Un­der­stand­ing IL&FS and In­dia’s move to seize con­trol

Gulf Times Business - - BUSINESS - By Saloni Shukla

For more than 30 years, In­fra­struc­ture Leas­ing & Fi­nan­cial Ser­vices Ltd has ar­ranged the fi­nanc­ing for some of In­dia’s ma­jor in­fra­struc­ture projects.

In the process, the fi­nancier turned its hand to project de­vel­op­ment and be­gan amass­ing huge debts – $12.6bn to be pre­cise.

When in­ter­est rates on its short-term bor­row­ings spiked this year, IL&FS ran out of cash. As the group be­gan miss­ing re­pay­ments, in­vestors grew con­cerned that the fall­out would in­fect sim­i­lar com­pa­nies and even the wider econ­omy.

But be­fore fear had time to turn to panic, the In­dian govern­ment stepped in.

What did the govern­ment do?

It un­ex­pect­edly seized con­trol of IL&FS, say­ing the group would oth­er­wise have col­lapsed.

Of­fi­cials promised to end a string of de­faults by IL&FS and or­dered an in­quiry by the Se­ri­ous Fraud In­ves­ti­ga­tion Of­fice.

Out went the old lead­er­ship and in came a new six-mem­ber board that in­cluded In­dia’s rich­est banker, the chair­man of its fourth-largest listed bank and the ex-head of its se­cu­ri­ties mar­ket reg­u­la­tor.

How big a deal is this in In­dia?

In­dia has taken con­trol of a com­pany just once be­fore, in 2009, fol­low­ing rev­e­la­tions that Satyam Com­puter Ser­vices Ltd had fal­si­fied ac­counts to the tune of more than $1bn.

IL&FS is no fly-by-night op­er­a­tor; its top share­hold­ers in­clude In­dia’s big­gest in­surer, big­gest mort­gage lender and big­gest bank.

Be­fore its fi­nanc­ing blew up, IL&FS had been de­clared “sys­tem­i­cally im­por­tant” by the cen­tral bank.

The fear is that if the group failed, its un­paid debts could wreak havoc in the wider econ­omy and other fi­nanc­ing com­pa­nies would strug­gle to get loans or would face higher in­ter­est rates that could im­peril their bal­ance sheets.

What is the fraud of­fice in­ves­ti­gat­ing?

In­dia’s fi­nance min­istry said there had been “se­ri­ous com­plaints” about some IL&FS group com­pa­nies but did not give de­tails.

Its state­ment of­fered a taster, with phrases such as “a highly ex­ag­ger­ated de­pic­tion of non-cur­rent as­sets” and debt stress that was “cam­ou­flaged by mis­rep­re­sen­ta­tion of facts.”

What’s the plan?

The govern­ment says IL&FS needs as­set sales and fresh fund­ing by in­vestors and lenders.

The group can raise 600bn ru­pees by sell­ing as­sets, ac­cord­ing to its big­gest share­holder, Life In­sur­ance Corp of In­dia.

Just be­fore the au­thor­i­ties in­ter­vened, share­hold­ers signed off on a non- con­vert­ible debt sale, a higher bor­row­ing limit and a rights of­fer­ing.

Whether the govern­ment will ul­ti­mately bail out IL&FS re­mains to be seen.

As Bloomberg Opin­ion’s Andy Mukher­jee put it, In­dia’s mini-Lehman mo­ment has been averted, but that might be the easy part given the chal­lenge of tack­ling the group’s fi­nances.

What does IL&FS do?

IL&FS helped de­velop and fi­nance projects worth Rs1.8tn ($25bn), in­clud­ing the Chenani-Nashri road tun­nel (In­dia’s long­est at 9 kilo­me­tres, or 5.6 miles). The com­pany de­scribes it­self as the pi­o­neer of pub­lic-pri­vate part­ner­ships, with a port­fo­lio of about 13,100 kilo­me­tres of roads.

Its ma­jor share­hold­ers in­clude Abu Dhabi’s sov­er­eign wealth fund and Ja­pan’s Orix Corp. “We im­ple­ment so­lu­tions that cre­ate value be­yond the books,” IL&FS says on its web­site.

What went wrong?

As well as a dry­ing-up of new in­fra­struc­ture projects in In­dia, IL&FS felt the pain from short-term in­ter­est rates reach­ing multi-year highs. On top of that, some of IL&FS’s own con­struc­tion projects, in­clud­ing roads and ports, have faced cost over­runs amid de­lays in land ac­qui­si­tion and ap­provals.

Dis­putes over con­tracts have locked about 90bn ru­pees of pay­ments due from the govern­ment. Ravi Parthasarathy, at the helm of the IL&FS em­pire at its in­cep­tion, stepped down for health rea­sons in July. The Re­serve Bank of In­dia ini­ti­ated a spe­cial au­dit in Septem­ber.

How did the credit-rat­ing com­pa­nies miss this?

Some ar­gue that IL&FS’s sprawl­ing setup, spread across 348 en­ti­ties, made it too com­plex for any watch­dog or cred­i­trat­ing firm to mas­ter. How­ever, crit­ics say that as­ses­sors – in­clud­ing the lo­cal part­ners of Moody’s In­vestors Ser­vice and Fitch Rat­ings – failed to spot warn­ing signs like a 44% surge in the group’s debt bur­den since 2015.

Were in­di­vid­ual in­vestors af­fected?

Yes. Some of the missed debt pay­ments, be­gin­ning late Au­gust, were on com­mer­cial pa­per, or short-term un­se­cured debt.

That’s a key com­po­nent of money-mar­ket mu­tual funds, which have surged in pop­u­lar­ity among reg­u­lar in­vestors as a re­sult of low bank de­posit rates and per­sis­tent in­fla­tion. Money man­agers have marked down hold­ings of IL&FS debt. The group was also in de­fault on short-term bor­row­ings known as in­ter-cor­po­rate de­posits.

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