The IL&FS scandal was the September 2018 collapse of Infrastructure Leasing & Financial Services, a 30-year-old Indian finance company that defaulted on roughly ₹91,000 crore of loans across 347 sister companies. Its top credit rating dropped from AAA to D in three weeks, hitting mutual funds, banks, and provident funds. The government replaced the entire board through a special tribunal.
In September 2018, one of India's biggest finance companies suddenly stopped paying its loans. The company was called IL&FS.
You may not have heard of it. But if you had savings in a mutual fund, money in your provident fund (PF), or even a fixed deposit at a government bank, there's a good chance some of your money was sitting quietly inside this company.
To understand why this was a disaster, you need to know one thing about how lending works.
When companies want to borrow money, they get a grade from special rating agencies. Think of it like a school report card for companies. The highest grade is AAA, which means "very safe — will definitely pay you back." The lowest grade is D, which means "has already failed to pay back." Normally a company moves from grade to grade slowly, over years.
IL&FS went from the highest grade to the lowest grade in about three weeks.
When that happened, mutual funds had to mark down what they were worth. Banks took losses. Pension funds got stuck with bonds nobody wanted to buy. The Indian government had to step in and replace the entire board of directors — something that almost never happens to a private company. This is the story of how a respected 30-year-old institution collapsed in plain sight, with auditors signing clean accounts and rating agencies handing out top grades right up to the day the music stopped.
What IL&FS Actually Was
IL&FS stood for Infrastructure Leasing & Financial Services. It was a finance company, but not a regular bank. Its job was to lend money to projects that build things — roads, bridges, power plants, water-treatment facilities. The kind of projects that take ten years to build and another ten to start earning back.
The company was set up in 1987 by three big institutions you'd recognise: Central Bank of India (a government-owned bank), HDFC, and Unit Trust of India (UTI, the company that ran India's first big mutual fund). So from day one, IL&FS carried the stamps of the most respected names in Indian finance.
By 2018, it was 30 years old. The Reserve Bank of India (RBI, India's central bank) had officially classified it as "systemically important" — meaning if it failed, it could shake the whole financial system. Over its lifetime, it had financed projects worth roughly ₹1.8 lakh crore.
On paper, this was the gold standard of Indian infrastructure financing. Pension funds owned its bonds. Mutual funds held its short-term loans. Public-sector banks had lent it tens of thousands of crores. Whatever the rating agencies said about IL&FS, the institutional world believed.
What they were actually trusting was a maze.
The mechanicsHow a Tiny Cushion Supported a Mountain of Debt
Here's the part of IL&FS's accounts that almost no regular saver — and apparently no rating agency — actually examined closely.
To explain it, we need one definition first. When a company starts up, the founders and early investors put in some real money — their own savings or money from shareholders. That real money is called the company's paid-up capital. Think of it as the actual cushion of cash the company owns, before it has borrowed anything.
For IL&FS, this real cushion was about ₹983 crore in early 2018. That sounds like a lot. But sitting on top of this cushion was group debt of around ₹91,000 crore — that is, loans the company had taken from banks and bondholders and would eventually have to repay.
That's group debt running at roughly 92 times the actual cushion of money the company owned. For comparison, most well-run finance companies in India operate with debt that's only 4 to 7 times their cushion. ICRA — one of the rating agencies that rated IL&FS — had quietly flagged in March 2018 that even by IL&FS's own reported numbers, the borrowing-to-cushion ratio was more than 13 times. That note was ignored.
The bigger problem, though, was how all that debt got built up across IL&FS's hundreds of subsidiaries (sister companies under the same parent).
The trick worked like this. The parent company would borrow money from a bank. Then it would put that borrowed money into a sister company, calling it "investment." The sister company now had what looked like a fresh cushion of cash. Using that fresh cushion, it could go and borrow even more from a different bank.
That sister company would then put part of its own borrowing into a smaller sister company below it, again calling it "investment." That third-level company could now borrow on top of borrowing on top of borrowing.
Across 347 sister companies, the same ₹100 of original money was being counted as "cushion" three or four levels deep.
This isn't accounting cleverness. It's borrowing hidden behind the word "investment." As long as the underlying projects — the roads, power plants, water-treatment plants — were earning money, the chain held together. When they stopped earning, the entire chain had to be paid back from the same set of stalled projects sitting at the bottom.
Screener shows you, for any Indian listed company, how many sister companies it owns, how much it has borrowed, and which deals are happening between sister companies. The IL&FS-style structure described above shows up clearly the moment you actually look at the basic numbers. The article above says you can't outsource this to ratings — Screener is how you do it yourself, in two minutes per company.
