5th ILFS Progress Report: More Questions Than Answers
Almost everything about the 5th progress report submitted by the new board of Infrastructure Leasing & Financial Services (IL&FS) raises more questions than it answers. For starters, there is not much progress that the report documents. The crucial information that has made news is all in the annexures which contain the RBI (Reserve Bank of India) inspection report for 2018-19 and a couple of key reports by Grant Thornton (GT) on IL&FS Securities, ILFS Financial Services (IFIN) and Ramesh Bawa’s conflict of interest. Details about the last two, as well as most of the sales details, are already in the public domain. 
 
From all appearances, this ‘progress report’ has been hurriedly put together in response to the rap from the National Company Law Appellate Tribunal (NCLAT) on 8th August. It is also unclear why the fourth and the fifth report have been submitted together. The NCALT had been critical about the ‘slow’ resolution process and asked for a progress report to be submitted by 3rd September. Shouldn’t the current management have taken time to ensure a comprehensive filing before the NCALT? 
 
Here are a few worrying omissions in the report. Sources close to developments had told me that the IL&FS board was optimistic about recovering Rs40,000 crore-Rs50,000 crore through the resolution process, as against its outstanding debt at Rs99,354 crore. However, institutional investors point out that the total of claims from creditors of all group companies submitted to GT may be another shocker.
 
The progress report makes no disclosure of claims received so far and only reproduces advertisements asking creditors of select companies to file their claims. Surely 10 months is a long enough time to arrive at this number? 
 
The extent of claims filed would indicate the challenges with regard to distribution of funds recovered and brings us to the issue of the urgent need for a financial sector resolution process that I had written about on 7th August.
 
Further, the progress reports are completely silent on the three expensive advisory firms appointed on 22 October 2018 to formulate and execute a resolution plan.
 
The board appointed Arpwood Capital and JM Financial as financial and transaction advisors; they would also undertake valuation and monetisation of assets. 
 
Alvarez and Marsal, appointed as restructuring advisor, was charged with maintaining controls, managing liquidity, managing stakeholders and evolving a resolution plan. Interestingly, Alvarez and Marshal had already been brought on board by the dismissed IL&FS board to formulate a turn-around strategy.
 
Creditors and investors find it curious that the IL&FS board makes no mention of any recommendations or submissions from any of the three advisors. Meanwhile, the appointment of legal advisors has already raised a storm, with Justice DK Jain finding issues with the submissions made, the conflict of interest issues with regard to Cyril Amarchand Mangaldas and the abrupt resignation of Shardul Amarchand Mangaldas after a ‘showdown’ with the deputy managing director, Bijay Kumar, over some inaccurate filings that were flagged by Justice DK Jain. 
 
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    COMMENTS

    Kochar Bipin

    4 months ago

    What is most concerning about the report is that no update has been provided on the progress in recovery of the over 15000 cr contractual dues from unscrupulous customers like Sivashankaran. The only public update here was provided by JV partner Gayatri Projects who have announced that their JV with IL&FS has finally won an arbitration award of over 900 cr.
    No update is provided on recovery from Noida on the breach of contract when the CAG report submitted to Supreme Court documents that the shortfall of recovery on this project is over 1900 cr as per contractual agreement with Noida.
    IL&FS board seems least interested in recovering the public money invested by PF and mutual funds from unscrupulous customers.

    NBFI Funding Squeeze to Hit Indian Property Developers Hardest: Fitch
    Liquidity risk is increasing for Indian-based real-estate developers, as non-bank financial institutions (NBFIs) including housing finance companies are shying away from lending to the sector, says a research note 
     
    In the report, Fitch Ratings says, "Developers that rely on refinancing from NBFIs, particularly those with weak financial profiles, will be affected the most should conditions persist. The availability of unencumbered assets among large developers may be of limited use, as NBFIs are looking to shed their already-high exposure to the sector, especially to large borrowers."
     
