THE ILFS CONUNDRUM

The crisis engulfing one of India’s largest infrastructure titans, a semi banking company has lead to a cascading impact on the overall industry, the manpower resource & the lending institutions.

BY DANFES

Mumbai based company Infrastructure Leasing & Financial Services (IL&FS) has been in the midst of a storm recently that has thrown most of the high value projects out of gear. Till the time it went kaput, ILFS, was an infrastructure lending giant, a ‘shadow bank’ or a non-banking financial company that provided services similar to those by a traditional commercial bank. The major shareholders constituting IL&FS include state-backed Life Insurance Corp of India holding 25.3% stake, Housing Development Finance Corporation with 9.02%, Central Bank of India with 7.67% and State Bank of India with 6.42% & the rest is held by Japan’s Orix Corp with 23% and Abu Dhabi Investment Authority with 12.56%

History of Crisis

Initially IL&FS defaulted on a few payments that were due & also failed to service its commercial papers (CP) on the due dates assigned. The company had piled up too much debt to be paid back in the short-term while revenues from its assets were twisted towards the longer term. The subsidiaries of IL&FS that include transportation network building subsidiary IL&FS Transportation Networks Ltd (ITNL), engineering and procurement company IL&FS Engineering and Construction Co. Ltd and financier IL&FS Financial Services Ltd also contributed to the developing of this situation by their failure to execute the projects on time. What compounded the matters was the slowdown in infrastructure projects and disputes over contracts locking about Rs 90 billion of payments due from the government.

In what became clear towards the middle of 2018 September was that IL&FS and IL&FS Financial Services had a combined Rs 270 billion of debt rated as junk by CARE Ratings and a further six group companies had suffered downgrades with a negative outlook on another Rs 120 billion of borrowings. The default in turn has had a trickle down impact on investors, which include banks, insurance companies, and mutual funds. Delays and defaults on debt obligations and inter-corporate deposits at this scale can have cascading impact and it is not a small deal, when an entity like  IL&FS is unable to service its obligation towards a letter of credit to IDBI Bank Ltd. Life Insurance Corporation (LIC), which has the largest shareholding in IL&FS,  has stated that it is keen to explore solutions for revival but for now, things are looking bleak.

No Quick fix solution?

Extraordinary problems require extraordinary solutions. In this scenario, there were no single or one shot solutions available. The most plausible of all the options was that IL&FS hived off and sold entire business verticals to willing buyers, and if that failed, it could go for asset-level resolution. This was said in its latest status report to NCLT(The National Company Law Tribunal which is a quasi-judicial body in India that adjudicates issues relating to Indian companies). The Uday Kotak-led board further said in the report that the so-called “group” resolution, which would involve significant capital infusion from credible and financially strong investors, was not feasible. The “group” resolution includes a condition that investors along with the new board engage with creditors, leading to an overall resolution across the IL&FS group.

The other suggestions to NCLT involved cost cutting measures such as assessment of liquidity, manpower optimisation etc have been mentioned, apart from evaluation of domestic and overseas assets and their sale for resolution.

The new board had taken charge after NCLT approved a resolution of the liquidity crisis at IL&FS given its huge debt. Specific cost-cutting measures include reducing operating costs by terminating non-essential real estate premises, closure of offices at various locations and leasing out offices of IL&FS Financial Services, salary rationalisation and separation of superannuated consultants.

Bad management?

The argument made in the court was that IL&FS had used a circuitous way to pay off loans of its own entities to meet RBI guidelines and used this method to obtain a high credit rating, and high managerial remuneration. IL&FS former directors’ counsel however argued that while the old board took business decisions that may have gone wrong, steps have been taken to solve the debt situation through an asset sale. Explaining the missteps in the past, it was said that earlier the business model was followed in a project-specific subsidiary way and all the accounts of all the years are fully audited.

The NCLAT has received intervening petitions from nearly 100 creditors, seeking redress in the proposed IL&FS Resolution Plan that was submitted by the government. The petitions are from both secured and unsecured creditors, including a wide array of corporate and their PF Funds, employee funds, MNCs, postal funds, banks, PSUs and some power companies. A large part of the petitions, however, have been filed by employee fund and trusts that are seeking recourse in the resolution framework considering their investment is unsecured, but affects millions of underlying small-time, salaried and gullible investors. In the nearly 100 petitions filed, nearly 50 per cent petitions have been filed by the employee funds, super annuation funds, gratuity funds and Provident Funds. This means these are retirement savings of working class blue and white collar employees.

Prayer in Election time

The main prayer by these funds, representing small savings of millions of small investors across a range of employees in corporate, public sector companies, Army Group Insurance Fund, media organisation, postal life services and MNCs, is to seek equal footing and fair share in the IL&FS resolution process.
“We need the government to help us in protecting our lifetime earnings, invested in IL&FS, by infusing funds or taking over the company. The present legal structure is biased towards secured creditors. The government needs to now stop lip service and start acting in the interest of small investors. We are not as organised and powerful as the secured creditors, banks and MNCs, who seem to have the muscle to fight for their share. But we do represent the salaried class, and electorate in large numbers, and are reaching out to our representatives to seek intervention”.

Moreover, in an election year, these salaried employees are also voters and since no one is forthcoming in giving or providing answers, the sensitive issue has gone into a tailspin. Some funds would also be reaching out for political support on the matter and it will be difficult for any political party to turn a blind eye to millions of middle class voters affected by the IL&FS crisis. 

Some of the list of petitioners include: Indian Oil EPF, Infosys EPF, EIL EPF, HUL’s Union Provident Fund, Titan PF, IDBI Trusteeship, UTI Retirement Fund, Postal Life Insurance, Army Group Insurance Fund among others. The small creditors, however, feel that the resolution plan is aimed at providing resolutions to secured creditors, leaving the small-time investor and salaried employees in the lurch, and importantly, has not taken them into confidence while arriving at a plan.