By Elton Gomes
The Infrastructure Financing and Leasing Services Ltd (IL&FS) has been facing a credit crunch, which has caused severe disruption among Indias financial markets in recent days. The credit crunch has triggered mounting concerns about risk in Indias shadow banking sector.
What is IL&FS, and why is it in trouble?
The IL&FS Ltd is an investment company and serves as the holding company of the IL&FS Group. Most business operations within the group are based in separate companies that form an ecosystem of expertise across sectors such as infrastructure, finance, and social and environmental services.
The IL&FS was the brainchild of the late M.J. Pherwani and was founded in 1987 with equity from Central Bank of India, Unit Trust of India, and Housing Development Finance Co to fund infrastructure projects at a time when peers IDBI and ICICI were more focused on funding corporate projects.
Till the end of September 2018, the IL&FS had defaulted on debt obligations amounting to Rs 3,800 crores. Though the IL&FS is a private entity, more than 40% of its shares are held by government-owned firms this meant that the government had to ensure the solvency of IL&FS in order to maintain financial stability in the country.
Infrastructure and financial assets owned by IL&FS are worth more than Rs 1,15,000 or $15.77 billion, but its debts are the result of “mismanaged borrowings in the past,” the government said.
Why did the government replace the IL&FS board?
In order to ensure that the IL&FS stays afloat, the government replaced the IL&FS board with six selected nominees. The government said that it would make sure that the IL&FS has sufficient liquidity so that no more defaulting takes place and infrastructure projects are implemented smoothly.
The move came as a surprise since the central government has rarely stepped in to take control of a private company. Reuters reported that the new six-member IL&FS board would prepare a revival plan, but it would be inevitable for some lenders to suffer major losses.
Who constitutes the new board?
The government announced that Kotak Mahindra Banks managing director Uday Kotak will serve as chairman of the new IL&FS board. Additionally, the government nominated technocrats with substantial experience in their fields.
Besides Kotak, the members on the new board include former chairman of the Life Insurance Corporation of India (LIC), Ghyanendra Nath Bajpai, IAS officer Malini Shankar, Tech Mahindras executive vice-chairman Vineet Nayyar, ICICI Banks non-executive chairman Girish Chandra Chaturvedi, former Deputy Comptroller and Auditor General Nand Kishore.
Who is to be blamed for the crisis?
The government blames IL&FSs board and management for the crisis. It is interesting to note that after Ravi Ramaswamy Parthasarathy stepped down, several group companies began defaulting on loan repayments to the tune of hundreds of crores.
Another reason for the crisis could be attributed to a business model where short-term loans were taken to pay for long-term projects. But the long-term projects did not earn enough or fast enough to pay off the short-term loans.
The truth behind the Centre’s takeover
Although IL&FS executives hammered out an ambitious restructuring plan to manage the $12.6 billion debt burden, the government threw in a surprise and sought to gain control of the vast conglomerate.
The move drew parallels with China’s command-and-control economy, and was not typical of Indias free-wheeling democracy. Prime Minister Narendra Modi’s government revealed that the Serious Fraud Investigation Office would be opening an investigation into IL&FS’s management.
New IL&FS board to discuss key issues
Several reports mentioned that the new IL&FS board was supposed to meet yesterday (October 4) in Mumbai to discuss the companys future plans.
Led by Kotak, the new board was expected to devise a resolution plan and submit its first report within 15 days. It was reported that the board would ascertain the magnitude of the crisis and recommend solutions to balance the huge mismatch and potential misrepresentation of facts by the company.
The new board will assess the need for new talent and skill sets for resolution of IL&FS financial stress. This is a bankruptcy resolution monitored by the National Company Law Tribunal (NCLT), but outside the bankruptcy code, a government official told Live Mint.
Latest development
The Serious Fraud Investigation Office will probe whether any of the loans granted to the IL&FS were diverted for other purposes, two officials aware of the matter said.
We need to find out whether all due diligence was done before sanctioning of such credit. Also, if the firm used some of this amount to retire old debt, said one official. It is possible that some banks did not carry out proper assessments and relied mostly on the companys credit rating while approving the loans, one of the officials told the Economic Times.
Elton Gomes is a staff writer at Qrius