Even as provident fund (PF) and pension fund trusts, which have invested in the bonds issued by debt-ridden Infrastructure Leasing and Financial Services Ltd (IL&FS), are fearing big losses, the finance ministry had said that such superannuated bonds do not carry any government guarantee and are exposed to market risks.
Thousands of crores of rupees of over 1.5 million employees of both public and private sector companies are exposed to IL&FS bonds through more than 50 funds. These include PF trusts of state electricity boards, public sector units (PSUs) and banks.
Responding to queries from IANS, the finance ministry says, "Since these are investments in bonds, the government does not ensure any guarantee on them as such and if these are invested in stock markets, they carry the market risks as applicable. It is between the bond issuer and bond holders..."
As many as 1.5 million salaried employees across different sectors are caught in this ticking time bomb and the number is only likely to go up as the true extent of the malaise is known and understood.
Till September last year, Indian rating agencies, not realising that IL&FS was set to implode, were giving Triple A rating to the bonds. With elections around the corner, this new exposé will further polarise the debate. After all, it is salaried employees who are now staking claim to their hard-earned monies.
Since these are tradeable instruments, the exact quantum is not known, but investment bankers estimate it to be in thousands of crores since the infrastructure company's bonds—which were 'AAA' rated - were preferred by retirement funds that have a low-risk appetite but still have to get assured returns even when interest rates are low.
The provident and pension fund trusts have filed intervening applications in the National Company Law Appellate Tribunal (NCLAT) stating that they stand to lose all the money since the bonds are under unsecured debt.
The worries of pension and provident fund trusts come from the classification of IL&FS profiling its companies about which can meet the dues obligations. Many important trust managing funds of PSUs like Metals and Minerals Trading Corp of India (MMTC), Indian Oil Corp Ltd (IOC), Housing and Urban Development Corp Ltd (HUDCO), State Bank of India (SBI) and IDBI are among those filing petitions. From private sector, Hindustan Unilever Ltd (HUL) and Asian Paints Ltd are among the petitioners.
IL&FS is currently under resolution process at the National Company Law Tribunal (NCLT). The process will decide under Section 53 of the Insolvency and Bankruptcy Code (IBC) the order of priority for distribution of proceeds of the process.
IL&FS has informed the NCLT that of the 302 entities in the group, 169 are Indian companies, out of which only 22 are emerging as those which can meet all obligations (green), while 10 firms can pay to only secured creditors (Amber).
There are 38 companies of IL&FS (red) which cannot meet any obligations of payment, and 120 entities are still being assessed.
These PF and provident funds trusts are worried that if payment is limited to secured creditors, then only financial creditors like banks will receive the dues while unsecured bond-holders will not get any payments.
The employee provident funds (EPFs) of various companies and other entities had invested in IL&FS bonds that are unsecured and bondholders may or may not get paid in the ongoing crisis at IL&FS.
In any case, they are seen pretty much last on the priority list. Over 75 companies and their PFs have filed an intervening petition before the appellate court to seek directions and instructions on repayment to unsecured creditors.
IL&FS bonds attracted investments by PF trusts SBI and Life Insurance Corp of India (LIC), had stake in the group, which gave its bonds the comfort factor.
Last week, a parliamentary committee recommended an inquiry into the role played by LIC and credit rating agencies (CRAs) in landing IL&FS into a debt trap. An investigation into the role played by LIC in the IL&FS mess becomes imminent as it is the largest shareholder in the conglomerate. The role of CRAs has come under the scanner as they failed to adequately vet IL&FS financials that led them to over-rate IL&FS entities just before signs of stress started appearing.
Calling for urgent measures to revive IL&FS while noting that it is the "only major institution funding the infrastructure projects in the country", the Parliamentary Standing Committee on Finance said the governance failures and indecision on the part of the IL&FS's board should also be thoroughly probed.