The Serious Fraud Investigation Office (SFIO) suspects that a senior RBI officer may have played a role in IL&FS Financial Services (IL&FS) collapse, a media report says. It is reckoned that the total failure of RBI's regulatory mechanism is one of the key reasons for the company's collapse causing likely loss of millions of rupees to investors.
The IL&FS crisis along with that of Dewan Housing Finance Limited (DHFL) had invited criticism of the regulatory efficiency of the pro-business government of Prime Minister Narendra Modi and Arun Jaitley as finance minister during the first stint of the Bharatiya Janata Party (BJP) and the RBI policies during the period. As the finance minister in Modi 2.0, Nirmala Sitharaman has her task cut out to clean up the mess that the non-banking financial companies (NBFC) are in and restore public confidence in them so that the liquidity crisis could be tackled.
SFIO, which is investigating the IL&FS case, has directed the RBI to conduct an internal investigation into the issues linked to the non-banking financial company (NBFC) to probe the complete failure of the regulatory mechanisms, the report on the Time of India website says. SFIO has apparently found some information to suggest that former IL&FS CEO Ramesh Bawa may have had links with a senior RBI official, which helped the company dodge procedural safeguards, the report says citing an unidentified source in the SFIO. Bawa allegedly used this contact to get favourable decisions on regulatory matters.
The SFIO has no evidence yet of any quid pro quo involving any RBI official and IL&FS, the source said. The RBI's inspection detected problems with IL&FS way back in 2015, the report says citing an unidentified government source. The RBI, however, took until 2017 to convey to IL&FS that the company had committed serious procedural errors. The RBI informed the company that its definition of what constituted a group was wrong and gave it two years to wind down its investment and follow regulatory norms on the definition of group companies, sources said.
The SFIO has asked the RBI to investigate why it failed to take timely action despite two reports about IL&FS' problems with net-owned funds and capital adequacy ratio. The investigative agency believes that timely regulatory action could have prevented the collapse. "The probe has shown that things would only go up to a level in the RBI," the report said quoting a source that cited SFIO's findings. In a charge sheet filed in a Mumbai court, the SFIO pointed to several irregularities by IL&FS, including the failure to follow the RBI's directions on non-performing assets (NPA) classification. It also said that IL&FS violated group lending norms, resulting in a grave miscalculation of net-owned funds.
Serious issues with the 1987-founded IL&FS group that has about 300 subsidiaries financing infrastructure projects began coming to light last year when some of them began defaulting on repayment of loans to various institutions. Since then the crisis has snowballed into something that has hit many NBFCs and threatened to pull in even many mutual funds.