IL&FS set to get LIC-SBI lifeline

The two institutions could increase their stakes through rights issue

Infrastructure Leasing & Financial Services (IL&FS) could get a lifeline, with public sector behemoths Life Insurance Corporation (LIC) and State Bank of India (SBI) likely to increase their stakes in the beleaguered infrastructure lending company through a rights offering as a means of infusing fresh capital.

LIC is IL&FS’ largest shareholder with a 25.34 per cent stake, while SBI, which owns 6.42 per cent, is the seventh-largest stakeholder in the company.

The prospect of the two public sector financial institutions raising their stake was discussed in a meeting chaired by Finance Minister Arun Jaitley on Tuesday. Economic Affairs Secretary Subhash Chandra Garg, Reserve Bank of India Deputy Governors Viral Acharya and BP Kanungo, LIC Chairman VK Sharma and SBI Chairman Rajnish Kumar were also present.

IL&FS’ top management plans to sell 25 assets worth ~300 billion and raise an additional ~45 billion by way

of a rights issue at ~150 a share.

After the meeting, Sharma said IL&FS would not be allowed to collapse and all efforts would be made to revive it.

Asked if LIC would raise its stake in the company, he said, “All options are on the table.”

Later in the day, Jaitley said at a separate event, “It’s not necessary for everyone to speak out of turn. LIC is a shareholder and its chairman has already spoken to you...As far as government is concerned, we are closely in touch and monitoring the situation.”

Sources told Business Standard that the option was discussed by the LIC and SBI chairmen in the meeting, among other issues related to IL&FS.

The RBI will consider ways to infuse more liquidity into the financial markets, and the government will consider solutions to the pending clearances and payments by central agencies for infrastructure projects in which IL&FS has a stake.

“It is a vicious cycle. Government agencies do not pay on time, rendering the projects unviable. Infrastructure finance companies with stakes in these projects default on their debt obligations and that leads to a liquidity situation in the markets,” an official said.

IL&FS has made arbitration claims worth nearly ~70 billion against the National Highways Authority of India (NHAI). In a letter to its employees, IL&FS claimed that if funds worth ~160 billion stuck with concession authorities were released on time, it would not have landed in this mess.

Another official said that cutting banks’ cash reserve ratio (CRR), or the amount of funds they set aside with the RBI, was among options that the central bank could look at to improve liquidity in the system. The central bank could also consider buying more bonds from the open market and open a special window for mutual funds to inject liquidity. IL&FS has been facing liquidity issues for some time and is staring at mismatch between loan repayments worth ~250 billion in the next one year and sagging cash flows. It had defaulted on a ~10 billion debt from Sidbi earlier this month. On September 14, it again defaulted on a repayment of ~1 billion worth of commercial paper and the next day, it defaulted on ~800 million inter-corporate deposits (ICDs).

The planned sale of assets by IL&FS may not receive a good response due to lack of investor interest, say analysts. The IL&FS management is also talking to its second-largest shareholder, Orix Corporation of Japan, to infuse more funds into the company – in case any shareholder backs out during the rights issue.