New Delhi: The Supreme Court on Tuesday allowed the reopening of books of accounts of Infrastructure Leasing & Financial Services Ltd (IL&FS) and its two units for five years on a plea filed by the Serious Fraud Investigation Office (SFIO) and the new state-appointed management of the group.
Restating the financial statements will make them more trustworthy for investors, at a time the new board led by billionaire banker Uday Kotak is exploring a turnaround of the IL&FS group by inducting new investors.
Restatement of accounts of IL&FS, and its units IL&FS Financial Services Ltd and IL&FS Transportation Networks Ltd, is bound to change the profit and loss figures of the companies as the new statements will have to make provisions for distressed assets that had not been made earlier, a lapse pointed out by SFIO in a charge sheet.
“There is no doubt that the recasting of financial statement is bound to have an impact on the profit and loss numbers. Also, dividends paid to shareholders and commissions paid to directors based on the numbers prior to restatement are recoverable," said Amarjit Chopra, former president, Institute of Chartered Accountants of India.
Chopra said potential investors in the IL&FS group will not go merely by the financial statements of the group, but will do their own due diligence before putting money into these companies.
A vacation bench comprising justices Indu Malhotra and M.R. Shah termed the decision as one of public importance and allowed the accounts of IL&FS and its two units to be reopened in accordance with a 31 January order passed by the National Company Law Appellate Tribunal. That order was stayed on 29 April by a division bench comprising justices Rohinton Nariman and Vineet Saran on an appeal filed by the former vice-president and director of IL&FS Financial Services, Hari Sankaran.
The financial crisis at IL&S has brought to focus the serious governance lapses in the group. Defaults by group entities have also triggered a liquidity crisis in non-banks that has hit consumption and contributed to a slowdown. India’s economy expanded at 5.8% in the March quarter, the slowest pace in five years. The governance lapses at IL&FS have also prompted probes into the roles of gatekeepers in the corporate ecosystem—independent directors, credit rating agencies and auditors. In February, a Parliamentary panel recommended an investigation into the IL&FS affair.
“Restatement of accounts after a fraud will have heavy impact on the financial statements. Any managerial remuneration distributed that is linked to the company’s profits is recoverable," said Vijay Kapur, adjunct faculty, Indian Institute of Corporate Affairs.