IL&FS Scam: Case Study of India's Biggest Financial Crisis

What Was IL&FS?

Infrastructure Leasing & Financial Services was founded in 1987 on a sound premise. India needed long-term capital for roads, power plants, and urban infrastructure projects that can take a decade or more to generate returns, and banks were not well suited to fund them.

Central Bank of India, HDFC, and the Unit Trust of India set up IL&FS to fill that gap. Former Citibanker Ravi Parthasarathy led the company for more than three decades and shaped its strategy and culture.

Its shareholder base grew stronger over time. The following entities own a portion of the company:

• LIC— about a quarter as of March 2018
• ORIX Corporation (Japan)— close behind LIC
• Abu Dhabi Investment Authority
• SBI— a shareholder until 2017

It is worth noting that IL&FS was not a fringe private operator. LIC policyholders' funds were directly exposed through it, but the company was subject to far less regulatory oversight than a bank of similar size.

How IF&LS Create Their Business Model and Scale?

IL&FS was not just lending to infrastructure projects, but also constructing, running them and financing them, sometimes through the same set of subsidiaries. IL&FS Transportation Networks (ITNL) constructed and maintained roads. IL&FS Financial Services (IFIN) was the NBFC lending wing of the group. In addition to these energy and environmental infrastructure arms, there were dozens of joint ventures under both. If you're on a slide, it's a vertical integration. In reality, it was a single company acting as developer, lender and equity investor on the same project, making it difficult to separate out related-party transactions unless you are inside the company.

Just how large was this? When the IL&FS crisis explained came to light, its new chairman Uday Kotak had disclosed that it has 348 subsidiaries, associates and joint ventures. The number that had been revealed was 169. Again, the public person was less than half of what he or she truly is. Many of these were special purpose vehicles established for specific road or power contracts, and identifying ownership of money by whom to whom became one of the really challenging aspects of the resolution. The org chart for IL&FS was not that bad. You'd have a sort of shadow banking conglomerate that wound up filing papers as an infrastructure financier.

Timeline of the IL&FS Scam

What leaves the greatest impression on me on the IL&FS timeline is the fact that the warning symptoms were left unread for so long. They were not linked up until it was too late and not because the information wasn't there or wasn't sufficiently connected, but because it was spread across ratings notes, board minutes and subsidiary-level accounts that nobody was real-time consolidating.

• 1987 — IL&FS became Core Investment Company (CIC) of Central Bank of India, HDFC and UTI.
• 1990-2010 — Growing into roads, power, water and urban infrastructure with hundreds of subsidiaries and SPVs, much of which was financed by short-term loans.
• March 2018 – ICRA's internal note points to a leverage ratio significantly higher than ICRA itself had reported, with the warning quietly going away.
• July 2018 — ITNL, the roads arm, starts struggling with bond repayments. The group has been overseen for over 30 years by Ravi Parthasarathy, who steps down as chairman.
• June – Aug 2018 — group entity begins to unilaterally default on inter-corporate deposits and short-term loans, most of which are not seen in the credit market.
• 4 Sept 2018 — IFIN fails to repay a small loan of about ₹1,000 crore to SIDBI.
• 6 Sept 2018 — IL&FS announces that the commercial paper with the due date of 28 August was settled late, on 31 August — the first time of anyone saying something is amiss.
• Sept 2018 — Ratings drop from AAA to junk in days for group entities; RBI urges LIC to refrain from adding more capital.
• 1 Oct 2018 — The Ministry of Corporate Affairs moves the NCLT under Section 241 of the Companies Act. A new six-member board headed by Uday Kotak replaces the board.
• April 2019 – SFIO arrests former vice-chairman Hari Sankaran and former IFIN MD Ramesh Bawa, questioning audit partners of Deloitte and BSR.
• 31 May 2019 — SFIO files its first chargesheet against 30 individuals and entities, including former directors and both audit firms.
• 2019–2023 — Resolution under NCLT/NCLAT (including stake sales in power, road assets).
• 2024-25 — NCLAT further extends resolution moratorium. As of March 2025, approximately ₹45,281 crore has been settled out of a target of ₹61,000 crore, with 197 of 302 entities resolved.

How Did the IL&FS Scam Happen?

Take away the acronyms and this is a fairly simple story: IL&FS borrowed short and lent long. Imagine you have a personal loan which will be repaid after 90 days and you use that money to start a business that will not provide any cash until 10 years later. As long as you can always get more 90-day loans to pay off the previous ones, it appears on the surface to be all good. Once the day lenders are no longer rolling over your loan then you're in trouble. It was exactly what took place on the group level for years and hundreds of entities.

The problem was compounded because it was not a coincidence. The entire business model was based on the difference between the maturity of the assets, namely roads and power plants with a life of 15 years, and the maturity of the liabilities, namely commercial paper and inter-corporate deposits, maturing every three to six months. It performed perfectly during good times with credit. It didn't have a lot of room for a bad quarter.

