Is LIC bailing out Debt-laden and Liquidity-strapped IL&FS?
In what could end up as one of the biggest bailouts in the financial sector, without portraying it as such, Life Insurance Corporation of India (LIC) is stepping in to 'take charge of' Infrastructure Leasing & Financial Services (IL&FS), an unlisted infrastructure behemoth with scores of complex subsidiaries, some of which are listed and a giant load of debt, the full details of which are not easily available in the public domain. It may be recalled that Ajay Piramal, a deal-hungry but astute acquirer, did a due diligence of IL&FS in 2015 but backed out. By then, even insiders felt its debt was getting out of hand. 
 
Hemant Bhargava, managing director of Life Insurance Corporation has taken over as IL&FS chairman at the last board meeting on Friday. A report in The Economic Times (ET) says that “LIC has tightened its grip” over IL&FS. The report says that LIC will “also be called upon to invest more to rescue the troubled company which is reeling under high debt and rating downgrades of key group firms.” 
 
Will LIC now bail out what is essentially a private entity (with some public sector shareholding), which has been allowed to grow into gigantic proportions without any oversight by a single sector regulator, the Comptroller and Auditor General (CAG) or Central Vigilance Commission? According to the ET report, IL&FS’s board has approved a Rs4,500 crore rights issue of this closely held company and will seek liquidity support of Rs3,500 crore from the lenders. This means LIC will have to invest over Rs1,000 crore in line with its equity holding. Central Bank of India, which itself is under Prompt Corrective Action by the Reserve Bank of India (RBI), will also have to invest or IL&FS will need to find another investor to take its share.
 
As the chart below shows, IL&FS has run up massive debt which has become unmanageable now. 
 
 
Ratings agencies have downgraded the debt of IL&FS Transportation Networks Limited and two other entities in the road sector are struggling to make payments on time. There are also reports about delayed salaries in its toll company and ILFS Environmental Infrastructure and Services Ltd. Several fund raising plans have also failed. 
 
IL&FS, the brainchild of ex-Citibanker Ravi Parthasarathy, had ambitions plans to finance mega infrastructure projects and become a complete financial services company. Incorporated in 1987, IL&FS was initially promoted by the Central Bank of India (CBI), Housing Development Finance Corporation Limited (HDFC) and Unit Trust of India (UTI). Others, such as State Bank of India, Life Insurance Corporation of India, ORIX Corporation Japan, and Abu Dhabi Investment Authority (ADIA) invested in the 1990s, while many of the original shareholders, like UTI, diluted their holding. In 1999, UTI had once asked for a three-member supervisory board to head IL&FS’s management; but after its own debacle, it sold out most of its equity.  LIC now has a 25% shareholding, making it yet another company where the insurance giant has a high exposure risk. 
 
What makes the unravelling of IL&FS extremely complex is that each of its subsidiaries also has a large investment from public sector banks and institutions. I messaged IL&FS’s vice chairman and managing director Hari Shankaran for comments on the details that we have put together about its outstanding debt. He responded to say, “We are in the middle of implementing our plans. We would be happy to share once consummated.” Hence, as mentioned to him, this article does not have IL&FS’s point of view. The article will be updated if any inputs are received. 
 
Despite running scores of different projects and businesses, IL&FS has reported a loss or meagre profit over the past three years for which data is available.
 
 
Indeed, IL&FS’s standalone operating losses are large and persistent.
 
 
Presided over by Mr Parthasarthy for nearly 30 years without any succession planning, IL&FS was run in the mould of National Stock Exchange (NSE), Stockholding Corporation of India and other private, so-called “professionally managed” unlisted companies. Although the bulk of the shareholding in these companies was held by public sector undertakings, they were run like private sector companies with similar perks and privileges. They have been operating in the penumbra of private or public label, as and when it suited them. IL&FS had an added advantage. Apart from being designated as a systemically-important, non-banking finance company, by the Reserve Bank, it did not come under the oversight of a single regulator, or central audit and vigilance agencies. 
 
Mr Parthasarathy, who strategically kept a very low profile, resigned last Friday on health grounds and it is only now that details of this gargantuan but shadowy group will probably become available to the public. He ruled over the entity without a fixed tenure or re-appointment or the yoke of public sector constraints. He has pushed the company to bid for a variety of innovative projects – some of which worked and some were spectacular failures. These included the first private toll road (between Rau and Pithampur in Madhya Pradesh), the international Iridium satellite phone project underpinned by Motorola corporation which went bust and the Tiruppur Water project to bring drinking water to this very rich hosiery exporting town in Tamil Nadu.
 
