
And when trust evaporated, so did every chance of revival.
IL&FS didn’t collapse because it couldn’t pay.
It collapsed because no one believed it ever could again.
The system didn’t fail in 2018 — it had been quietly cracking for years.
That one default only exposed the truth governance had been hiding.
💬 “Default doesn’t destroy companies. Denial does.”
💡 Investor & Boardroom Lesson
- A default is a signal, not the end — if acted upon early and transparently.
- Trust, once lost, can’t be refinanced.
- Governance is the first line of credit — not the last.
The Broader Message: Trust but Verify
The IL&FS saga is more than a story of financial mismanagement — it’s a story of human failure:
of pride, blindness, and misplaced trust.
It shows that corruption doesn’t always come with theft — sometimes, it’s the slow erosion of accountability that kills an institution.
For every investor, auditor, and policymaker, IL&FS stands as a reminder that good governance is not about compliance checklists, but about courage to question.
🔍 The Emotional Aftermath: IL&FS as a Symbol
IL&FS is no longer a company — it’s a case study.
A name that makes investors shiver and governance students take notes.
It symbolizes how:
- Reputation can hide rot.
- Complexity can kill oversight.
- Silence from auditors and directors can be deadly.
Today, IL&FS is being slowly dismantled — not buried, but studied.
Every asset sale, every recovery, every investigation is a lesson in slow, forensic repair.
And while no one bought IL&FS as a whole, the Indian financial system bought time — time to fix its own governance DNA.
💬 In Summary
| Stage | Action | Outcome |
|---|---|---|
| Oct 2018 | Govt takeover, new board | Prevented systemic panic |
| 2019–2022 | Forensic audit, restructuring | Identified fraud, viable assets |
| 2020–2024 | Asset sales, debt recovery | ~60% recovery achieved |
| 2021 onward | Legal & regulatory reforms | Stronger auditor & NBFC oversight |
| 2024–2025 | Final resolution nearing | IL&FS slowly being wound up |
⚠️ A Call to Action: Learning from IL&FS Before It’s Too Late
The IL&FS collapse was not just a corporate failure —
it was a mirror reflecting our collective negligence.
It showed that when everyone assumes “someone else is watching,” no one really is.
🏛️ For Regulators
You are the custodians of systemic trust.
Oversight cannot be reactive — it must be continuous, data-driven, and fearless.
Strengthen early-warning frameworks. Demand transparency beyond compliance.
Because silence today becomes a crisis tomorrow.
“Regulation is not about paperwork — it’s about protecting public faith.”
📊 For Auditors and Rating Agencies
You are the sentinels of truth.
Numbers lie when questions aren’t asked.
Don’t hide behind checklists — dig deeper.
If something feels wrong, say it loudly and early.
Remember: one clean audit can save an economy; one blind eye can sink it.
“Independence is not a word on a letterhead — it’s a moral stance.”
🧑💼 For Independent Directors and Boards
You are not ornaments; you are guardians.
Read the fine print, ask the uncomfortable questions, and challenge management.
A boardroom without dissent is a boardroom heading for disaster.
Governance is not about prestige — it’s about courage to confront power.
“Your silence can be more expensive than your salary.”
💰 For Investors and Analysts
Don’t fall for glossy annual reports or celebrity boards.
Look at cash flows, debt ratios, and governance disclosures.
Remember — ratings can mislead, reputations can deceive, but numbers rarely lie.
Do your own due diligence, diversify, and never invest in opacity.
“In finance, curiosity is your best defense.”
🧍♀️ For Employees and Citizens
Ask where your money goes — your pension fund, your insurance, your taxes.
Corporate governance is not an elite concept; it decides your future too.
When companies collapse, it’s not just shareholders — it’s society that pays.
“Every citizen has the right to demand accountability — and the duty to stay aware.”
🌱 For Policymakers
Turn lessons into laws.
The IL&FS crisis should never repeat — not because we fear it,
but because we built a system strong enough to prevent it.
Encourage transparent reporting, strengthen NFRA, empower whistleblowers,
and build a culture where ethical business is rewarded, not punished.
Epilogue: The Broken Bridge
In the heart of Mumbai, the IL&FS tower still stands tall — its glass façade reflecting the skyline it helped shape.
But for those who know its story, that building is no longer a symbol of progress.
It’s a monument to arrogance, a reminder that governance without conscience is a ticking time bomb.
When the watchmen sleep, even the strongest walls crumble.
And IL&FS — once the builder of India’s roads — became the roadblock that taught us how fragile trust can be.
💡 “Governance is not just about preventing fraud; it’s about preserving faith.”
Let’s remember IL&FS — not as a failure, but as a warning that even the largest empires fall when accountability disappears.
💡 Final Word
The fall of IL&FS was a tragedy of trust —
a warning carved in stone that governance isn’t optional, it’s existential.
We can mourn the loss,
or we can learn, rebuild, and rise stronger — together.
Governance is everyone’s business — because when trust collapses, everyone pays.
Read our blogs on corporate governance here.
Here is an academic paper reference for more reading:
Corporate governance failure at IL&FS: The role of internal and external mechanisms