IL&FS: Rs 91,000 crore mess

IL&FS Head Quarters at BKC, Mumbai

IL&FS Financial Services MD & CEO Ramesh Bawa along with four independent directors and a non-executive director quit on Sept 21, 2018 just hours after the parent IL&FS informed lenders that it would be unable to make payments on ₹250 crore of debt falling due. On Sept 30, 2018, rating agency ICRA had downgraded IL&FS citing factors like liquidity pressure and high debt levels - to BB from AA+. The central government on Oct 1, 2018 dissolved the 15-member board of IL&FS in a move to revamp investor confidence scalded by the firm’s defaults and fears of a credit freeze. The board was replaced with a new six-member panel headed by Managing Director of Kotak Mahindra Bank Uday Kotak. The board of IL&FS has unanimously appointed Hemant Bhargava, Managing Director, LIC and nominee on the board of the company as Non Executive Chairman with immediate effect. The newly-appointed board is expected to chalk out a resolution plan and submit its first take within 15 days.

• The troubles at IL&FS had been intensifying since July, when the company's founder Ravi Parthasarathy has resigned as the Non-Executive Chairman of IL&FS, which he served for over 30 years, citing health reasons. Parthasarathy, an alumnus of IIM Ahmedabad joined the IL&FS in 1987 as President & Chief Executive Officer and was appointed as Managing Director in 1989. He was later designated Executive Chairman of the company.  
• IL&FS also failed to repay corporate deposits subscribed by the Small Industries and Development Bank of India (SIDBI). It only repaid ₹50 crore out of 250 crore.
• Some group companies have started defaulting on repayment of commercial paper and other instruments to the tune of ₹300-400 crore. 
• IL&FS Group has shown a loss of ₹2,670 crore for the year 2017-18 in consolidated balance sheet. The leverage is about 13 times as the borrowing of about ₹91,000 crore is on on the base of equity capital and reserves of about ₹6,950 crore. IL&FS is burdened with a consolidated debt of around ₹91,000 crore, of which ₹55,000 crore is housed in the special purpose vehicles created to build infrastructure ranging from roads to power companies. 
• Among the public sector banks, Bank of India has the highest exposure of Rs 2,388 crore. The company also owes Rs 1,841 crore to Yes Bank, the maximum among private lenders.
• IL&FS has deep business ties with the roads ministry and its agencies such as National Highway Authority of India. States and the centre, including their agencies, owe as much as ₹16,000 crore in receivables to ILF&S. The company claimed in its recent letter to its employees stated that "had the concession authorities released our monies", IL&FS would not be in the current situation.
• IL&FS was due to repay ₹1,066 crore of its debt by October and around ₹1,953 crore between September 26 and September 30. The company needs an immediate capital infusion of ₹3,000 crore and is planning a ₹4,500-crore rights issue. 
• LIC and ORIX Corporation are the largest shareholders in IL&FS with their stakeholding at 25.34 % and 23.54%, respectively. Other prominent shareholders include ADIA (12.56%), HDFC (9.02%), CBI (7.67%) and SBI (6.42%). 