There was a second problem stacked on top of the first. IL&FS borrowed for short periods and lent for long ones.
Most of IL&FS's borrowings were short-term — three to six months. After that, the loans had to be paid back. The company would just take new loans to pay off the old ones. (This is called "rolling over" debt, and in normal markets, it happens routinely.)
The trouble was, the projects IL&FS was funding — those roads and power plants — wouldn't generate cash for 10 to 15 years.
So as long as banks and bondholders kept handing IL&FS new short-term loans every few months, everything looked fine. The day they stopped, the company would not have enough cash to pay back what it owed. There was no plan B.
That day arrived in mid-2018.
The unravelingJune to October 2018 — Four Months in Public
For most of 2018, none of this was visible to ordinary savers. Mutual funds owned IL&FS short-term loans. Pension funds owned its bonds. The credit rating sat at AAA, the highest grade.
Then, over four months, everything collapsed in public view.
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June 2018 · First crack
The highways company misses a loan
IL&FS Transportation Networks (ITNL), the highways arm of the group, fails to pay back a short-term loan that's due. Stock and bond markets barely react. Most analysts treat it as "one bad subsidiary" rather than a parent-company problem. The parent's grade stays at AAA.
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July 2018 · The exit
The man who built it walks away
Ravi Parthasarathy had run IL&FS since 1989. He turned it from a small 1987 startup into a 347-company empire. Just as the cracks start showing, he quietly steps down as chairman, citing "health reasons." Years later, India's fraud-investigation office (SFIO) names him as the main mastermind behind the entire scheme.
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August 2018 · Cracks widen
More sister companies start missing payments
Multiple sister companies miss repayments on various short and long-term loans. Credit rating agencies still hold the parent at AAA, even though by this point at least one operating arm has been downgraded. Mutual funds and banks are still buying IL&FS bonds.
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Early Sept 2018 · The trigger
IL&FS misses a ₹1,000 crore loan to SIDBI
IL&FS fails to pay back a ₹1,000 crore short-term loan from SIDBI (the Small Industries Development Bank of India, a government-owned bank). This is the moment markets actually panic. Bond traders refuse to give IL&FS any more short-term loans. Within days, the entire group runs out of cash.
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Sept 17, 2018 · The reckoning
Top grade to failed grade in one day
The three biggest rating agencies in India — ICRA, CARE, and India Ratings — all drop IL&FS's grade from AAA (highest) directly to D (failed) on the same day. Outstanding rated bonds at that moment: ₹11,725 cr (ICRA), ₹16,270 cr (India Ratings), ₹20,942 cr (CARE). Normally there are seven grades in between AAA and D, designed to be moved through gradually as a company gets weaker. All seven were skipped.
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Oct 1, 2018 · Government takeover
The board is removed, Uday Kotak takes over
The Indian government goes to a special tribunal called NCLT (which handles company-law cases) and asks it to remove the IL&FS board of directors. The tribunal agrees. The 15-member board is thrown out. A new six-member board is put in its place, led by banker Uday Kotak. The government dismissing a private company's board through a tribunal is extremely rare in India.
The day before September 17, IL&FS bonds were sitting inside ordinary mutual funds and provident funds as "top grade." The day after, no one wanted to buy them at any price. Mutual funds had to mark down what they were worth. Banks reclassified their loans to IL&FS as "bad loans," which then put pressure on the banks themselves. Other big finance companies — DHFL was the next big one — got caught in the same panic and started failing too.
Who Was Supposed to Catch This — and Didn't
The most uncomfortable part of the IL&FS story isn't the cheating itself. It's that every system that was supposed to catch it was either looking the other way or being paid to.
The rating agencies. Remember the report-card grading system from earlier? Three big agencies issue these grades for Indian companies — ICRA (linked to the global firm Moody's), CARE Ratings, and India Ratings (linked to Fitch). They held IL&FS at AAA or AA+ throughout most of 2018, even after the road subsidiary ITNL had already missed a loan repayment in June.
Years later, an independent forensic audit (a deep accounting investigation done by Grant Thornton) found something disturbing. Senior employees at these rating agencies had been receiving favours from IL&FS officials over the years: tickets to Real Madrid football matches in Spain, discounts on a luxury villa, a Fitbit watch, donations to charities where rating-agency executives sat on the board.
India's stock-market regulator, SEBI (the Securities and Exchange Board of India), eventually fined each of the three agencies ₹1 crore. To put that in context: the three agencies together had given grades to IL&FS bonds worth more than ₹49,000 crore. The fine was a tiny fraction of one percent of what they'd rated.
