The IL&FS Scam: Hundreds of nested SPVs rolling over debt to package road and power projects into quasi-sovereign AAA credit

Who Gets Targeted

Victims are primarily institutional investors, mutual funds, and banks holding bonds, commercial paper, and non-convertible debentures issued by IL&FS and its subsidiaries, as well as ordinary Indian savers with indirect exposure through bond funds and fixed-income products. There are also a large number of domestic retirees and conservative households who, attracted by AAA ratings and the halo of shareholder backgrounds from the Madhya Pradesh government and major life insurance institutions, used their retirement savings to purchase related bond funds. Their psychological vulnerabilities are typical: first, blind faith in ratings, believing AAA means zero default; second, blind faith in shareholder backgrounds, misinterpreting government equity participation as a government backstop; third, dissatisfaction with low deposit rates, chasing yields one to two percentage points higher without questioning that the underlying assets are roads and power plants with long twenty-year toll cycles, allowing maturity mismatch risks to be completely concealed by layered structures.

骗局怎么运作

• Step 1: Building a pyramid structure. Under the parent entity IL&FS, more than 300 subsidiaries and special purpose vehicles (SPVs) branch out. Each road and power project is housed in a separate SPV, dispersing and hiding debts at the bottom. Real off-balance-sheet leverage is nearly impenetrable to investors and auditors, with the narrative being that project companies operate independently with risk isolation.
• Step 2: Short-term borrowing for long-term investments to roll over and survive. Using commercial paper and interbank loans with maturities of several months, they funded infrastructure projects with construction cycles of 5 to 10 years and payback cycles of 20 years. When interest fell due, new debt was issued to repay old debt. As long as the market was willing to roll over, the books looked pristine—internally referred to as normal project financing arrangements.
• Step 3: Packaging future cash flows into high net present value assets. Toll revenues and electricity prices post-completion were discounted based on optimistic assumptions to generate massive NPVs, which were then used as collateral to borrow new money. This essentially supported credit with paper valuations rather than real cash flows, with sales pitches emphasizing ample project reserves and valuations far exceeding liabilities.
• Step 4: Creating a quasi-sovereign illusion using shareholder backgrounds. Founding shareholders included Madhya Pradesh government-related agencies and large life insurance companies, leading the market to long assume implicit government backing. Rating agencies consequently maintained AAA or AA ratings, and channel pitches directly claimed it was as safe as buying government bonds while offering higher yields.
• Step 5: Small and medium financial institutions forming a fund-channeling loop. Affiliated companies engaged in circular interbank lending and mutual holding of notes, shuffling and concealing bad debts within the system until cash flows broke in 2018. Defaults by affiliated subsidiaries triggered a domino effect, instantly freezing liquidity across the entire shadow banking system.

红旗信号（看到这些快跑）

• 🚩 The shareholder list includes the government or large institutions, which is claimed to be quasi-sovereign credit implying implicit backing, yet no written government guarantee documents can be provided.
• 🚩 The underlying assets are infrastructure projects with 15 to 20-year payback periods, yet short-term notes or wealth management products with maturities ranging from a few months to a year are sold to investors, creating a severe maturity mismatch.
• 🚩 The group has hundreds of subsidiaries and project SPVs with overlapping equity structures, and audit reports cannot penetrate down to the real underlying liabilities.
• 🚩 Interest repayment relies on the continuous issuance of new debt, and construction costs and interest expenses far exceed the actual operating cash flows of the projects, causing an immediate blowout once refinancing tightens.
• 🚩 Rating agencies assign ultra-high AAA ratings based on shareholder backgrounds and paper NPVs, yet the projects themselves have not yet opened or generated a single stable cash flow.
• 🚩 Affiliated institutions frequently engage in mutual borrowing and note-holding, with funds circulating idly within the system—showing superficial prosperity while generating no new real revenue.

真实案例

• Between August and September 2018, IL&FS financial service subsidiaries continuously defaulted on interbank borrowings and commercial paper. In September, the parent company level confirmed its inability to honor payments, and media disclosed the group's total debt to be around 9 trillion rupees, making it India's largest financial default event at the time and directly triggering a nationwide shadow banking liquidity crisis.
• On October 1, 2018, the central government of India applied to the National Company Law Tribunal to dissolve the original board and take over, citing severe corporate governance failures that endangered financial stability. A new board headed by veteran banker Mr. A was appointed, marking a rare direct government takeover of a large non-banking financial company.
• Crisis spillover created cascading victim cases: multiple mutual funds suffered net asset value losses due to holding IL&FS commercial paper, and short-term financing for shadow institutions in the housing finance sector was immediately frozen. In 2019, another large housing finance company fell into a payment crisis, and a small private bank was subsequently taken over by regulators, restricting depositories from withdrawals—collectively referred to by public opinion as the IL&FS shockwave.
• Regarding restructuring and liquidation, official disclosures show that as of June 2026, the new board has cumulatively resolved approximately 5.04 trillion rupees of debt through asset monetization, transferring projects to infrastructure investment trusts, and terminating unfinished projects, achieving about 82.6% of the established restructuring target. Meanwhile, the National Company Law Appellate Tribunal continues to hear circular transaction recovery cases involving approximately 10.8 billion rupees.

Official Stance

• In October 2018, the Ministry of Corporate Affairs of India instructed the Serious Fraud Investigation Office to register a case and investigate the IL&FS集团 (IL&FS Group), accusing it of misleading investors and creditors through pyramid financing, debt rollover, and transferring debts among SPVs.
• On October 1, 2018, the National Company Law Tribunal of India approved the central government's takeover of IL&FS and replacement of the board, determining that the original management committed severe corporate governance dereliction, constituting grounds for takeover in the public interest.
• The Reserve Bank of India repeatedly issued regulatory framework tightening notices after 2018 regarding maturity mismatches and liquidity risks of non-banking financial institutions, and promoted accountability and reforms regarding rating agencies' delayed and failed ratings during events such as IL&FS and DHFL.
• The National Company Law Appellate Tribunal has implemented classified disposal orders for over 300 entities of the IL&FS Group since 2019, grading debt repayment based on green, amber, and red asset conditions, while continuously hearing recovery cases targeting original management and related circular transactions.

How to Protect Yourself

• ✅ When encountering short-term debt products with AAA or AA high ratings backed by long-term infrastructure projects at the bottom, always question how maturity mismatches are bridged, and demand the management to disclose refinancing arrangements and stress-test scenarios in writing.
• ✅ Verify whether a so-called government background equals a government guarantee: demand formal letters of guarantee or legal documents. Having state-owned enterprises in the shareholder list does not equate to a national backstop, and verbal promises should never be relied upon.
• ✅ Use corporate search tools or regulatory disclosures to penetrate the equity structure of the issuing entity. If dozens or hundreds of SPVs nested under the parent company and frequent related-party borrowings are found, treat them directly as high-risk signals to avoid.
• ✅ Verify whether the project is actually operating and generating cash flow: only invest in project shares with a stable toll collection record of over two years, and maintain zero exposure to in-development project revenue rights that only feature paper net present value calculations.
• ✅ Diversify allocations and set an exposure cap for a single issuer. Bond fund holders should review the fund's major bond holding list and promptly redeem and adjust when holdings are concentrated in the same group or non-bank issuing entity.