Evergreening and Related Party Lending

To maintain the picture, a few subsidiaries allegedly provided additional funds from which to repay existing debt to other subsidiaries, a practice referred to as evergreening. The old trick is to deny that a loan went bad and then give the new loan as a "repayment" of the old loan. The consolidated books are good. The net balance of cash is unchanged.

Complex Subsidiary Structures

Now the story gets a little more complicated! A relatively small amount of real capital from the parent was "invested" several layers down in 348 entities that were organized in various holding companies, SPVs and joint ventures, and backed by a significantly higher amount of borrowing. It is very difficult to have consolidated and audited accounts of a structure this size when everyone is doing their best to work together. When they are, it's virtually impossible for an outsider to get a shot at them.

Rating Agencies Caught Off Guard — or Complicit?

This is the aspect that should make anyone who uses credit ratings uneasy. The IL&FS group debt was downgraded from AAA — the highest rating — to default grade in a span of few weeks. Not months. Weeks. The rating agencies rely heavily on information provided by management, and when this information is minimal and does not show the extent to which one entity relies on another, it turns out to be a lagging indicator, that has been made to look like a forward-looking one.

Causes of IL&FS Collapse

The causes of IL&FS collapse wasn't one event, it was a series of events. It was a chain of misfortunes, one bad thing on top of another.

• Over-Leveraging and Asset-Liability Mismatch — The risk of funding assets for 15 years with 90-day paper is exactly the kind of risk that regulators look for in banks. IL&FS operated that very business model, operating like a bank economically, but without the burden of bank supervision.
• Weak Board Oversight and Independent Directors — The board had credible, well known names on it. Which is exactly why — good credentials don't necessarily mean good overseership. Concern about cash flow difficulties at ITNL and increased short-term borrowing that arose from the start of 2015 were never escalated to hard board-level pushback. Independent directors were created because it is their job to ask the question that management doesn't want to hear. In IL&FS, the question was not asked, or not shouted loud enough.
• Political and Institutional Connections — Government-backed institutions, such as LIC, SBI and Central Bank of India, had significant stakes, so it was tacitly understood that IL&FS was too political to fail. A tacit endorsement softens up intense reviews — both from lenders and regulators who become complacent as if someone else is on top of things.
• Delayed Government Payments on Infrastructure Contracts — Not all of this was self caused. Government departments and public authorities have been tardy in disbursing payments due on the completed infrastructure projects, thereby locking up thousands of crores that IL&FS's road and power subsidiaries need to settle their debts. This is a genuine structural issue in the infrastructure finance scam India and IL&FS was merely one company that was caught with no buffer to cope with the delay.
• Audit and Rating Failures — Deloitte Haskins & Sells audited IFIN for approximate a decade without any adverse findings, including in its 2017–18 annual report, the very same 12 months the group was fighting a liquidity squeeze privately. In the 2019 chargesheet, SFIO had accused BSR, a KPMG partner, and the other auditor of the last year of the IFIN, of hiding information and tampering with accounts. Both companies have challenged the charges and the legal process continues. But the optics don't tell you anything went wrong in that relationship but much went wrong because the clean audit opinion was issued in the face of a cash shortage.
• Regulatory Gaps in NBFC Supervision — IL&FS was set up as a Core Investment Company, rather than a deposit-taking NBFC, and operated under a less stringent regime of supervision than that of banks and larger NBFCs. It had a presence throughout the system on par with a medium-sized bank. It was not subjected to any regulatory review.

Financial Structure of IL&FS

At the time of the IL&FS crisis explained the IL&FS group's external debt was approximately ₹99,355 crore, of which the amount of fund-based borrowing was approximately ₹94,215 crore. Some ₹48,000 crore of this was lodged at four holding companies – IL&FS Ltd, IFIN, ITNL and IL&FS Energy Development Company – with each of them holding about half of this money. Now let's compare it with parent company's net worth as on March 2018: ₹7400 crore. Calculate and you get a company with a capital cushion of less than a percent of nearly ₹1 lakh crore of group debt.

In simple terms, think of a person who has saved ₹7 lakh in his savings account and is personally guaranteeing loans of nearly ₹1 crore in a dozen family businesses. As long as each business pays their own fare, it is fine. The second time 2 or 3 of them fail at once, there isn't enough spring in your step to take the hit.

It didn't just happen in one or two banks either, which is why the fallout was widespread. The exposure was carried by nationalised banks, private banks, mutual funds with commercial paper and NCDs, insurance companies and pension funds. The general public who had invested in a debt mutual fund, were not aware that they were indirectly lending to IL&FS. That is why the rippled effect was felt throughout the fixed-income market and not just by a few institutional lenders.

