Sack IL&FS Board To Fix the Mess

Infrastructure Leasing & Financial Services (IL&FS), the massive conglomerate of over 174 direct and indirect subsidiaries, is unravelling fast. Like the cops in Bollywood movies, the regulators and rating agencies have woken up to the implications of IL&FS’s imploding only after it began to default on its obligations.

The Reserve Bank of India (RBI), which classifies IL&FS as a systemically-important non-banking finance company, has ordered a special audit, only after it began to default. RBI, we are told, will investigate why the investment company did not inform it beforehand about its financial position. This belated action is laughable and is not going to resolve the looming crisis triggered by the huge debt overhang and severe liquidity crunch.

For years together, I have been highlighting the governance and accountability issues in a set of ‘professionally managed’ companies that quickly turned into protected fiefs headed by one or two people for decades. They, often, posture as quasi-government entities and have played a critical role in our economic or financial system. But these companies are not subjected to any government oversight such as by Central Vigilance Commission or Comptroller & Auditor General of India. They have managed to stay out of Right to Information Act too. IL&FS is one of them; the National Stock Exchange (NSE) is another.

NSE is under a cloud now after we published a whistleblower’s letter alleging price manipulation and unfair access in its co-location servers. At IL&FS, things started unravelling rapidly after Moneylife first reported its Rs1 000-crore default to SIDBI (Small Industries Development Bank of India) on 4th September.

This was followed by other defaults and a series of credit downgrades by rating agencies. The group debt is currently estimated at Rs1.2 lakh crore and what we have seen so far are tiny ineffectual steps by the board. It is nowhere up to the task of resolving a giant problem that is, once again, likely to need a bailout by the public through the exchequer.

Life Insurance Corporation (LIC) has reportedly stepped in but Hari Shankaran, the vice-chairman, and a close associate of the former chairman Ravi Parthasarathy (who stepped down in July for health reasons) has taken to occupying the chairman's room. Hemant Bhargava of LIC has been appointed as the chairman. Mr Parthasarathy has been fully in charge of this gargantuan infrastructure, education and consulting conglomerate for 30 years, without change or challenge.

In an election year, the government clearly does not want to admit that IL&FS’s precarious finances may be as big a problem as those of telecom, steel, coal and realty. But allowing the existing management to continue, while working at a surreptitious bailout by LIC, could boomerang both politically and financially.  

We now need the government or the finance ministry to step in and take some hard decisions ahead of the board meeting tomorrow (15th September). Before we go into what those would be, let’s look at where things stand and what has been done so far.

Writing for Bloomberg-Quint, Andy Mukherjee calls IL&FS a ‘shadow bank’ and compares the systemic shock of its unravelling to the collapse of Lehman Brothers, exactly a decade ago. He writes, “The IL&FS Group is too big to fail; isn’t regulated nearly as closely as it would have been as a deposit-taking institution; and has no ‘living will’—a plan to let it fail safely.”

He also says that ‘socializing losses’ by dumping the problem on to Indian taxpayers or, ultimately, the public (through the exchequer or a bailout by LIC) may be “the only way to avoid panic from spreading.” Mr Mukherjee, correctly, argues that ‘opacity’ has the ‘propensity to amplify panic’ and as “IL&FS goes radioactive, the money market doesn’t know who’s exposed to its toxicity, and to what extent.”

If this is, indeed, the inevitable way forward, then it is high time the government steps in more decisively. Clearly, IL&FS cannot remain in control of Ravi Parthasarathy’s crony club at this time – after all, they are fully complicit in having created the mess in the first place.

The role of the board, both shareholder directors and independent directors, also comes into question. If they were clueless about what was happening so far, are they capable of acting decisively in a panic? We have also heard nothing about the whistleblower’s letter, which, according to sources, has detailed corruption and pay-offs connected with the group’s finance companies.

Now that IL&FS is in trouble, we have been hearing many stories about the lavish lifestyles and big-spending ways of several senior employees in the group. This is yet another reason why the same management team should not be handling the crisis, especially if the group is headed for a bailout by LIC or the government.

In a letter to employees, the IL&FS management has said that the board meeting scheduled for tomorrow (15 September) will provide more clarity. It is unclear to me how a failed-board which was clueless about the mounting problems will, suddenly, be able to act decisively and steer a sinking ship to safe harbour. The board needs to be dismissed immediately and a core management committee put in charge that will report to the government and shareholders.