• Its woes are shared by other infrastructure funding institutions in India that have been unable to cope with projects that have got stuck and become unviable. IL&FS needs nearly ₹15,000 crore in financial support to avert a collapse and could only be saved if lenders agreed to take a big haircut.
• IL&FS had compromised on corporate governance and risk management norms. The risk management committee of IL&FS did not meet between 2015 and 2018, except once in July 2015. IL&FS has not been able to take up any new infrastructure projects after 2015.  
• The fact that the company continued to pay dividends and huge managerial payouts regardless of looming liquidity crisis shows that the management had lost total credibility. The company paid dividend of ₹65.70 crore in 2017-18. The company posted a standalone profit of ₹584 crore in 2017-18. Average managerial remuneration increase was 66% in 2017-18 and the average salary increase of other employees during the year was 4.44%. Last year Ravi Parthasarathy, the Chairman, got a 144% jump in remunerations to ₹26.3 crore, Hari Sankaran, Vice-chairman and MD, got a 3.86% hike to  ₹7.7 crore and Arun K Saha, Joint MD & CEO, 10.43% hike. 
• The financial mismanagement of the IL&FS is apparent from its rapid debt built up and misrepresentation of true state of financial fragility, which is being reflected in unprecedented rating downgrade from highly rated to a default category.
• The report also warned about repercussions due to lack of authentic information in the market about the financial status of 169 unlisted group companies of IL&FS.
• The group will sell its corporate headquarters in Mumbai’s Bandra Kurla Complex (BKC) to raise funds to stave off repayment challenges and switches to an asset light strategy. The sale of the corporate headquarters is expected to fetch Rs 1,300-1,500 crore. IL&FS is also planning to sell some 25 projects, which will reduce its debt by Rs 30,000 crore.
• The Ministry of Corporate Affairs got a lookout notice issued for former directors Ravi Parthasarathy and Ramesh Bawa, and serving directors Hari Sankaran, Karunakaran Ramachand. However, Ravi Parthasarathy is in London at the moment for medical treatment and there is no clarity about when he will return. All others are said to be in India.
• Board directors can’t be absolved of their obligations by resigning abruptly. That wouldn’t absolve them of any wrongdoing. The government on Mon Oct 1, 2018 ordered an investigation by SFIO into IL&FS and its subsidiaries after they failed to make repayments on time, damaging investor confidence and sparking fears of defaults by other NBFCs that roiled the markets. 
• The Serious Fraud Investigation Office (SFIO) kicked off its probe into financial irregularities at IL&FS by questioning the top management, searching the group’s offices and gathering information from its servers. The agency will also question the ousted directors and former chief Ravi Parthasarathy. 
• Apart from the board members sacked on Oct 1, 2018, the agency will also question those who resigned recently amid defaults and rating downgrades. For instance, Ramesh C Bawa quit as chief executive and managing director of IL&FS Financial Services on September 21, the day it defaulted on an IDBI letter of credit that came due. 
• Gujarat Urban Development Company Limited (on behalf of the Government of Gujarat) and IL&FS are jointly developing Gujarat International Finance Tec-City (GIFT) project since 2006 when Modi was  CM of Gujarat. IL&FS is an 50:50 investor and co-developer in the project. About 866 acres of real estate is to be developed for commercial, residential etc to provide one million direct & indirect jobs in Financial, IT & BPO segments. After 12 years and as on Jan 1, 2018, the GIFT city has 2 million sq.ft. operational and 3 million sq.ft. under development out of has 62 million sq. ft. in its master plan. GIFT has attracted about $1.5 billion in investments. About 150 companies have started operations employing just 8,000 people. The city hopes to employ a million one day.
• "It is completely baseless to say that ₹70,000 crore worth of project (GIFT City) has been handed-over to IL&FS. In all the phases of GIFT City development, only ₹10,000 cr is projected to be spent on entire infrastructure development," says the Gujarat government.
• The Congress on Sept 30, 2018 stepped up its attack on PM Modi, with party President Rahul Gandhi alleging that public savings (funds from SBI and LIC) was being used to bail-out the debt-ridden IL&FS group. 
• The Congress has raised the issue and warned of "an impending 'Lehman Brothers-type' economic crisis facing the country". The IL&FS crisis has also dented equity investors confidence in the entire NBFC space. Congress party has called for a forensic audit of the group over the disbursement of ₹42,000 crore in the last four years.   

The central government's swift action to seize control of IL&FS, within hours of payments default, and ordering investigation is more typical of China's command-and-control economy than a free-wheeling democracy like India, stunned investors by surprise. It indicates that Govt, FM, PM etc are aware of the situation for the past several months but actions were announced in a dramatist manner. The restoration of confidence of the money, debt and capital markets, the banks and financial institutions in the credibility and financial solvency of the IL&FS Group is of utmost importance for the financial stability of the nation. Modi & Jaitley have few options since the economy was already grappling with surging fuel prices and a plunging currency and widening fiscal gap. Any company going bust due to mismanagement, reckless spending, non transparent operations, financial frauds, political corruption etc and Govt attempting to recapitalize with a hope to turn around is generally futile. Very rarely, say 1 or 2 in 100 will succeed. The classic examples are Air India, BSNL which went from bad to worse to worst. The best way is to wind up these companies, liquidate its assets and pay up prorata due amounts to creditors even if it entails loss of credibility. That would at least send clear message that government will never bailout any company at the expense of public interest. Lenders are hopeful of recovery with 10-15% haircut, but when it really happens it could be as high as 25-30%. Govt must ensure that who ever has committed process violations must be prosecuted and punished, but in India the statistics show dismal 6% conviction rate. The new board members suffer legacy issues and none has any experience in infra space to handle the crises and instill market confidence.