IL&FS: A riddle wrapped in a mystery

Annual numbers throw up questions on financial management, complex group structure and debatable accounting policies The new Board of Directors of Infrastructure Leasing & Financial Services Ltd. (IL&FS) has ordered a fresh audit of its books and it is just as well that it has done so.
A quick run through the 2017-18 consolidated financial statement of the company shows evidences of shocking financial mismanagement, a complex group structure and questionable accounting policies.
Here are five broad points that scream for attention.
Riding on intangibles?
This is the key to understanding if the IL&FS story is one of mere financial mismanagement or if it has more serious dimensions. The balance sheet has a very significant component of intangible assets. They were as much as Rs. 22,613 crore at the gross level (total balance sheet size of Rs. 1,15,814 crore), which is almost the same as the gross fixed assets owned by the company. Almost all of the intangible assets is made up of “Rights under Service Concession Arrangements (SCA)”. These intangibles together with receivables from them account for a quarter of IL&FS’s balance sheet in 2017-18. According to a note to the accounts, SCA is the right to charge users of a public service though the amount is contingent on the extent that the public uses the service. The actual construction cost plus the margins as per the SCA is taken as the book value of the intangible asset.
The asset is depreciated on the basis of units of usage based on technical evaluations or traffic studies. Simply put, if IL&FS builds a toll-road, the asset is capitalised in its books on the basis of the money it spent plus its margins. It is depreciated based on the number of vehicles that are estimated to have used the road in a given year. The accounting for intangibles affords a lot of scope for financial engineering. Asset values can be inflated by gold-plating project costs; the higher costs can be used to pitch for larger borrowings which can be diverted elsewhere. Similarly, the depreciation can also be tweaked to suit the firm as it is based on estimates of units used. This is not to suggest that IL&FS has done any of this but given the overall opaque picture it certainly raises doubts. Only an audit of the finances, as ordered by the new board, can unravel the true picture.Is IL&FS a non-banking finance company (NBFC) or an infrastructure company?
Going by its balance sheet, it is an infrastructure company with 68% of its consolidated revenues coming from there. Financial services accounted for just 22% of revenues in 2017-18. But it is treated as a non-deposit taking NBFC by the RBI. Did RBI miss the goings-on or did it raise it in its reports and leave it at that?
Finally, a thought to end this piece: would IL&FS have been able to get away with all that it did had it been a listed company? Would the stock market have seen through its maze and sent a signal for authorities to follow up?
Source : https://www.thehindu.com/todays-paper/tp-business/ilfs-a-riddle-wrapped-in-a-mystery/article25222725.ece

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