Can the govern­ment’s in­ter­ven­tion to save ‘sys­tem­i­cally im­por­tant’ IL&FS shore up its prospects—and pre­vent a larger NBFC melt­down?

India Today - - UPFRONT - By M.G. Arun

Can the new board con­sti­tuted by the govern­ment save IL&FS and a cas­cad­ing cri­sis in the NBFC sec­tor?


In his nearly three-decade stint with In­fra­struc­ture Leas­ing & Fi­nan­cial Ser­vices (IL&FS) what dis­tin­guished Ravi Parthasarathy from other CEOs was his abil­ity to take a de­ci­sion and stick to it. What he built in the process was an in­sti­tu­tion with an­nual rev­enues of close to Rs 19,000 crore. It was ac­knowl­edged as a pi­o­neer in pub­lic-pri­vate part­ner­ships (PPP) in In­dia, with ex­per­tise in ex­e­cu­tion of projects in sec­tors as di­verse as roads, wa­ter, power, ports, area de­vel­op­ment and en­vi­ron­men­tal in­fra­struc­ture. That fi­nan­cial ed­i­fice looked im­pen­e­tra­ble, till cracks ap­peared in the form of long-term li­a­bil­i­ties, threat­en­ing the firm’s sur­vival and rat­tling the stock mar­kets.

In a sur­prise move, on Oc­to­ber 1, the Cen­tre re­placed all board mem­bers by mov­ing the Na­tional Com­pany Law Tri­bunal (NCLT), as it at­tempted to calm the fi­nan­cial mar­kets after the be­lea­guered in­fra­struc­ture fund­ing firm de­faulted on its loans and threat­ened to shake up the en­tire NBFC (non­bank­ing fi­nan­cial com­pa­nies) seg­ment. A new six-mem­ber board led by Uday Ko­tak, vice-chair­man and MD of Ko­tak Mahin­dra Bank, has taken over as a new phase be­gins for the firm.


Parthasarathy, 66, a post-grad­u­ate in busi­ness ad­min­is­tra­tion from the In­dian In­sti­tute of Man­age­ment (IIM), Ahmed­abad, joined IL&FS in 1987 as pres­i­dent & CEO and was ap­pointed man­ag­ing di­rec­tor in 1989. Mer­chant bankers who have worked with him closely on var­i­ous projects say Parthasarathy’s ag­gres­sion as a CEO suited a fledg­ling IL&FS in the early 1990s, both in rais­ing funds as well as find­ing in­fra­struc­ture projects. “But he was far too op­ti­mistic,” says Ashvin Parekh, a former EY part­ner and now an in­de­pen­dent con­sul­tant. It was to Parthasarathy’s credit that IL&FS gained con­trol of May­tas In­fra­struc­ture in 2011, a Ra­ma­linga Ra­jupro­moted com­pany that was in the eye of the storm just ahead of the Satyam scam; turned IL&FS Trans­porta­tion Net­work (ITNL) into a prom­i­nent player in the roads seg­ment, and ex­panded the group into a host of sec­tors with sub­sidiaries in each of them. The com­pany was, in fact, a con­glom­er­ate of some 200 firms, with IL&FS be­ing the hold­ing firm for over a dozen com­pa­nies, 23 di­rect sub­sidiaries, 141 in­di­rect sub­sidiaries, six joint ven­tures and four as­so­ciate com­pa­nies. Parthasarathy’s stature grew with the firm he nur­tured. In 1994, he was el­e­vated as vice-chair­man and MD and be­came chair­man and MD in Novem­ber 2004.

What as­sisted a fleet-footed Parthasarathy in the early years was the hunger for in­fra­struc­ture fund­ing, a new ap­petite for projects in the PPP arena after the govern­ment opened the flood­gates of lib­er­al­i­sa­tion in 1991. That three state-owned in­sti­tu­tions should come to­gether to form IL&FS— the Cen­tral Bank of In­dia, the then Hous­ing De­vel­op­ment Fi­nance Cor­po­ra­tion (HDFC) and Unit Trust of In­dia (UTI)—was proof enough of the need of the day. Grad­u­ally, as the or­gan­i­sa­tion needed bet­ter fi­nanc­ing, it ad­di­tion­ally opened it­self to two large in­ter­na­tional play­ers—Mit­subishi (through Orix Cor­po­ra­tion, Ja­pan) and the Abu Dhabi In­vest­ment Au­thor­ity. As on March 31, Life In­sur­ance Cor­po­ra­tion of In­dia held 25.3 per cent in IL&FS, while Orix Cor­po­ra­tion held 23.5 per cent. Other prom­i­nent share­hold­ers in­clude Abu Dhabi In­vest­ment Au­thor­ity (12.6 per cent), Hous­ing De­vel­op­ment Fi­nance Cor­po­ra­tion Ltd. (9.02 per cent), Cen­tral Bank (7.7 per cent) and State Bank of In­dia (6.4 per cent). But as he went on an ex­pan­sion-spree, with a fin­ger in ev­ery in­fra­struc­ture pie, Parthasarathy was los­ing sight of the long-term pic­ture. In the process, IL&FS amassed close to Rs 91,000 crore in debt and be­gan de­fault­ing on loan re­pay­ments. Parthasarathy’s sud­den res­ig­na­tion in July this year, cit­ing health rea­sons, only added to the con­fu­sion.

