IL&FS Scam: The Giant That Collapsed Under Its Own Weight

In the world of finance, trust is everything. For more than three decades, Infrastructure Leasing & Financial Services (IL&FS) was the rock-solid heart of India’s effort to become an economic powerhouse. Supported by well-regarded government and private institutions, IL&FS financed everything from highways to tunnels, power projects and urban developments that laid the groundwork for modern India. It was more than a company — it was a symbol of progress.

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But in 2018, the unthinkable happened. IL&FS, which at one time had a credit status of AAA, defaulted in its debt obligations, revealing a massive economic black hole of close to ₹94,000 crore. What came next was one of India’s greatest corporate scandals — a spider’s web of fraud, mismanagement, regulatory failure and unchecked greed.

The Rise of IL&FS 

IL&FS began with an admirable goal: financing and building infrastructure in India. Established in 1987, IL&FS had influential institutions like LIC, HDFC, SBI and overseas entities Abu Dhabi Investment Authority and ORIX Corporation of Japan as shareholders. Over the years, IL&FS has had over 300 subsidiaries, joint ventures, and associates, which also include high-profile projects like the Delhi-Noida Direct Flyway and Chenani-Nashri Tunnel in Jammu & Kashmir.

What Went Wrong?

The saga started in 2018 when IL&FS and its subsidiaries started to default on payments, first ₹1,000 crore and then higher amounts. By October 2018, total liabilities had exceeded ₹94,000 crore (almost $12 billion).

As early as 2012–2013, internal auditors flagged concerns about non-transparent practices, project delays, cost overruns, and dubious inter-company loans. Yet, the glitter of big projects and the confidence of major investors allowed IL&FS to continue borrowing.

1. Over-Leveraging

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IL&FS took on too many projects and borrowed excessively to finance them; many of its projects were delayed or unviable, leading to cash crunches.

2. Poor Corporate Governance

There was no transparency. The same top executives sat on the boards of several group companies, creating a closed loop with little oversight or accountability in loan disbursals and fund usage. Independent directors failed to flag risks.

3. Fake Profits & Concealed Losses

Audits and investigations revealed that loss-making projects were shown as profitable using complex accounting tricks. This misled investors and rating agencies.

4. Rating Agencies' Failure

Until just days before the default, IL&FS had a “AAA” credit rating, which gave investors a false sense of safety. This failure to flag risks earlier worsened the impact.

5. Project Delays & Cost Overruns

Many infrastructure projects ran into red tape, land disputes, and cost escalations, but IL&FS kept borrowing more instead of fixing core problems.

The Fallout 

When IL&FS defaulted, the shock rippled through India’s financial ecosystem:

• Mutual Funds & NBFCs (Non-Banking Financial Companies) that had invested in IL&FS debt instruments faced liquidity crunches.

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• Markets dipped, and credit dried up.

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• In October 2018, the government had no choice but to step in and take over IL&FS to prevent a major financial meltdown.

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A new board, led by Uday Kotak, was brought in, and detailed forensic audits were launched.

Findings from Investigations

In 2019, the National Company Law Tribunal (NCLT) allowed the government to take control of IL&FS and several agencies like the SFIO (Serious Fraud Investigation Office) and the Enforcement Directorate exposed shocking details:

• Top officials like Ramesh C. Bawa, Hari Sankaran and Arun Saha were arrested for fraud and misconduct.

• The management had created “shell companies” to siphon off money.

• Fake loans, circular transactions, and inflated revenues were used to create an illusion of stability.

Reforms and What’s Happening Now

After the IL&FS debacle, the Indian government and regulators initiated several reforms:

• SEBI tightened norms for credit rating agencies.

• RBI imposed stricter rules on NBFCs and corporate governance.

• Prompt corrective action plans for large, systemically important NBFCs to step in before problems escalate.

• Mutual fund houses became more cautious in evaluating corporate debt.

As of 2024, around ₹65,000 crore (over 70% of the group’s total debt) has been resolved or recovered through asset sales and settlements, the new board has been appointed by the government.

Conclusion

The IL&FS scandal was more than just financial mismanagement — it was a tale of unchecked ambition, greed, and inadequate regulatory oversight. It reminded us that 'too-big-to-fail' isn't really too big to fail, when you don't have transparency and ethics in place.

But it also led to the reforms - improvements of oversight, regulation, and a renewed focus on corporate accountability. There are already scars from the IL&FS crisis, but it could be a watershed moment for India's management of financial infrastructure.