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).

4 years 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
5 years 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.
Replied to Dr Ananthanarayanan comment 5 years 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
Replied to SURAJIT SOM comment 5 years 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.
Replied to Prakash Patel comment 5 years 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
Replied to SURAJIT SOM comment 5 years 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
Replied to Sunil Rebello comment 5 years 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.
Sunil Rebello
Replied to Sucheta Dalal comment 5 years ago
Thanks for the info that IL&FS is not a government company. But who are its major shareholders - 2 Governments companies - India & Abu Dhabi: 1. LIC 2. ADIA
Now our rating agencies & our Big 4 Auditors have to take up responsibilities for their reports. They should be punished otherwise.
I do not understand the IL&FS head was on the seat for 30 years.
Rana Kapoor not allowed more than 6 years, is RBI govt. puppet always.
Lastly we have so many 'so called experts' coming on business TV and pulling shares up & down whenever they want to sell & buy - do they have to have a Licence.
Foreign experts are no less.
Replied to Sucheta Dalal comment 4 years ago
IL&FS needed to be in RTI but due to my lack of experience in second appeal at CIC , it has managed to get rid of RTI net in 2008. Now after 10 years, law have significantly settled at supreme court level also. under 2(h)(d) of rti act, any company,society whose survival is based on the govt support in award of works, it will have to comply rti.
B. Yerram Raju
5 years 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
5 years 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 ?
5 years ago
Very good suggestion. Further excess salary paid to top management to be recovered
5 years 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
5 years 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
5 years ago
What the species called (in)dependent directors are doing? They must be sacked first.
5 years 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.
Replied to Harish comment 4 years ago
It is more important that their passport be impounded and should not be allowed to leave the country.
Vasant Kulkarni
5 years ago
Rajendra Ganatra
5 years 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.
5 years ago
5 years 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
5 years 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
5 years 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.
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