- October 3, 2018, 4:41 pm
IL&FS has debts of ?91,000 crore. A series of defaults by the IL&FS holding company and group outfits beginning in August have set off a market-wide contagion.
Infrastructure Leasing & Financial Services Ltd. (IL&FS) was set up in 1987 by Mr. M.J. Pherwani (former chairman of Unit Trust of India, National Housing Bank, etc.) to finance and promote infrastructure projects in the country.
It is now a financial behemoth with assets of over ?1,15,000 crore — and debt of ?91,000 crore.
IL&FS is a holding company that operates through 169 other companies that are subsidiaries, group companies or joint ventures with others. It is/has been associated with landmark projects such as the tunnel under the Zoji La Pass, Delhi-Noida toll bridge, Gujarat International Finance Tec-City (GIFT) and a host of road, power, water and port projects.
Three of its group companies are listed on the stock markets. They are IL&FS Investment Managers Ltd., IL&FS Engineering and Construction Company Ltd. and IL&FS Transportation Networks Ltd. IL&FS was originally promoted by the Central Bank of India, Unit Trust of India and HDFC. Orix Corporation of Japan, Abu Dhabi Investment Authority, LIC and SBI joined in as co-promoters later.
IL&FS Finance, a group company, defaulted in late August on a commercial paper repayment. This was followed by a default by IL&FS on repayment of a ?1,000 crore deposit to Small Industries Development Bank of India (SIDBI). A series of defaults by the holding company and group outfits followed in the ensuing weeks running up to the annual general meeting of IL&FS on September 29.
That the group was over-leveraged and facing liquidity issues was well known in the market over the last few months leading to ratings downgrades by CARE and ICRA of IL&FS paper to junk status. Yet, the series of defaults in September shocked the markets. When a mutual fund sold the debt paper of a housing finance company at a steep discount to meet its fund redemption obligations in mid-September, the markets pressed the panic button and resorted to wholesale selling of all NBFC shares. The fear set in that defaults by IL&FS, a company rated as important to the system by the RBI, was spreading across the financial system.
HOW DID IT HAPPEN
The company borrowed many times its equity to fund its infrastructure projects, most of which bring in returns over 20-25 years. Making things worse, IL&FS’s borrowings were all repayable in the short to medium-term of roughly 8-10 years. Usually, these would be rolled over at the end of the term. Where IL&FS ran into trouble was in its projects stalling and not being completed due to various reasons ranging from statutory approvals not coming in, problems of land acquisition and projects simply becoming unviable as it happened in the case of power plants. With returns from these projects not coming in, IL&FS was forced to borrow more. Lenders pulled the plug leading to trouble for IL&FS.
INITIATIVES TAKEN SO FAR
The IL&FS has initiated a three-way strategy to tide over the crisis:
1. Offer a rights issue, sell assets to repay debt and address liquidity issues till the asset sale starts.
2. It is planning to raise ?4,500 crore through a rights issue in which it will be issuing 30 crore equity shares at ?150 per share.
3. Its board has also approved the recapitalisation of group companies of ?5,000 crore in IL&FS Financial Services, IL&FS Transportation, IL&FS Energy, IL&FS Environment and IL&FS Education.
1. The Centre has sent out an unambiguous message to the markets that it will not allow the company to fail as the Centre’s move to supersede the Board of Directors of the troubled Infrastructure Leasing & Financial Services (IL&FS) has not come out in the right time. In fact, a lot of the turbulence witnessed in the debt and stock markets earlier could have been avoided had the government acted earlier.
2. Any rescue plan for the beleaguered company obviously had to begin with replacing the existing management that was responsible for mismanaging its affairs. A change in management and the appointment of experienced people should lend confidence to lenders and investors.
3. The problem appears to be one of liquidity and not solvency — it is a classic case of over-leveraging, and an asset-liability mismatch caused by funding projects of 20-25 years payback period with relatively short-term funds of 8-10 years. There is a felt need here for long-term finance sources for infrastructure projects.
4. The LIC and some insurance companies are the only domestic sources and they too do not lend beyond 10 to 12 years. The Centre and the RBI should look at ways to deepen the debt markets where infrastructure players can borrow long-term.
5. It also needs to be analysed how a company listed as “systemically important” managed to fly under the radar with misgovernance.
Questions put Forward
The debt pile-up due to over-leveraging did not happen overnight?
How did the RBI, as the regulator, miss the goings-on?
Are the shareholders, which are well-known institutions, guilty of misplaced faith in the management, or were they negligent?
Finding answers to these questions is as important as rescuing IL&FS?