Mean­while, the Se­ri­ous Fraud In­ves­ti­ga­tion Of­fice (SFIO) has started a probe into the al­leged fi­nan­cial ir­reg­u­lar­i­ties, the erst­while top IL&FS man­age­ment is be­ing ques­tioned, and searches are on at the group’s of­fices, say re­ports.


“I felt some­thing was struc­turally wrong be­cause there was no long li­a­bil­ity,” says Parekh. IL&FS funds long-term projects of over 10 years, but its bor­row­ings are of shorter du­ra­tions, which widens the as­set-li­a­bil­ity gap. Parthasarathy was hop­ing the govern­ment would do two things—cre­ate some kind of buy­out mech­a­nism the minute a project be­came op­er­a­tional, and sec­ond, cre­ate a credit en­hance­ment bu­reau so that if/ when an in­fra­struc­ture fund­ing unit found a project un­vi­able, the bu­reau would step in and of­fer some sort of buf­fer or liq­uid-

Those who worked with him closely on projects say Parthasarathy’s ag­gres­sion as a CEO suited a fledg­ling IL&FS in the early 1990s, both in rais­ing funds as well as in find­ing in­fra projects

ity. “Nei­ther of these hap­pened. Against that back­drop, IL&FS should have re­alised that they were run­ning with their legs tied,” says Parekh. The pres­sure kept build­ing up. The group’s con­sol­i­dated debt in­creased by Rs 11,211 crore in fi­nan­cial year 2017-18, and to Rs 91,091.3 crore as of March 2018. Much of it (82 per cent, or Rs 74,591 crore) was con­trib­uted by its sub­sidiaries.

Close on the heels of the Lehman Brothers bank­ruptcy fil­ing in the US in 2008, a num­ber of large in­fra­struc­ture projects in In­dia, es­pe­cially those in power gen­er­a­tion, started get­ting into trou­ble, sev­eral run­ning afoul of en­vi­ron­ment pol­icy guide­lines. IL&FS got stuck with those, but Parthasarathy was still hope­ful and kept on build­ing more and more as­sets. The first warn­ings of ill health came in the RBI’s an­nual in­spec­tion re­port in 2014-15. It said that IL&FS Fi­nan­cial Ser­vices’ net owned funds had been wiped out and that it was over­lever­aged. But the IL&FS man­age­ment re­futed the RBI’s views and re­fused to take cor­rec­tive mea­sures. This was the time when Parthasarathy’s health was also fail­ing, and he was in exit mode. Noth­ing seemed to go right there­after. IL&FS closed FY 201718 with rev­enues of Rs 18,798.78 crore on a con­sol­i­dated ba­sis and a loss of Rs 1,886.85 crore.


The firm be­gan to re­peat­edly miss debt re­pay­ments in the past few months. On Septem­ber 24, for the third time that month, IL&FS de­faulted on in­ter­est pay­ments on com­mer­cial pa­pers. Com­mer­cial pa­pers are un­se­cured, short-term debt in­stru­ments is­sued by a cor­po­ra­tion, typ­i­cally for the fi­nanc­ing of ac­counts re­ceiv­able and in­ven­to­ries, and meet­ing short-term li­a­bil­i­ties. It de­faulted on a short term loan of Rs 1,000 crore from Small In­dus­tries De­vel­op­ment Bank of In­dia (Sidbi). So far this year, it has not been able to pay Rs 490 crore and is due to pay an ad­di­tional Rs 220 crore by end-Oc­to­ber. In the next six months, it needs to pay up as much as Rs 3,600 crore.

