IL&FS Board’s New Sale Plans May Also Hit a Roadblock
The government-appointed board of Infrastructure Leasing and Financial Services (IL&FS), is under pressure to speed up the messy resolution, having bled over Rs100 crore in legal fees and requesting another 270 days to resolve the issue. Earlier this month, IL&FS filed an affidavit before the bankruptcy tribunal which has several proposals tucked in it. Will they work? Or will they add to the morass of existing litigation? 
 
Some actions proposed by the board are perplexing, especially when it is already struggling with a highly complex resolution of 347 group companies with an outstanding debt exceeding Rs94,000 crore. It is increasingly clear that the IL&FS resolution ought to have been tackled by a separate enabling legislation. This was attempted during the securities scam of 1992; but, unfortunately, shoddy implementation ensured that scam cases are still dragging through the Bombay High Court, even after 25 years. The resolution of IL&FS may be headed the same way, with only the legal community being the biggest beneficiary. 
 
Let’s look at two proposals that are part of the affidavit. The first is to create an infrastructure investment trust (InvIT) to give life to nine road projects which cannot find buyers at fair market value (FMV).The second is to sell two controversial Tamil Nadu water companies, for which the Union government is paying up on a sovereign guarantee, to a fund management company set up by the state. This is the Tamil Nadu Infrastructure Fund Management Company Ltd (TNIFMC). Both these proposals raise several issues. 
 
InvIT for ITNL SPVs
At the core, the idea of the investment trust is to transfer nine road projects worth Rs11,000 crore of IL&FS Transportation Network Ltd (ITNL) – one of the big, listed, holding company of the group, to the investment trust. Of the nine projects, each a special purpose vehicle (SPV), three have been ‘normalised’ by restructuring debt and payment schedules. These are: Jharkhand Road Projects Implementation Company (JRPIC), Mahua Bharatpur Expressways (MBEL) and West Gujarat Expressway (WGEL). The remaining six do not have sufficient cash-flows to meet debt obligations, even after restructuring. 
 
IL&FS has submitted the InvIT proposal to the capital market regulator for clearance under its 2014 guidelines, with some special concessions. This involves a significant mark down of investments for lenders which, the IL&FS board says, is similar to the haircut that lenders will accept. The question is: Will it lead to the promised ‘economic benefits’?
 
The InvIT requires a sponsor (an entity with infrastructure experience), a trustee independent of the sponsor, who will maintain a minimum net-worth of Rs100 crore, as well as an investment manager and project manager.
 
The IL&FS board has proposed to keep most of these functions within the discredited group’s entities. The sponsor of the InvIT, it says, could be a newly incorporated entity or use ‘an existing entity from the transportation vertical with nil operations’. It proposes to appoint North Karnataka Expressway Limited, a group SPV, as investment manager and Elsamex Maintenance Services Ltd as the project manager. 
 
 
ITNL would swap three assets, including their external loans, to the sponsor against issuance of equity of Rs100 crore, in line with InvIT regulations of the Securities and Exchange Board of India (SEBI). The sponsor SPV and its receivables will be sold to the InvIT at FMV in exchange for 15% of the total units issued by the InvIT. Other ITNL SPVs and IL&FS group entities, with exposure to ITNL, will transfer their receivables to InvIT in exchange for 85% of the units issued by it. 
 
These units received by IL&FS group entities will be distributed to their respective lenders in accordance with the resolution framework approved by national company law appellate tribunal (NCLAT) to ensure transfer of beneficial ownership. The units will be listed on a recognised exchange and provide an exit option to lenders after the mandatory lock-in period. 
 
The benefits cited are: potential to raise fresh capital, refinance projects, benefit from improved toll collections, the reduction in interest rates and the prospect of InvIT emerging as a strong infrastructure player with appropriate management teams and supervision. 
 
Even while this requires a plethora of approvals from lenders, regulators and the tribunal, the success of this depends entirely on how well InvIT is managed. Given IL&FS’s past record of chicanery, here is what one lender has to say: “In summary, this is a debt for equity swap with the pretence of liquidity via a listing of assets that no one wants, or which are otherwise unviable.”
 
He further says, “A glaring flaw in ITNL’s model was the expectation of a constant refinancing or restructuring of debts; this is just more of the same because they expect that lowered InvIT yield expectations will provide equity value at ITNL.” (quote from affidavit in image below).
 
 
What is worse, he says, the proposal “glosses over the extent of IL&FS’s debt, which is due to excess interest charges and development fees that it could charge, because various group entities were allowed to benefit or profit from every large infrastructure project.” He believes that these shady actions of the previous management ought to be netted off as being unjustified and not be allowed any repayment. 
 