Had the rating agencies downgraded the ratings at the appropriate time and thereby forewarned the investors, the impact of the default on investors who invested in AAA rated instruments could not have been this severe.
— SEBI order, September 2020The auditors. Auditors are independent accountants whose job is to check a company's accounts every year and certify them as correct. Two big audit firms shared this job for IL&FS: Deloitte (one of the world's largest auditors, working on IL&FS's main financial subsidiary from 2008 to 2018) and BSR & Associates (the Indian arm of another global firm, KPMG, who joined as a second auditor in 2017–18).
India's fraud-investigation office (SFIO, the Serious Fraud Investigation Office) charged both firms with hiding information, signing off on false accounts, and missing the round-tripping of money inside the IL&FS group. ("Round-tripping" is when the same money moves in circles between sister companies to make the books look healthier than they are.) The chargesheet ran 800 pages.
The Ministry of Corporate Affairs asked for a five-year ban on both audit firms. The Bombay High Court got involved on the question of whether the ban should be automatic. Separately, India's Enforcement Directorate (the agency that investigates money-laundering) raided both firms.
The regulator. The Reserve Bank of India (RBI) is supposed to keep an eye on big finance companies. RBI had classified IL&FS as "systemically important," meaning RBI was meant to be watching it closely.
But IL&FS didn't accept deposits from the public the way regular banks do. So it sat in a kind of regulatory grey zone — RBI watched it, but with looser reporting rules than what commercial banks had to follow. And honestly, with 347 sister companies cross-holding each other in tangled ways, even the most alert regulator would have struggled to make sense of the structure.
The board itself. When the Indian government went to NCLT to remove the IL&FS board, it submitted a damning document. The government said the board had been "camouflaging its financial statements by hiding severe mismatch between its cash flows and payment obligations." In plain English: the board was hiding the fact that IL&FS didn't have enough cash coming in to pay what it owed.
There was also something called the Employee Welfare Trust, which on paper held 12% of IL&FS's shares. According to the government's filing, this trust had been used to enrich Ravi Parthasarathy and a small group around him at the cost of the actual shareholders. Loans were being given to companies that had no business getting them. Money was being moved through deals between IL&FS and other companies that the same insiders controlled.
The pattern is the same one you find in every major financial scandal anywhere in the world — Enron in the US, Satyam in India, Lehman Brothers, and now IL&FS: the watchmen were being paid by the people they were supposed to be watching.
The takeawayWhat This Story Should Teach a Regular Saver
If your reaction to this article is "fine, but I'd never have put my money into something this complicated" — the truth is, you almost certainly would have. IL&FS bonds were sitting inside ordinary debt mutual funds, inside your provident fund, inside your bank's lending pool. You didn't have to choose them. The whole point of a top rating was to spare ordinary savers from having to check all this themselves. The hard lesson from IL&FS isn't that you need to study 347 sister companies on your own — it's that nobody else was doing it either, and the risk got passed quietly to you anyway. We spend three weeks on financial-statement reading inside the Elite program for exactly this reason.
See how the programs are structured →There are four lessons inside the IL&FS story that matter for every Indian saver, whether you trade actively or only own mutual funds.
A top rating is an opinion, not a fact. Three of the most respected rating agencies in India had IL&FS at the highest grade until weeks before the actual collapse.
Treat ratings as one piece of information, not as the answer. Look at the basic numbers yourself. If a company's loans are 13 times its real cushion of money, that fact doesn't change because someone wrote AAA next to its name.
Hundreds of sister companies is usually a warning, not a sign of being well-organised. Honest, well-run businesses don't need 347 sister companies. Most well-run Indian listed companies operate cleanly with one parent and 5 to 20 subsidiaries.
When you see hundreds of step-down companies, joint ventures, and offshore companies all owned by each other, that level of complexity is almost always there to hide something — either how much they've borrowed, or who's actually getting paid.
Borrowing short-term to fund long-term projects is the classic finance-company death trap. Borrow for three months, lend for ten years, and hope someone keeps giving you fresh short-term loans in between. It works for years, until the day someone refuses. Then everything collapses at once.
This is exactly what killed IL&FS in 2018, DHFL the next year, several urban cooperative banks before that, and even contributed to the Silicon Valley Bank failure in the US in 2023. Whenever you see a finance company taking 90-day loans to fund 10-year projects, you are looking at IL&FS in waiting.