If the existing team remains at the helm, we will continue to see foolish media leaks that will do more harm than good. For instance, on 13th September, media reports said that IL&FS plans to sell its massive corporate building at the posh Bandra-Kurla Complex (in Mumbai) to raise money. The few hundred crores of rupees that this may fetch will not even be a drop in the ocean of debt.

IL&FS itself occupies only two floors of this extravagant building. The rest of the offices are on long-term lease arrangements with little scope for further value extraction. If shareholders, as reported by the media, want IL&FS to raise funds by selling non-core assets, it will need a genuine and concerted effort to find buyers for many group companies, in a distress situation.

The Ajay Piramal group was interested in buying IL&FS at one time, but even if the group is still in the market for some of its special purpose vehicles (SPVs), one can be sure that it will now want a sharp haircut.

In a letter to employees, IL&FS has said: “It is our case that if concession authorities released our monies, which is around Rs16,000 crore of IL&FS group’s liquidity and stuck in claims and termination payments, we would not be in the situation that we are in.”

But then, delayed payments by government agencies, litigation, stakeholder protests and other problems are an inevitable part of doing business in India. Surely, IL&FS has been dealing with these issues for over 25 years and should have factored this into its ambitious growth plans. Instead, it specialised in structuring lucrative public-private partnerships that escaped all the vigilance, audit, transparency and accountability forced on government organisations.

This gave us a bunch of gold-plated infrastructure SPVs, usually headed by ex-bureaucrats, whose connections helped push the ever-growing ambitions of Mr Parthasarathy’s private fiefdom and crony club. Such super-expensive infrastructure projects are scattered all over India—from Tamil Nadu to Gujarat, Rajasthan, Haryana, Maharashtra and elsewhere.

So far, there is no clear indication of how IL&FS plans to generate liquidity to meet multiple payment obligations that are due in the coming months. Bloomberg points out that Indian public sector banks are not only large shareholders in IL&FS, but have also lent to its distressed infrastructure projects, some of which are still being ‘carried as standard (debt) on the balance sheets of many banks’. Equity infusion by shareholders is unlikely to be enough to address the problem it faces.

The government needs to have a strong team in place to take charge of IL&FS and make an honest assessment of the situation. At stake are huge public investments by various debt mutual fund schemes, estimated at Rs3,500crore by Value Research, and instruments such as financial paper like the cumulative redeemable preference shares worth Rs8,500 crore with a AAA rating and dividend of 16%-16.5% that was mainly subscribed by high net-worth individuals (HNIs).
 

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COMMENTS

Krishna

2 months ago

Looks like scam and passports of management who created this situation should be immediately impounded. It is not fair to mess around with public money .Indiscrete handling of financial matters borders on economic crime. Should be accordingly handled. If all senior executives run away abroad you may not be able to complete investigation.

Dr Ananthanarayanan

2 months ago

I shudder to think as to how many such behemoths exist and how our regulators have consistently failed in their oversight processes.Kudos to the alacrity and vigilance exercised by media like Moneylife.

REPLY

SURAJIT SOM

In Reply to Dr Ananthanarayanan 2 months ago

It was 15th September 2008 when Lehman Brothers collapsed. "That sucker is going down !!!" , President Jr Bush remarked contemptuously. Within days the contagion spread to the world banking system. The US politicians across party lines scrambled to save the world economic system(read the western banksters' mafia ). US Congress authorised US$ 700 billion dollar for fire fighting. Many are comparing IL & FS with Lehman Brothers. Hope Govt takes action rather than watching like George W Bush. Friday's Sensex drop of 1100 point was no fun. Without Govt intervention ,it may repeat next week or thereafter. The cost will be much much higher .

Prakash Patel

In Reply to SURAJIT SOM 2 months ago

There is no point in saving this company. Let it die a natural death or some stronger company acquire it. The government should not intervene. Only shareholders and bondholders will suffer. By the government bailout, entire taxpayers have to suffer for no fault of theirs.
The same principle has to be adopted both for private and government-owned companies that naturally will lead to the privatization of government-owned companies.

SURAJIT SOM

In Reply to Prakash Patel 2 months ago

The problem is that Market is not as rational as you are. It never was ,it will never be. Why do you think fixed deposit is so popular despite paltry return ?Contagion is a serious issue. Why did the Market fell 1100 on Friday and what is the guarantee that every time it will be a V-shaped recovery ? Think of a building (with hundreds of apartments) on fire even though the fire is restricted to one apartment at the moment. Should we yawn and relax ? Now from the press:"Press Trust of India | 23/09/2018 | 1 hour ago........ RBI and SEBI, Sunday said they are "closely monitoring" activities in the financial markets and ready to take appropriate actions, if required, following a sharp meltdown on Friday in equity and debt markets. Reports of debt defaults by IL&FS also sparked concerns, which spilled over into other NBFC counters. The regulators came out with separate but identical statements amid apprehensions about steep volatility in markets on Monday. Against the backdrop of debt defaults by diversified IL&FS group, there are also worries about NBFCs even though the country`s largest lender SBI assured lending support to the NBFC sector. ". Dont tell me that all these people are fool.

