Mismanagement or Scam? A discussion over dark clouds looming over IL&FS.

September 30, 2018

What the crisis is about?

The row over IL&FS (Infrastructure Leasing and Financial Services)  is in the air for last few weeks. IL&FS, an unlisted Indian Company whose main activity is infrastructure finance and construction. Though many of its subsidiaries which are NBFC’s are regulated by Reserve Bank of India, IL&FS is not directly under the supervision or regulation of RBI. IL&FS is a large company with large assets and loan books. It is having a debt exposure of Rs. 91,000 Crore in its books.

 

Cash crunch and heavy debt burden in the company had ended up in defaulting of its short term debt obligations of Rs. 440. 46 Cr with SIDBI and that had resulted in downgrading the credit rating score by broking, which had created a knee jerk reaction in the market and resulted in crashing of the stock markets. The company had missed few more deadlines with SIDBI and that escalated the heat in the panic barometer.

 

How the default happens?

Being an infrastructure leasing company, the weak performance of the real estate sector post demonitisation and tightened lending norms could have affected the repayment of the loans given to the clients by IL&FS. Apart from the above, the delay in clearing the payment by the Government also may have worsened up the financial crisis of the company. The default may have occurred due to normal business conditions and may not be due to mismanagement or diversion of the funds.

 

How it panicked the already nervous market?

IL&FS is a Private company which has not listed it shares in stock markets. Even if the company is a Private limited company with zero exposure to direct public investment, it is having very big exposure to investments by Public Undertakings such as Life Insurance corporation(LIC), State Bank of India (SBI) etc. IN past the RBI had expressed concerns about the over leverage of IL&FS.  The default made by IL&FS in honoring its debt obligations got compared with the Lehman Brothers incident which lead to global market meltdown of 2008 and it had resulted in a nervous situation in financial markets. The news about the default made by the infrastructure finance leasing major was a blow to an already nervous market which was panicked on account of falling rupees and rising fuel prices. The panic selling in browses had affected the stock prices of major listed NBFC companies such as DHFL.

 

Is there anything to worry about?

Banks and Mutual funds are major source of funding for housing finance companies and IL&FS had raised approximately Rs. 2000 Crores through Mutual funds. The default made by IL&FS had brought down the confidence on NBFC companies and the major lenders to NBFC’s had hinted about the chances of hike in the cost of funds had further hammered the weakened market. A default in repayment with banks will affect the financial performance of the lending banks in direct manner. If the cost of funds is going up, then it will reflect in the lending rates of the NBFC’s which will ultimately affect the common man. Hence there is something to worry about even though it is an unlisted public company.

 

What is the way forward.

IL&FS had already approached the National Company Law Tribunal(NCLT) to get immunity from the creditors pressure. It had already taken steps to off load its assets worth of Rs. 30,000 Crore to ease the debt burden. The major stakeholders of the company such as LIC( 23.34% stake) and SBI( 23.54% stake)  had promised fresh infusion of the funds through Rights issue to rejuvenate the operations of the company and other major stakeholders such as ORIX ( 23.54%) , HDFC (9.02%) are expected to participate in the rights issue.  Whereas Abu Dhabi Investment Authority (ADIA) the holder of 12.56% stakeholder is unlikely to participate in the rights issue claims an article appeared in Economic Times.

 

The RBI & Ministry of Finance had taken an active role in coordinating the way out of crisis and extended all its support for the same. LIC & SBI, though public undertakings, are having independent board to analyze the risk factors in further infusion of funds to a debt laden company and decision will have an impact on their respective books. 

 

Improve the Corporate Governance standards

Being an unlisted company the Corporate governance level and disclosure standards of the Company is very poor and the general public and regulators are kept in dark about many of the activities, unlike in case of listed entities. As the company is having direct investment from Public sector undertakings it is as good as investment of public money. Hence the Government may step in to take necessary steps to covert the Private Limited company into a Public Limited company and list the shares in stock exchanges. Being a growing market and the mindset of the investing community is always being in favour of listed public sector companies, the IL&FS can generate more funds from open market and reduce the stake of private parties in the entity to an extent. Further the Company will be able to tide over the present troubled waters and restart its journey in a cleaner slate.

 

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