You need basic balance-sheet literacy, even if you're only a saver. The mutual funds, debt funds, and corporate fixed deposits that ordinary Indians hold all carry exposure to the same kinds of companies that IL&FS was.
Three numbers are enough to start with: how much real cushion of capital the company has, how much it has borrowed in total, and which sister companies it has been doing big deals with. If those three numbers don't add up to a sensible story, no rating fixes that.
The IL&FS story is uncomfortable for a reason. It wasn't a Ponzi scheme run out of a back room — it was a 30-year-old institution embedded inside the most respected lenders, auditors, and rating agencies in India. The lesson isn't that you should avoid every Indian financial product. It's that relying on the watchmen to catch problems is no longer safe, and probably never was.
Could you have spotted IL&FS?
Imagine it's January 2018. Eight months before the collapse. For each item below, tap whether you would have treated it as a serious warning sign at the time.
Where the case stands today
Cleaning up after IL&FS has become one of the largest corporate workouts in Indian history. By September 2025, seven years in, the replacement board had recovered about ₹48,500 crore — about 80% of the ₹61,000 crore the new board had originally set as a target. That target itself represents a 61% recovery on the original ₹91,000 crore. By Indian Bankruptcy Code standards (where the average recovery is around 31% of money owed), that's actually strong.
By the standards of pensioners and ordinary mutual-fund holders whose money was caught inside, it is still a painful, multi-year hit. What stays with regular savers, long after the resolution closes, is the underlying lesson: the system you assumed was watching was not watching. Your own basic understanding of company finances is the actual safety net. Nothing else is.
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Frequently asked questions
What was the IL&FS scandal?
IL&FS was a 30-year-old finance company that lent money to infrastructure projects like roads and power plants. In September 2018, it suddenly stopped paying its loans. Total group debt was around ₹91,000 crore, spread across 347 sister companies. The credit rating agencies had given it the highest grade until just weeks before the collapse, which prompted the government to step in and replace the entire board through a special tribunal.
Why did IL&FS collapse?
Three problems compounded. First, hundreds of sister companies were stacked on each other, with debt at one level being treated as "investment" at the next, multiplying the borrowing without adding any real money. Second, the company borrowed for short periods (3 to 6 months) but lent for very long ones (10 to 15 years), so it depended completely on banks and bondholders giving it fresh loans every few months. Third, several infrastructure projects had stalled or run over budget, so the cash needed to repay the loans was not coming in.
How did the rating agencies fail in the IL&FS case?
The three big rating agencies in India — ICRA, CARE, and India Ratings — held IL&FS at the highest grade (AAA or AA+) even after one of its sister companies had already missed a loan in June 2018. The agencies finally dropped the grade to D (failed) on September 17, 2018, skipping all seven grades in between. SEBI later fined each agency ₹1 crore. A separate forensic audit by Grant Thornton found that senior agency staff had received favours from IL&FS officials over the years.
How did IL&FS affect mutual funds and provident funds?
IL&FS bonds and short-term loans were widely held by debt mutual funds, banks, insurance companies, the government's provident fund (EPFO), and several private retirement funds run by big companies. When the grade was dropped to D, mutual funds had to take losses, banks had to mark IL&FS loans as "bad loans," and retirement funds were left holding bonds that had become unsellable.
What can ordinary Indian savers learn from IL&FS?
Four lessons. A top rating is an opinion, not a fact, so don't outsource your judgment to it. Hundreds of sister companies under one parent is usually a warning, not a sign of being well-organised. Borrowing short-term to fund long-term projects is the classic way finance companies fail. And basic understanding of three numbers — a company's real cushion of capital, total loans, and deals with sister companies — is the actual safety net for regular savers.
Sources used in this article
- SEBI orders on rating-agency penalties (Sept 2020) — increasing fines on ICRA, CARE, and India Ratings for failures in rating IL&FS bonds.
- Grant Thornton forensic audit findings as reported by Moneylife and Business Today — covering favours and gifts from IL&FS to rating-agency officials.
- SFIO chargesheet (May 2019) against 30 entities including IL&FS Financial Services directors and auditors — as reported by Business Today and Bar & Bench.
- NCLAT status report affidavits filed by IL&FS (Oct 2024 and March/Sept 2025) on resolution progress — as reported by Business Standard and Devdiscourse.
- The Wire analysis (Oct 2018) on rating-agency role and credit-risk weighting in IL&FS exposures.
- IL&FS FY2017–18 Business Responsibility Report for paid-up capital figure (~₹983 crore).
- RBI investigation report noted in Moneylife coverage — on Ravi Parthasarathy's role and group-level governance failures.