Sunil Rebello

In Reply to SURAJIT SOM 2 months ago

Lehman Brothers was not a government company.
UTI & IL&FS are both government companies - both failed like our PSU banks.
Our politicians cannot take care of their own jobs like infra and they want to run businesses - where they have no knowledge or expertise - They have only ulterior / selfish motives. Basically they want to rob the poor citizens to fill their pockets - HOOK OR BY CROOK. All will be held responsible for their misdeeds.

Sucheta Dalal

In Reply to Sunil Rebello 2 months ago

IL&FS is not a government company. it took pride in being a private company but pretended it was govt-like when it suited it. But the private nature allowed it to escape all norms of govt and scrutiny - no CAG, CVC, RTI or caps on salaries, perks, tenders etc.

B. Yerram Raju

2 months ago

Strange that SIDBI meant for small industries loaded investment to the SI-NBFC, IL&FC giving back seat to to micro and small enterprises. The then Board should account for any consequent losses.

surajit som

2 months ago

How things could come to such a stage in IL & FS ? The finance of the company appears to be a riddle wrapped in a mystery inside an enigma. Tens of billions of dollar have been mismanaged or swindled. Even top audit companies are unable to decipher its webs of accounting numbers(read frauds). Compared to this , Mallya, Mama-Bhanja ... look like innocent kids. Now we know why India has such shoddy infra. Sack the board immediately and send some ( the former boss ,to start with) to jail immediately. Or- may be- some of them have already fled like Mama-Bhanja etc ?

rajee

2 months ago

Very good suggestion. Further excess salary paid to top management to be recovered

Anil

2 months ago

It's time, when Govt calls spade a spade and take to task all those credit rating agencies, who till yesterday were rating company's borrowings as AAA. What's the credibility of their assessment of company's financial strength? Should these credit rating agencies not be faulted for misleading ratings and should not their senior officials especially credit rating committee members, be sacked immediately.

Karthick babu

2 months ago

The intresting and curious question is how many such entities are there that operates in public and private partnership and has been hidden from RTI and another audit requirements. Sad to know india's future is in the hands of such institutions.

Prakash Patel

2 months ago

What the species called (in)dependent directors are doing? They must be sacked first.

Harish

2 months ago

The direction-less ILFS Board Members should also resign from all other Boards of Companies where they may cause mischief because of "expertise" gained in ILFS.

REPLY

Krishna

In Reply to Harish 2 months ago

It is more important that their passport be impounded and should not be allowed to leave the country.

Vasant Kulkarni

2 months ago

BE A SILENT SPECTATOR?

Rajendra Ganatra

2 months ago

The group has never come up with a single project without financial distress and haircuts to banks. In the education / skill development sector it grabbed attractive contracts with government due to posse of IAS folks it hires. This was waiting to happen, and now it's a speedy road downhill. The board needs to be sacked and high class professionals brought in if to protect the remnants. This is a never before situation and it would b
be interesting to see the government's resolve to dress down this white elephant with powerful sympathizers.

dhingra

2 months ago

OVERHAULING SECURITY EXCHANGE BOARD OF INDIA IS QUITE NECESSARY BY INFUSION OF TALENTS IN THE BOARD. INSTEAD OF SIMPLIFYING THE REGULATORY PROCESSES, THE EXISTING SET UP OF THE THE BUREAUCRATS UNWITTINGLY GETTING THE REGULATIONS MORE AND MORE COMPLEX IN THE NAME OF STRINGENT NORMS TO BE UNDERSTOOD PROPERLY BY THE GULLIBLE INVESTORS.

dhingra

2 months ago

Inefficient team of any organization always lands the organization to the brink of disaster. A pertinent question arises, what the SEBI had been doing so far, when it is the first and foremost duty of SEBI to protect the rights of investors and ensuring safety to their investment? SEBI seems to always remain busy in issuing stringent norms, which always go against the investors and the companies and their Share Transfer Agents manipulate such instructions and discretely take advantage of such regulations and instructions in their own interests. On the other hand, the Sock Exchanges would conveniently delist such companies to add more to the woes of the investors.