Failure to Account and Governance

The fraud is what every accounting student eventually learns about IL&FS, but disclosure limits are a part of the equation too.

• Short-Term Borrowing Rollover and Disclosure Failures — Financial statements at the parent and key subsidiary level failed to adequately disclose the true nature of short-term borrowing rollover, or the dependence of one on the other on cash flowing. The lenders and rating agencies were operating with a partial, perhaps not a misleading, but certainly an incomplete set of information, not on every line item but enough to cover up the actual risk.
• Auditor Independence in Question — A whistleblower complaint stated that Deloitte facilitated transactions that concealed the actual financial situation of IFIN, and as a result was paid additional fees. If that's proven, it goes to the heart of what auditor independence is supposed to prevent. That SFIO questioned both Deloitte and BSR partners in 2019 is a sign that investigators were not taking the audit-failure angle lightly.
• Employee Welfare Trust Misuse — Investigators also took a look at the improper use of an employee welfare trust by an employee of ILFS, which was more of a sideshow in comparison to the main default, but has a self-dealing element to it.
• Ethical Accounting Lessons — It's not that the audits failed. It is that a consolidated financial statement is as reliable as the poorest disclosures at any level of subsidiaries that contribute to it. While a 348-entity group is not necessarily a fraud, it would be very difficult to audit on a proper basis, and in the case of IL&FS, the management took advantage of the difficulty, not compensated for it.

Who Was Responsible?

The temptation is to lay it at the door of one villain, typically the former chairman who has served the group for more than three decades, and has been responsible for its harmful borrowing policy more than anyone else, namely Ravi Parthasarathy. But that's not enough. The board didn't buy in enough when signs of trouble become apparent around 2015. The chargesheet filed by SFIO against the auditor of the company, Deloitte and BSR, for allegedly hiding information and falsifying accounts is a severe allegation made against firms that are all about independence. Until weeks before the collapse, the credit rating agencies maintained AAAs, as they had stringent supervisory regime of banks under its Core Investment Company structure, even though it had the systemic risk characteristics of a bank. And institutional shareholders, such as LIC, SBI and other institutions, continued to support the company for years without any demand for transparency on group wide exposure. Each of these actors could have asked tougher questions. None of them did, except that it was too late to make a difference.

How the Crisis Triggered NBFC Crisis India

This was not to be IL&FS's trouble for long. In within weeks, the NAVs of the debt mutual funds with its commercial paper had to be marked down and the retail investors who had no idea of what it was in their portfolio began to redeem from all the debt funds with sheer panic. The experience of the banks and mutual funds was so devastating that they became even more wary of giving loans to NBFCs, irrespective of the connection with IL&FS.

The bad news: that caution paid no heed to discrimination. NBFCs which had sound books were denied access to funding as well as the weaker NBFCs, just because market could not easily distinguish them. The developers of residential property, who heavily borrowed money from the NBFCs, were left with no funds to fund the projects almost from a blink of an eye. MSMEs who were dependent on NBFC working capital loans also faced a credit crunch. Today, most economists consider IL&FS to be a significant factor in the deceleration of growth rates in 2019 and when DHFL faced difficulties a year later, market sentiment against the latter was quickly extended to the next shadow lender – almost as though they had been burnt once before.

Government Actions

It was an unusually direct response by the government, particularly for a non-public, unlisted company. The Ministry of Corporate Affairs transferred the NCLT to the section 241 of the Companies Act on 1 October 2018 on the ground of oppression, mismanagement and conduct of the company which is prejudicial to the public interest. The NCLT had replaced the board that same day with a new board headed by Uday Kotak, only to make the company stable and move it toward an orderly resolution and not an unruly liquidation.

Simultaneous investigations were conducted. SFIO had earlier in April 2019, sent out a probe on the alleged falsification of accounts and arrested former executives Hari Sankaran and Ramesh Bawa. The Enforcement Directorate probed on alleged fund diversion under the Prevention of Money Laundering Act. The Ministry of Corporate Affairs had separately filed a complaint against the auditors. On the recovery side, the new board dealt with the entities, liquidated assets and negotiated with the counterparties. As of March 2025, more than six years after the collapse, about ₹45,281 crore has been settled against a target of ₹61,000 crore, with 197 out of 302 group entities being completely settled. The dates speak for themselves: How hard it is to unwind a conglomerate sprawled over 348 entities that are interlinked.

Major Lessons from the IL&FS Scam

Dropping the specifics, IL&FS has lessons that are relevant and extend beyond one infrastructure lender.