    According to the ratings agency, NBFIs have disproportionately increased their share of real-estate sector credit in the previous few years, owing to heightened risk aversion by banks. Banks have been cutting exposure due to their own funding challenges that began in late 2018, which have become more acute in the previous few months as domestic bank exposures fell to 2.3% of loans in the financial year ending March 2019 (FY19), from 2.8% in FY16. 
     
    NBFIs are now also shying away from refinancing maturing debt of even large, proven developers to limit concentration risk to the sector, Fitch says, adding this is pushing developers towards alternative funding channels, such as private equity. "The availability of such funding could be more limited than the value of maturing debt and may only be available to established developers with sufficient unpledged assets. It would also come at a higher cost. We believe banks may still consider exposure to quality real estate, but overall exposure continues to decline," it adds. 
     
    According to the ratings agency, developers that are focused on high-end projects may face higher risk, as sales of such projects have slowed in the last two years. 
     
    It says, "We believe these developers would be wary of taking sharp price corrections on unsold inventory to boost sales, except in extreme circumstances, as this could diminish the value of unsold inventory and weaken collateral cover for existing lenders. In addition, any boost in sales would be temporary. Meanwhile, developers with substantial exposure to affordable housing may still benefit from marginal access to lenders in light of healthy pre-sales growth, supported by India's substantial housing deficit and government incentives for buyers via the credit-linked subsidy scheme as well as for developers, including tax deductions and grant of infrastructure status, which entitles companies to some benefits and concessions." 
     
    The government has announced measures to improve NBFI-sector liquidity, but their efficacy remains to be seen. For example, Fitch says it believes the government's July 2019 announcement to provide a first-loss guarantee of 10% on securitised assets issued by NBFIs to banks could ease funding pressure for NBFIs in the short term. However, the provision refers only to financially sound issuers and there is a lack of clarity about the duration of the guarantee and the definition of what comprises a 'financially sound' entity. In addition, most of the actions by the authorities to alleviate the liquidity squeeze will benefit the largest and least risky NBFIs and is unlikely to address the pressure on the more property focused players.
     
    Defaults by two NBFIs - Infrastructure Leasing & Financial Services Ltd (IL&FS) in September 2018 and Dewan Housing Finance Corp Ltd (DHFL) in June 2019 - have contributed to the sector-wide liquidity squeeze, as investors have become more risk averse. Banks' low appetite for lending to real-estate developers is evidenced by the usually high risk weights attached to such loans. These are due to developers' typically low credit ratings amid high leverage, making exposure to the sector an inefficient use of banks' already-limited capital. 
     
    "Substantial bank recapitalisation to increase lending capacity could benefit NBFIs as well as real-estate developers, subject to the banks' risk appetite. Although a structural improvement in NBFI asset books would take time. Nonetheless, even under better conditions we expect NBFI's to tighten credit standards, with developers facing funding pressure until there is a broader improvement in their operations, with better end-user demand and pricing support," Fitch Ratings concluded.
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    Hero MotoCorp stops production for 4 days
    Hero MotoCorp, the country's largest two-wheeler manufacturer, on Friday said that their manufacturing facilities will be closed for four days (August 15 to 18) owing to "demand scenario".
     
    Hero MotoCorp indicated it is undergoing a stressful period as it said: "While this has been part of the annual holiday calendar on account of Independence Day, Raksha Bandhan and the weekend, it also partly reflects the prevailing market demand scenario."
     
    Auto sector is one of the worst hit sectors in India due to the lack of consumption. The sectors has seen massive loss of jobs in just the last few quarters.
     
    Morover, industry data recently showed that sales across all segments have declined for 9 consecutive month, creating recession like scenario in the sector.
     
    Hero MotoCorp is not the first auto maker to shut manufacturing. Earlier Tata Motors, Ashok Leyland and few others made such announcements.
     
    The company further said that production planning is a matter of advance monitoring of the market dynamics and prudent demand forecasting.
     
    "This helps us to plan our production well in advance, thereby enabling us to stay flexible both in terms of volumes and production schedules, " the company said in a regulatory filing.
     
    Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
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