In fact, nobody actually works to safeguard the rights of the investors, more particularly the small and petty investors.

Prakash Patel

2 months ago

There is no other way left other than outright privatization of our PSBs/FIs .Otherwise cases of such defaults will keep on coming as they are ready to change the corrupt and unprofessional way of working. I think they are not competent enough to appraise the projects for which they lend.

Sunil Rebello

2 months ago

Your conclusion: In an election year, the government clearly does not want to admit that IL&FS’s precarious finances may be as big a problem as those of telecom, steel, coal and realty.
This is India’s Lehman Brothers. It will surely have an impact on the 2018 & 2019 Indian elections.
Why does all the dirty linen come out for a wash, the was just before Elections.

IL&FS Financial Services’ Rs4,800 Crore NCD Downgraded to ‘BB’ on Debt Concerns
CARE Ratings has downgraded its rating on Rs4,800 crore non-convertible debentures (NCD) of IL&FS Financial Services Ltd (IFIN) to 'BB' from 'AA+' while keeping the ratings on credit watch with negative implications. Instruments with ‘BB’ rating are considered to have moderate risk of default regarding timely servicing of financial obligations, while those with ‘AA+’ are considered very low risk and with a high degree of safety for timely servicing of financial obligations.
 
"The revision in ratings assigned to debt instruments and bank facilities of IL&FS Financial Services due to significant deterioration in the liquidity profile of the company on impending debt servicing obligations in the near future and delay in funding support from the parent group on account of delay in fund raising plans. The rating revision also factors impairment of financial flexibility of the company as IFIN would not be able to access the commercial paper (CP) market for six-month period in line with compliance with the Reserve Bank Commercial Paper Directions, 2017,” the ratings agency says in a statement.
 
 
According to CARE Ratings, IFIN has been witnessing asset quality pressures for the last couple of years in sync with the stressed environment prevailing in the economy, especially in the infrastructure sector. 
 
 
During FY17-18, IFIN’s asset quality parameters saw deterioration on account of slippages in certain accounts as well as shift of non-performing asset (NPAs) recognition from 120 days past due (dpd) to 90 dpd norm. As on 31 March 2018, IFIN reported a gross NPA ratio (calculated on credit exposures) of 5.30% as against 3.30% and net NPA ratio of 3.49% compared with 2.36% a year earlier. 
 
The company’s net NPA to net worth ratio stood at 27.50% as on March 2018 compared with 14.84% same period last year. In addition to provisioning for NPAs, IFIN has been conservatively creating contingency provisions, which stood at Rs275 crore as on 31 March 2018 compared with Rs450 crore previous year, which covers about 52% of net NPAs, providing some comfort.
 
According to the ratings agency, there is deterioration in the financial risk profile of IFIN’s parent, Infrastructure Leasing and Financial Services Ltd (IL&FS) as well. It says, “The overall financial risk profile of the parent company-IL&FS has seen weakening on account of group’s elevated leverage levels and moderation in credit profile of key business verticals like energy vertical (housed in IL&FS Energy Development Co Ltd-IEDCL) and engineering vertical (housed in IL&FS Engineering and Construction Co Ltd-IECCL).” 
 
CARE Ratings had earlier downgraded the ratings of IEDCL to ‘CARE BB-; Credit watch with negative implications’ and IECCL to ‘CARE BB; Negative’.
 
Earlier, the ratings agency had revised its ratings on long term debt instruments and bank facilities of IFIN due to moderation in the financial risk profile of the company on account of continued deterioration in asset quality parameters with rise in slippages, weakening of profitability on account of higher provisioning and increase in leverage on account of significant increase in borrowing levels and continued increase in exposure to IL&FS group entities. 
 
The rating revision also factors in moderation in the credit profile of the parent company IL&FS and the group’s elevated leverage levels, CARE Ratings say.
 
CARE Ratings says its ratings downgrade also take into account that IFIN needs to comply with the regulatory requirement with respect to capital adequacy and group exposure norms by 31 March 2019, as prescribed by the Reserve Bank of India (RBI) in its inspection reports. “Considering the significant amount of exposure towards group entities vis-à-vis the company’s net owned funds (NOF), CARE believes that IFIN would require either significant capital infusion or off-loading exposure to its group entities to comply with the requirement within the time line,” it added.
 
The ratings continue to remain on ‘credit watch with negative implications’ on account of the IL&FS group’s pursuit of a strategic plan to de-leverage balance sheet by way of equity infusion, reduction of debt by refinancing the exposures in group companies and monetisation of certain identified (core as well as non-core) assets by end of FY18-19. 
 