• Match Your Funding Tenure to Your Asset Life — Any institution, whether a bank, an NBFC or the corporate treasury, which funds long term assets with short term liabilities is playing the same game that made IL&FS bankrupt! It's not a back-office box to check: Asset-liability management. It is the one thing that makes the difference between being solvent and non-solvent.
• Complexity is a potential governance risk in itself — An organisation with 348 entities does not necessarily signify that it is being used for fraud. It requires consolidation controls, internal audit coverage and board-level oversight commensurate with that complexity, however, and at IL&FS, oversight was never anywhere near meeting the complexity of the group.
• When disclosure is weak, ratings are backward-looking — The recent morass of an AAA-to-junk rating change in a few short weeks should forever change the importance analysts place in a rating. A rating can only be as reliable as the degree of data completeness.
• Independent Directors Must Ask Ugly Questions Early — Board Oversight Fails Not Due to Lack of Credentials. It didn't work because as it got going, the early warnings of cash flow pressure and increasing short-term debt didn’t get escalated to the hard questions over group-wide leverage.
• Auditor Rotation and Independence Matter — This could be the case with one firm being auditing the same company for a decade as IFIN was with Deloitte, which is the sort of familiarity risk the Companies Act, 2013 sought to prevent with the forced rotation of auditors. The IL&FS default case study to understand the reason for this rule is IL&FS.

IL&FS Compared With Other Major Indian Financial Scandals

People often tend to confuse IL&FS with Satyam, Yes Bank, DHFL and PMC Bank etc., however, each of these had their own reasons for breaking, and that is the difference that matters if you're trying to develop your mental models of corporate fraud typologies rather than just memorising names.

IL&FS is not about size, it is about reach. Satyam was mostly confined to the one listed IT firm and its shareholders. The problem of PMC Bank was mostly limited to its own deposit base. IL&FS was essentially in the middle of the debt market plumbing of India, and the default spread across the financial system, as opposed to just one company or sector.

Key Numbers at a Glance

These are indicative and based on the IL&FS group affidavits, NCLAT cases and contemporaneous reporting. The final numbers will continue to move as any entities remaining are settled.

Conclusion

The IL&FS scam's impact was not limited to just the losses for lenders in terms of numbers.The losses for lenders were not limited to the number of investment losses in the IL&FS scam. It made India reevaluate the regulation of NBFCs, disclosure of information at the group level, and the responsibility of the auditor. The fact is that IL&FS had been mundane, with its AAA rating, Big 4 auditing, and the backing of the largest institutional investors in the country — and yet it was so plainly set up to fail in its business model.

Tightening of NBFC crisis India liquidity norms, stricter disclosure requirements for related parties, and the closer watch of NBFCs by the RBI, which is what this case brought to light, are all a part of the reform. If the system truly learned that lesson is only time will tell on the next uptick in credit growth that outpaces real risk management. In the past, it has typically done.

Key Takeaways

• IL&FS borrowed for 10-15 year projects and disbursed money in 3-6 month increments — an anomaly that came back to haunt it when new loans dried up.
• The group's true size is more complex than previously reported, at 348 entities, making consolidated supervision almost unattainable.
• Credit ratings dropped to junk status within weeks, as a reminder of the disclosure dependency of ratings.
• SFIO has filed chargesheet against both Deloitte and KPMG branch BSR and against ex-directors making it a significant audit responsibility test case in India.
• This default led to a wider liquidity crisis among NBFCs, real estate, MSMEs, and mutual fund investors who were totally unaware of their exposure.
• Resolution has taken over six years and is still running, with roughly 61% of debt targeted for recovery as of 2025.

Frequently Asked Questions

Q: What is this IL&FS scam in simple terms?

It was the 2018 failure of Infrastructure Leasing & Financial Services, the financial firm that borrowed short-term to fund long-term infrastructure projects. It was unable to roll over that short-term debt any longer and defaulted on debts of nearly ₹91,000-99,000 crore, leading to disclosures of weak governance, group-level leverage and audit failures.

Q: When did the IL&FS crisis really start?

The internal stress and strain had been growing, culminating in public defaults in September 2018. The roads arm, ITNL, had already been in financial distress with bond repayments in July 2018 and evidence of stress in the group's credit metrics was apparent as early as March 2018.

Q: How much up was IL&FS when it defaulted?

The group's external debt was outstanding at around ₹99,355 crore, or about ₹91,000 crore, through 348 group entities at the time of the crisis, in October 2018.

Q:Who took over IL&FS after the scam broke?

The NCLT took over the existing board on an application by the government on 1 October 2018 and appointed a new six-member board led by Uday Kotak, whose job is to stabilise the group and move towards an orderly resolution.

Q: Which auditors were investigated in the IL&FS case?

Deloitte Haskins & Sells, IFIN's auditor for roughly a decade, and BSR & Co, KPMG's Indian affiliate that jointly audited IFIN in its final year, were both named in SFIO's May 2019 chargesheet, which alleged concealment and falsification of accounts.