Corporate governance failure at IL&FS: The role of internal and external mechanisms

Abstract

This paper explores the origins of the Infrastructure Leasing & Financial Services (IL&FS) crisis which threatened to become a domestic credit crisis by its mere size and extent had it not been for the timely intervention by the government. In most of the scams post liberalisation, the most high profile being Satyam, there was a failure of both internal and external mechanisms of corporate governance, that is there was a failure on the part of the board of directors (internal) and failure on the part of auditors and credit rating agencies (external). This paper argues that in most cases, and especially in case of a non- banking finance company like IL&FS the external mechanisms are as important if not more so, than the internal ones and if they function properly they can play a pivotal role in regulating and supervising the management thus making overall corporate governance effective.