When a fi­nancier cat­e­gorised by the RBI as ‘sys­tem­i­cally im­por­tant’ has such a huge debt, it is in trou­ble, say ex­perts. The dan­ger is that al­most 60 per cent of IL&FS’s bor­row­ings are in non-con­vert­ible deben­tures that are not se­cured by phys­i­cal as­sets or se­cu­ri­ties. The sub­scribers of a ma­jor chunk of the deben­tures are in­sur­ance com­pa­nies, pen­sion funds and prov­i­dent funds—sav­ings the coun­try’s mid­dle class banks on. A col­lapse will have grave con­se­quences for all the NBFCs in the coun­try.

Sources say more in­fra­struc­ture lend­ing firms could come un­der the scan­ner. Firms such as IDFC will be looked at more closely, as it has to re­tire long li­a­bil­ity in the next three years of a very high or­der, they say. The stock mar­kets too faced the IL&FS heat. The BSE sen­sex fell over 1,000 points on Septem­ber 21 in a highly volatile mar­ket. “Fear psy­chosis in the mar­ket has a rip­ple ef­fect. More than fun­da­men­tals, it is sen­ti­ments that mat­ter,” says J.N. Gupta, a former Sebi ex­ec­u­tive di­rec­tor.


There are many who say the trou­bles at IL&FS are un­likely to spill over and cre­ate a na­tional fi­nan­cial cri­sis, es­pe­cially with the govern­ment putting its weight be­hind the firm. The res­cue plan is in place and share­hold­ers like LIC and SBI are will­ing to in­vest to meet the firm’s re­pay­ment obli­ga­tions. At the same time, the present cri­sis should act as a wake-up call, es­pe­cially since nei­ther the ma­jor share­hold­ers nor the reg­u­la­tor (RBI) were able to sense the trou­ble early enough.

In its pe­ti­tion be­fore the NCLT, the govern­ment re­port­edly cited mis­man­age­ment by the firm’s

“A board un­der the chair­man­ship of a re­spected fi­nan­cial sec­tor pro­fes­sional like

Uday Ko­tak will have the le­git­i­macy to gauge the ex­tent of trou­ble at IL&FS,” says a Mum­bai-based banker

board and ex­pressed deep con­cern over the cas­cad­ing ef­fect the IL&FS col­lapse may have on mu­tual funds. One al­le­ga­tion against the ear­lier board was that the com­pany con­tin­ued to pay div­i­dends and huge man­age­rial payouts in the face of a loom­ing cri­sis. The aver­age per­cent­age in­crease in man­age­rial re­mu­ner­a­tion was 66 per cent in 2017-18. Parthasarathy drew a salary of Rs 26.3 crore in 2017-18, a 144 per cent jump in his re­mu­ner­a­tions. “Some mis­matches were thrown up. The new board will ex­am­ine what is a quick way out of this. A res­o­lu­tion plan has to be put in place,” says Ari­jit Basu, MD, SBI. Apart from Ko­tak, other mem­bers of the new IL&FS board are re­tired IAS of­fi­cer Vi­neet Nay­yar, former Sebi chair­man G.N. Ba­j­pai, ICICI Bank non-ex­ec­u­tive chair­man G.C. Chaturvedi, IAS of­fi­cer and Di­rec­tor Gen­eral of Ship­ping Malini Shankar and se­nior bu­reau­crat Nand Kishore.

San­deep Parekh, founder, Fin­sec Law Ad­vi­sors, says the govern­ment move will in­stil con­fi­dence and con­tain the fi­nan­cial con­ta­gion. It will also help bring fresh eq­uity in­fu­sion into the com­pany. The new board will look into all the al­le­ga­tions against the ear­lier man­age­ment as well as the com­pany’s frag­ile fi­nan­cials. This, ac­cord­ing to ex­perts, will calm the mar­kets, as the real mag­ni­tude of the prob­lem will now be as­cer­tained.

At the an­nual gen­eral meet­ing of IL&FS on Septem­ber 29, share­hold­ers ap­proved its Rs 4,500 crore rights is­sue, which re­ports say three share­hold­ers—LIC, Orix Corp. and SBI—will sub­scribe to. Share­hold­ers passed an en­abling res­o­lu­tion for a Rs 15,000 crore non-con­vert­ible deben­ture (NCD) is­sue and also ap­proved an in­crease in its bor­row­ing limit by Rs 10,000 crore to Rs 35,000 crore. Short-term fund in­fu­sion, cou­pled with a new man­age­ment should help the firm sta­bilise for now. But only a deeper probe will bring into the open its hid­den weak­nesses, help­ing the govern­ment and reg­u­la­tor fix the malaise at the firm Parthasarathy had men­tored for so long.

HOPE SINKS IL&FS ex-chair­man Ravi Parthasarathy

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