The anticipated recovery of nearly Rs50,000 crore from the resolution of the beleaguered Infrastructure Leasing & Financial Services (IL&FS) is unlikely to fix the problem over its default. In the absence of a clear financial sector resolution process, actual disbursement of the funds recovered could remain stuck in a legal quagmire, unless the government puts together a quick resolution process.
Persons close to developments believe that the government-appointed board at IL&FS, with plenty of cooperation from state governments and public sector units (PSUs) partners, has a fighting chance to recover nearly Rs45,000 crore to Rs50,000 crore. This is about 50% of IL&FS’s debt estimated at anywhere between Rs94,000 crore and Rs100,000 crore. Although we now have a higher recovery estimate than before, the absence of a resolution process that meets the demands of thousands of creditors, across geographies, needs to be addressed, especially when money from the sale and resolution is beginning to flow in.
The hydra-like IL&FS group, with 347 entities (with four holding companies and layers of step-down entities), began to default on its financial commitments in July 2018. Since then, a forensic audit and investigation agencies have exposed how a small coterie of executives, headed by founder Ravi Parthasarathy, had run this global corporate empire like a private fief, in cahoots with willing bureaucrats and dodgy businessmen.
A few months ago, the IL&FS board classified 169 of the 437 IL&FS entities into: Green (going concerns with a debt of Rs10,472 crore), Amber (partly recoverable debt of Rs16,372 crore) and Red (covering Rs61,375 crore which was largely irrecoverable). On 24th July, the company confirmed that it was close to recovering Rs20,000 crore. What is the basis of this expectation? Here is a quick run-down.
1.Around Rs4,000 crore has been recovered through sale of assets and from the borrowers of ILFS Financial Services (IFIN) who have begun to pay up.
2.Nearly 40% of the group’s assets, spread across hundreds of special purpose vehicles (SPVs), are in road projects. The board has issued advertisements seeking expression of interest in January and April. It now hopes to call for final binding bids in the next 15 days and complete the sale. If all goes well, these bids could fetch around Rs10,000 crore. An internal botch-up led to serious mistakes about board decisions of subsidiary companies (including mistakes about which board members attended the meetings) being conveyed to Justice DK Jain, who has been asked by NCLAT (National Company Law Appellate Tribunal) to approve the resolution proposals. A furious Justice Jain is understood to have conveyed his displeasure to the board in writing. This caused some delay, especially since one board member even speculated that the mistakes may have been deliberate.
3.Justice Jain has approved the acquisition of wind power assets held under IL&FS Wind Energy by Orix Corporation of Japan, one of the large investors in IL&FS, on 22nd July. This sale is expected to fetch Rs5,000 crore. Orix held 49% stake in the wind power companies and is exercising its right under the contract by matching the highest bidder. The matter is pending before the insolvency tribunal for approval.
4.The board is hopeful of extracting good value from several joint ventures (JVs) with state governments and PSUs, such as ONGC Tripura Power Company Ltd (OTPC), Mangalore SEZ and IL&FS Paradip Refinery Water Ltd. However, there is a catch. The JV agreements specify that if one of the partners faces financial trouble, the buyout of its stake will be at 20% below the face value. In many cases, these are strategically important projects with good value. Hence, the IL&FS board has written to NCLAT seeking an order that the sale of equity should be at fair value. The fair value, in many cases, may be higher than the face value. If the bankruptcy court approves, it is likely that the PSU partners and state governments will agree to what amounts to a bailout of IL&FS’s JVs.
IL&FS has 26% stake in the Rs3,800 crore OTPC power project and 50% stake in Mangalore SEZ Ltd, with state entities holding the rest. The Paradip project, with Indian IOC is a BOOT (build-own–operate-transfer) project with a 25-year concession period and was completed in 2014. It has similar projects in Jharkhand and Karnataka with state entities.
5.GIFT City is a joint venture in which the Gujarat government has 50% stake. The Gujarat chief minister had, however, announced that the government would buyout IL&FS’s stake. The problem, as I wrote earlier, is that IL&FS had drawn up such a gold-plated deal for itself that it was the subject of a public interest litigation (PIL) filed by a former director, DC Anjaria. Sources say that an independent valuer has been appointed to decide what the government would pay. The government has also replaced the managing director of GIFT City; but the final decision would, probably, depend on the withdrawal of the PIL.
6.A similar situation exists at the two water companies that are JVs with the Tamil Nadu government—both ‘Green’ companies. In Tamil Nadu Water Investment Company Ltd (TWICL), the state government holds 48% stake. This, in turn, set up the New Tirupur Area Development Corporation Ltd (NTADCL) which is embroiled in a legal dispute pending in the Supreme Court. IL&FS, along with bureaucrats and bankers, had unilaterally reduced the shareholding of its 27% institutional partner, AIDQUA of Mauritius. Significantly, the new team at IL&FS has made no attempt to discuss a resolution with NTADCL or AIDQUA, almost 10 months into their term, probably indicating the continued malevolent influence of the IAS (Indian Administrative Service) officials on these companies, irrespective of what is needed in public interest. In fact, Bijay Kumar, the government-appointed deputy managing director (DMD) of IL&FS has yet to follow the directive of the ministry of corporate affairs (MCA) with regard to appointment of a full-time managing director (MD).
This apart, the new board at IL&FS needs to focus on some internal cleaning up. It may be recalled that a whole-time director, Bijay Kumar, has filed a formal complaint with MCA about the conflict of interest in with Cyril Amarchand Mangaldas (CAM) remaining a legal advisor to the new board. In an exclusive report, I had pointed out that this complaint was weird because Mr Kumar himself was among the three whole-time directors empowered to replace CAM in February this year. This has still not happened. I now learn that four or five firms have been shortlisted and a decision is expected shortly. However, CAM continues to be the legal advisor for the final bids on the road project, to ensure that the process is not stalled. This raises questions about the motive behind filing a formal complaint. MCA is understood to have sought a response from the IL&FS board.
Moneylife had sent a list of queries to IL&FS about various issues related to this complaint and Justice DK Jain’s notes of displeasure, in May, over serious factual inaccuracies in IL&FS’s submission of resolution proposals to him (these pertained mainly to road project in Dubai and elsewhere). The official response to my queries was: ‘no comments’.
While things are moving ahead on the resolution, a lot of core issues clearly remain unresolved, including the disbursement of funds recovered by the new board. The fate and hopes of many investors in mutual funds (MFs), pension funds and others remain tied to the outcome. If the government takes a greater interest in ironing out some of the issues flagged here, the faith and normalcy in the non-banking financial sector will be restored faster.