IL&FS Crisis

This article talks about fall of IL&FS, an NBFC of India and the expected consequences in Indian economy. It also discusses the position of this big company along with the projects it handles and also explains the causes which led to the situation of huge debt burden. It also describes the steps taken by the government to tackle this crisis.

Introduction

Projects Handled by IL&FS

What is the issue?

Causes of Downfall

Impact of Crisis

Potential Gravity of Crisis

Steps taken by Government

Way Forward

Introduction

Infrastructure Leasing and Financial Services (IL&FS) is a non banking finance company registered under Companies act 1956. It operates more than 250 group companies as of 2018 including subsidiaries, joint venture companies and associate entities. It was formed in 1987 by three financial institutions namely Central Bank of India, Housing Development Financing Corporation. It is involved in giving finance to large infrastructure projects.

The major stakeholders are:

1. LIC (25.34%)
2. ORIX (23.54%) popularly known as Mitsubishi and
3. ADIA (12.54%) called Abu Dhabi Investment Authority.

Other stakeholders are IL&FS employees welfare trust (12%), HDFC (9.02%), Central Bank of India (7.67%), SBI (6.42%), India Discovery Fund (0.86%), UTI (0.82%) and others (1.77%). The overall stakes of government in this company is 40% and that of foreign companies is 35%.

Projects Handled by IL&FS

The company is handling large infrastructure projects in diverse sectors like transportation, area development, e-governance, health initiatives, cluster development, finance, power, ports, water and waste management, urban infrastructure, environment, education, tourism etc. Some of the projects are:

1. GIFT (Gujarat International Finance Tech) City of Gujarat – jointly developed by IL&FS along with GUDC Ltd. (Gujarat Urban Development Company Ltd.)
2. Zoji La tunnel connecting Ladakh to Kashmir
3. State of art oil terminal in a tough new landscape which is the third largest petroleum storage and trading centre in the world
4. Longest and safest road tunnel along Jammu and Srinagar highway  

What is the issue?

It is being given a title equivalent to Lehman Brother’s of USA which got crashed in 2008 resulting in its closure and a big financial crisis in USA economy and a spillover effect on global economy. Same situation was expected to be visualized in India due to fall of IL&FS in 2018. IL&FS starts defaulting in August 2018. It defaulted loan of Rs. 1000 Cr of SIBDI followed by default of commercial paper obligations. Currently, it is under a debt burden of Rs. 90,000 Cr. Due to such high burden, credit ratings fell down resulting in fall of investor’s confidence and crash of stock market.

Causes of Downfall

1. High Debt to Equity Ratio or Leverage Ratio resulted in high repayment liability of company which puts high pressure on finance of company
2. Passage of LARR act (Land Acquisition Rehabilitation and Resettlement) forced compensation to landowners worth Rs. 17000 Cr.
3. Shift in Strategy: The original strategy of company was to finance only which later changed to owning infrastructure projects which increased risks.
4. Over dependence of IL&FS on PPP model delayed the projects because government could not provide timely clearance of licenses and could not overcome regulatory hurdles. Due to such issues and corruption, some projects got stuck off in arbitration disputes. The value of stuck projects was equal to about $90bn.
5. Non viability of Projects: The company could not get loans from banks since 2016. So it borrowed from money market which is a short term borrowing. Thus, borrowing short term loans for long term projects resulted in asset liability mismatch.

Impact of Crisis

1. Market indices like Sensex and Nifty fell down.
2. Defaults of company triggered fears of liquidity crisis in financial market.
3. Fall of shares of housing finance companies like 60% fall in shares of DHFL.
4. Fall of shares of other companies like 14-16% fall in Bajaj finance.

Potential Gravity of Crisis

1. Corporate debt market will come under pressure.
2. Infrastructure investment will be hit.
3. Borrowing will become costly for market players.  

Steps taken by Government

1. RBI and SBI infused liquidity in the company.
2. RBI conducted a forensic audit in to IL&FS’s books and found it a Satyam group owned company.
3. Government approached NCLT (National Company Law Tribunal) and filed a petition to overtake board of IL&FS on account of being stressed as per sections 241 and 242of NCLT act. NCLT passed an order in favour of government.
4. As per NCLT’s order, government superseded the existing board of debt laden company with six new board members, announcing Mr. Uday Kotak as chairman and nominated techmocrats with diverse experiences in their careers.
5. Parliamentary panel on finance decided to investigate the whole issue.
6. SFIO (Serious Fraud Investigation Office) has launched an enquiry in to alleged financial irregularities at IL&FS, questioning top management and searching its office.

Way Forward

1. New investors should be brought in by issuing equity.
2. Some of the assets can be sold.
3. Bailout package from stakeholders can be a solution.
4. Need to enhance transparency, regulation and accountability of market.
5. There is need to regulate rating agencies.

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