Often IL&FS would rush in to be the first bidder for an infrastructure project, but would gave it up after squatting on it a long time. This included the Worli-Sea Rock link in Mumbai, which was eventually completed after long delays and massive cost escalation. It has similarly sat on the Panvel bypass until the Maharasthra State Road Development Corporation (MSRDC) acquired it to complete the Mumbai Pune Expressway. There is not an infrastructure project it would not be interested in. As recently as April, it beat Reliance Infrastructure to in its bid to run Mumbai’s monorail project that has been lying closed since November 2017. In 2011, it took over Maytas, promoted by Ramalinga Raju of Satyam and renamed it IL&FS Engineering and Construction, which too has been making losses consistently.
 
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COMMENTS

Ashok Senniappan

2 weeks ago

If LIC thiks of bailing Debt-laden and Liquidity-strapped IL&FS then one day Who will bail out LIC? Put the Board Members behind the bars for misusing and abusing the position till the court gives out its judgement

manoharlalsharma

4 months ago

the unsuitable job of government should be sold out to private players like one tack mahindra takenover the SATYAM or close down.

SuchindranathAiyerS

4 months ago

In India, the basic question is, "Whose life is it anyway?" Lives other than VIPs do not matter:

Elamaran R.

4 months ago

GOVERNMENT OF INDIA'S REAL TACTICS IS IN BACK STABBING LIC FOR STUBBORN INDIAN PUBLIC'S GENUINE AGITATION & TOUGH STAND AGAINST PRIVATISATION
TO GIVE THE CURRENCY MAKING TREASURE CHEST TO BE LOOTED BY CORPORATE HOUSES.

THIS TACTIC AGENDA WOULD DILUTE LIC IN LONGRUN.

TO STOP THIS ACTIVITY, LIC HAS TO BE PRIVATISED WITH SHARE HOLDING OF 95%
PERCENT HAS TO GIVEN TO INDIAN ORDINARY CITIZENS ONLY WITH CAPPING & NO OTHER CORPORATE ENTITY SHOULD BE
GIVEN RIGHTS TO TAKE THE SHARE HOLDING, THEN IN FUTURE, LIC WILL NOT PLAY ACCORDING TO THE WHIMPS & FANCIES OF INDIAN GOVERNMENT.

Rakshita

4 months ago

Informative and logical article. Just have one doubt. The last paragraph says that the Monorail project has been lying closed since November 2018? Does it mean 2017?

Ramesh Sampath

4 months ago

This article reminds us of the US financial system break down in 2008. It resulted in the global financial meltdown. It is not good for LIC to bailout and it may be doing what AIG of US did which caused undue stress on the economy.

Instead those who are responsible for the situation should be made accountable and shown legal consequences.

PALANIAPPAN Muthukumar

4 months ago

good article and thanks for exposing this ILFS group to the public

Indian securitisation market surged 128% to Rs32,300 crore in June quarter
The financial year 2017-18 witnessed one of the major reforms in the country, that is, Goods and Services Tax (GST). GST replaced the erstwhile central excise duty, sales tax and service tax laws, thereby changing the indirect tax regime entirely. This had large-scale implications as the country had been an unfortunate hostage to apprehension, uncertainty and overhaul of various economic models. The securitisation market in India was also affected by this change. Despite performing quite well in the first quarter of the last financial year, the market slowed down in the subsequent three quarters, which was mainly due to a difference in opinion with respect to applicability of the GST on the assignment of receivables. 
 
This issue was, however, settled by a set of frequently asked questions (FAQs) and answers from the GST Council on financial services. The FAQs compared assignment or securitization transactions with derivatives and hence termed it as a security for the purpose of GST laws. Under the current GST law, GST is not charged on securities. Therefore, vide these FAQs the confusion with respect to applicability of GST on assignment or securitization transactions has been dispensed with.
 
The securitisation industry reacted quickly after this and the volumes surged by 128% year-on-year to Rs32,300 crore during the June quarter of FY2019. Also as per the reports of ICRA, the pass through certificate (PTC) transaction volumes increased by around 69% to Rs11,300 crore as against Rs6,700 crore in Q1 FY2018 while the volumes for direct assignment (DA) transactions increased by around 180% to Rs21,000 crore in Q1 FY2019 as against Rs7,500 crore in Q1 FY2018.
 
The overall market growth was primarily driven by the increase in PTC issuance volumes. The last two years have seen the PTC market grow on the back of regulatory developments such as the revised Priority Sector Lending (PSL) guidelines, which decreed banks to achieve various sub-targets within the overall PSL target and also progressively increased the PSL target for foreign banks. The year saw a growing number of non-banking finance companies (NBFCs) investing in PTCs primarily due to the higher yields attached to those instruments. 
 
The PTC market has also benefitted from a growing investor base as a number of asset management companies (AMCs) restarted investments in securitisation transactions in FY2017. AMCs had earlier abstained from investing in securitised papers because of tax-related concerns, which have been subsequently resolved. Of the three major investor categories, namely banks, NBFCs and AMCs, the latter two made up the bulk of the investments in non-PSL securitisation.
 
The following graph shows the trend of securitization and market composition (direct assignments-DAs versus PTCs) during the last three years.
 