“Given the heightened leverage levels and the immediate need to support the group entities,” CARE Ratings say, “Infusion of funds by means of equity capital and credit lines in a time bound manner would be critical; any delay would further exacerbate the company’s financial profile.” 
 
Meanwhile, the National Stock Exchange and the Bombay Stock Exchange had asked IL&FS Engineering and Construction, and IL&FS Transportation Networks to clarify on the ratings downgrade.

Both companies, however, informed the bourses that the news pertains to IL&FS Ltd, their promoter and not to the companies; hence they are unable to comment on it.
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COMMENTS

jaideep shirali

2 months ago

Every chain is as strong as its weakest link, in this case the rating agencies have failed the investors again miserably, thus raising doubts about the responsibility that credit rating agencies have towards investors. A downgrade of nine rating notches in one day makes one wonder if they are, put mildly, sleeping on the job. The rating agencies must be fined and in fact made to pay the losses investors may occur due to panic selling. SEBI should also focus more on the debt markets, one reason for the lack of liquidity is the danger of default, such incidents without suitable deterrent, would drive investors back to bank FDs.

V Ramesh

2 months ago

As I said earlier, the downgrade happened after , everybody, including my grandmother, knew there was a problem. The rating agencies have the highest EBIDTA of any sector, and they have absolutely no accountability.

Debt-laden IL&FS Calls Emergency Board Meeting for Raising Funds
Infrastructure Leasing & Financial Services (IL&FS), the an unlisted infrastructure behemoth with scores of complex subsidiaries, some of which are listed and a giant load of debt, has called an emergency meeting of its board of directors for raising funds. The financial services conglomerate, with around Rs1-lakh-crore public debt, is gasping for liquidity after failing to meet certain repayment obligations and triggering fears of loan recalls, says a report from Times of India.
 
"The emergency meeting is expected to convey the intensifying crisis at IL&FS to all the main shareholders and also possibly expedite a proposed Rs4,500-crore rights issue, which is scheduled for early November. On the positive side, all prominent shareholders - Life Insurance Corp of India (LIC), Orix of Japan, State Bank of India (SBI), Abu Dhabi Investment Authority and HDFC - have agreed in principle to participate in the rights issue," the report says. 
 
Other report from Business Standard says the board will take a call on fundraising, sale of assets, including road projects, and default by its subsidiary IL&FS Financial Services (IFIN) on commercial paper. 
 
Last month, IL&FS Financial Services has failed to meet its repayment obligations through a commercial paper. Due to this, Reserve Bank of India (RBI) barred the group company from raisng short-term funds through commercial paper route till 2019.
 
Ratings agencies have downgraded the debt of IL&FS Transportation Networks Ltdd 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. 
 
As reported by Moneylife, IL&FS has reportedly defaulted on a short-term loan worth hundreds of crores from Small Industries Development Bank of India (SIDBI). According to our sources, IL&FS has defaulted in repaying a short-term loan of Rs1,000 crore to SIDBI. At the same time, a subsidiary of IL&FS too has defaulted in repaying loan worth about Rs500 crore to the development financial institution.
 
Defaulting on short-term loan commitment that too from an infrastructure development and finance company with pan-India presence, is very serious issue. Nothing of this sort has happened before, our source says.
 
Separately, last week, ratings agency ICRA has downgraded to 'D' from 'C' bank debt of Rapid Metrorail Gurgaon South Ltd (RMGSL) for not making interest payment for August 2018 on time. RMGSL is a special purpose vehicle (SPV) sponsored by IL&FS Rail Ltd (IRL) with 65.0% stake and IL&FS Transportation Networks Ltd (ITNL) with balance stake.
 
"The revision of RMGSL's rating takes into account the recent irregularities in debt servicing by the company. RMGSL has not paid the interest for the month of August 2018. The company's inability to generate sufficient revenues due to continued weak ridership on the project route had made it highly dependent on timely funding support from promoters. However, the promoter has not made available the required funds. As per the RMGSL's management, the company has represented to Haryana Urban Development Authority (HUDA) for claims due to breach of provisions of the Concession Agreement," ICRA has said.
 
Total cost of the project was funded by a combination of debt of Rs1,500 crore and equity. The entire term loan of Rs1,500 crore has been sanctioned by a consortium of five banks with Canara Bank as the lead bank and an external commercial borrowing (ECB) loan lender. The project achieved commercial operations on 31 March 2017.  
 
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