New Delhi: Sacked directors of Infrastructure Leasing and Financial Services Ltd (IL&FS) will have to face questions on negligence, diversion of funds, failed risk management and misrepresentation of facts that are viewed seriously under the Companies Act. They will also need to explain charges of mismanaging the infrastructure lender that is threatening the stability of the financial system.

A statement issued on Monday by the corporate affairs ministry and its petition filed before the National Company Law Tribunal blamed the erstwhile directors for a host of failures at IL&FS which affected the markets and the financial system, though it is for the Serious Fraud Investigation Office (SFIO) to dig out facts and initiate prosecution.

The charges against these directors include siphoning off of funds through excessive executive pay, financial mismanagement, misrepresentation of true state of the group’s financial fragility, suppression of material information, misrepresentation of facts to camouflage debt stress and exaggerated depiction of non-current assets. Some of these failings, if found to be done intentionally such as making a false statement, could get covered under definition of fraud which makes a defaulter liable to imprisonment of up to 10 years and a fine of up to three times the amount involved, as per section 447 of the Companies Act.

A government official, who spoke on condition of not being named, said the SFIO investigation was ordered given the “enormity and depth of the violations." “169 group companies of IL&FS are under probe. The new board of directors will review decisions of the previous management," said the official. The government is also likely to impose travel restrictions on some of the ex-directors.

The auditor of IL&FS will also be covered under the proposed investigation by SFIO, a multi-disciplinary agency with members from different financial regulators, said a person informed about the charges being pressed by the government.

The auditor SRBC & Co and IL&FS did not respond to emails seeking comment.

The government took the serious step of replacing the board as a significant portion of the money invested in IL&FS is public money from financial institutions and the failure of the group has led to contagion effect in markets and posed risks to financial stability. As much as 40% of IL&FS is owned by Life Insurance Corporation of India (LIC), Central Bank of India and State Bank of India.

Experts said in the case of entities which are large and the failure of which could impact markets, negligence and failure are taken seriously by regulators.

“Even in cases where there is no financial manipulation or siphoning off of funds, wrong judgment, failed business acumen and negligence could bring a company to its knees. Specifically when such actions are against public interest, they are viewed seriously under the Companies Act," said Pavan Kumar Vijay, founder of advisory firm Corporate Professionals.

Directors are the custodians of the company and have a fiduciary duty to safeguard the interests of stakeholders, said a chartered accountant, who spoke on condition of anonymity.

To be sure, pressing charges by the regulators do not establish guilt, which is the domain of the judiciary. The 10 directors replaced by the government include vice-chairman Hari Sankaran and chief executive officer Arun Saha.

Varun Sood contributed to this story.

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