 
Priority Sector Lending requirements is a major driver in the Indian securitisation market
 
The role of regulation in shaping the market is critical. The Indian securitization market is largely driven by the need to meet the priority sector targets for banks; therefore, the dependence on demand for priority sector loans is prodigious. 
 
Priority sector lending targets are specific requirements laid down by the Reserve Bank of India (RBI), which require banking institutions to provide a specified portion of their total lending to a few specific sectors. Banks in India are required to direct at least 40% (32% in case of foreign banks having less than 20 branches) of their total credit to certain sectors categorized as priority sectors. Priority sector involves agriculture, education, MSME’s, housing, social infrastructure, renewable energy and others.
 
Higher PTC yields (yields observed in Q1 FY2019 in ICRA rated transactions was 75bp – 100bp higher compared to previous fiscal) may also have improved the attractiveness of PTCs vis-à-vis the other options available to banks for meeting PSL targets like PSLCs. The asset class wise break-up of PTC transaction has been shown in the table below:
 
 
Also, the spurt in securitisation was despite a significant 47% pick-up in trading of priority sector lending certificates (PSLCs), the hot pick of the market, to around Rs86,300 crore during the quarter, as per rating agency ICRA. The PSLCs act as an alternative to securitisation for banks falling short of meeting the mandated PSL requirements. Mortgage loans dominated the securitisation volumes with a 79% share, including 66% home loans and 13% loans against property, it said.
 
(Rajeev Jhawar is an Executive at Vinod Kothari Consultants P Ltd)
 
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surajit som

4 months ago

Some lay readers may find some terms difficult to understand. This is a common problem in Indian financial journalism. It seems to be addressed by one professional to another. They should think of lay readers and write for them.

Banks sign inter-creditor agreement on resolving NPAs: Goyal
Indian banks and financial institutions (FIs) on Monday entered into an inter-creditor agreement (ICA) to expedite the resolution of banks' non-performing assets (NPAs), or bad loans, and ensure smooth credit flow, acting Finance Minister Piyush Goyal said.
 
The agreement, as suggested by a committee headed by state-run Punjab National Bank (PNB) Chairman Sunil Mehta, is a "huge step forward" towards resolving the stressed assets issue and has been worked out under the Insolvency and Bankruptcy Code (IBC), Goyal told reporters here on the sidelines of a convention here organised by the Confederation of All India Traders (CAIT).
 
"Almost the entire banking system and prominent NBFCs (non-banking finance companies) like REC, PFC are joining the ICA which has held back fast and effective resolution of stressed assets for decades in the past.
 
"This is a huge step forward. It is a historic occasion for the banking system and is absolutely not a parallel system. This is within the framework of IBC that the entire process has been worked out and it will help in faster resolution within extant guidelines and rules," he said. 
 
The ICA is being signed by 22 public sector banks, including the India Post Payments Bank, 19 private sector banks and 32 foreign banks. Besides, 12 major financial institutions such as LIC and HUDCO have also signed the agreement.
 
Goyal said that several other organisations, including private lender ICICI Bank, would be joining the ICA after seeking approval from their board.
 
"There were many occasions when a good resolution plan, which would have helped saved jobs, save national assets and recover large amounts of loans, were held up by one or two creditors for months and years," he said.
 
Drawn up by banks themselves, the ICA is a reflection of the bankers' resolve to collectively find a solution to the problems of the banking sector, he said.
 
"We finally have the banks recognising the importance of working as a team to collectively find solution to the banking problem and ensuring an orderly credit flow in the future," he added. 
 
The ICA signed on Monday said: "Pursuant to the recommendations of Sunil Mehta Committee and under the aegis of Indian Banks' Association (IBA), an Inter-creditor Agreement (ICA) has been prepared which shall serve as a platform for the banks and financial institutions to come together and take joint and concerted actions towards resolution of stressed accounts." 
 
"The lead lender, that is the lender with the highest exposure, shall be authorised to formulate the resolution plan, which shall be presented to the lenders for their approval."
 
After approval of a resolution plan by majority lenders, it will be binding on all the lenders party to the ICA.
 
The binding decision will be by way of approval of the "majority" lenders defined as those with 66 per cent share in the aggregate exposure.
 
"The operating guidelines for functioning of the Overseeing Committee including the terms of reference shall be as approved (and amended from time to time) by 66 per cent by number of the Lenders that are a party to this Agreement," the ICA said.
 
In case a lender dissents, the lead lender will have the right but not the obligation to arrange for buy-out of the facilities of the dissenting lenders at a value that is equal to 85 per cent of the lower of liquidation value or resolution value.
 
The dissenting lenders can exercise such right of buy-out for the entire facilities held by other relevant lenders, the agreement said.
 
The accumulated NPAs in the Indian banking system have crossed the staggering level of Rs 9 lakh crore.
 
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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