Why would the new board want IL&FS entities as sponsor, project manager and investment managers, given their past record? Is this just a ploy to keep alive ‘zombie’ companies with no potential buyers? Also, how exactly would the units be apportioned among creditors? There are no details yet.
 
Ideally, it is the committee of creditors (CoC) that ought to decide who will manage InvIT. Well, with public sector banks (PSBs) as the biggest investors and lenders in IL&FS, the government-appointed board is clearly calling the shots. 
 
Sale of Tamil Nadu Water Projects
The second proposal buried in the affidavit is to sell two of the controversial water companies in Tamil Nadu to a ‘third party’—TIFMCL, a fund management company. The projects to be sold are: the New Tirupur Area Development Corporation Ltd (NTADCL) and the Tamil Nadu Water Investment Company Ltd (TWICL). 
 
TWICL is a joint venture with IL&FS and the Tamil Nadu government and also holds a 32% stake in NTADCL. Both companies have, effectively, been run and controlled by Tamil Nadu bureaucrats. The MCA (ministry of corporate affairs) affidavit says that the sale will be at a valuation carried out by TIFMCL and IL&FS. But there is a catch.
 
 
Moneylife has written several times about how AIDQUA, a Mauritius-based investor with a significant stake in NTADCL, had blown the whistle on fudging of accounts revealed by a forensic audit. But Reserve Bank of India (RBI) and lenders, in cahoots with Ravi Parthasarathy, IL&FS’s discredited founder, choose to ignore the evidence. 
 
One of AIDQUA’s directors was also threatened with jail for raising uncomfortable issues at board meetings. IL&FS had followed up the threat by filing criminal defamation cases against directors of AIDQUA that went all the way to the apex court.
 
The crux of the dispute, now pending in the Supreme Court of India (SC) is that IL&FS, under Mr Parthasarathy, tried to unilaterally reduce AIDQUA’s shareholding, as part of corporate debt restructuring exercise, in a move that is in contravention to the articles of association of the company. The case has been dragging for over a decade.
 
I understand that AIDQUA has written a strong letter to the new board after having noticed the proposal in the government affidavit. But it smacks of extraordinary arrogance that the IL&FS board has ignored all of AIDQUA’s letters for over a year and made no attempt to resolve issues with it. This only goes to show how the IL&FS board, dominated by IAS officers, has been handling issues, despite spending Rs100 crore on legal fees and, probably, as much on five expensive consultants helping it with the resolution. 
 
AIDQUA has repeatedly written to MCA, IL&FS, Justice DK Jain and the consultants handling the resolution (JM Financial), but has got no response. This only raises questions about the purpose of packing the board with bureaucrats who either worked with IL&FS’s erstwhile management or were close to it. Is it aimed at a selective resolution to suit some vested interests?
 
 

Comments
hamungel
2 years ago
The article is excellent. Our management teams are experts at making things messier and messier.
hudafshaikh
2 years ago
Seems that other than distribute tens of crores of rupees to lawyers, consultants etc... who have added no value at all, the board has achieved nothing at all -
godavari_joshi
2 years ago
A good article from moneylife. As rightly mentioned by you, the influence of the govt nominated coteries and an attempt to “protect the vested interests” is visible. ILFS is a maze and it woud be nearly impossible to find out whether the entire behemoth did ever have any sound economic rationale and feasibility of the projects and their management. Did ILFS at its apex level as a Group ( considering all the units /arms of the behemoth regardless of their structures (whether they were fashioned as pvt, public, govt, non govt, subsidiaries, associated ventures or whatever ) ever have any clear idea of whether they were generating any real cashflows or merely book entries and keep a continuos flow of borrowings for projects which will be perpetually guzzling money and you can go on raising money and liability and “fictitious economic assets” while the Management kept fattening itself with excessive remunerations by all means…Did anybody bother to have a Asset-Liability mismatch review and sensible solutions to it ? Its like ILFS being perpetually on a spinning wheel??
The proposals suggested are MORE OF THE SAME THING WHICH BROUGHT THIS MESS in the first place. Its going to be again the TAX Payers money down the drain and with none to be held accountable.
While one appreciates the necessity & priority of trying to find a solution to this massive problem ,yet we haven’t even reached the surface to fix responsibility for this problem.
rajoluramam
2 years ago
With the past experience of settling the financial fraud cases in our country, it will take minimum a decade to come to a conclusion what is the extent of fraud, since when the fraud is going on, what is the role of auditors, accountability of the government supervising officials. Our judiciary is overburdened with scores of cases and have no time to settle the cases expeditiously. The fraudsters have huge resources and engage top lawyers and delay the cases. They go to higher courts one by one and delay the cases. It is a shock to read that 100 crores has already been spent for the office to settle the matters of ILFS. We the people are not concerned whether DHFL starts business again from the internal accruals or not, what about our repayments. The company further mis manage funds. It is throwing good money after bad money.

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