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IL&FS Crisis: Rise and fall of an infrastructure behemoth

Ten years ago, almost to the date, Satyam happened. It was India’s Enron moment and PwC was the statutory auditor. Inflated profits, overstated balance sheet and missing cash were a part of that gigantic corporate fraud. And now, infrastructure behemoth, IL&FS has given India its Lehmann moment.

While prima facie IL&FS appears to be a case of financial mismanagement than of outright fraud, the truth will be out when the Serious Fraud Investigative office (SFIO), comes out with its findings.

IL&FS, aka Infrastructure Leasing and Financial Services, was incorporated in 1987 to deal with development and financing of infrastructure projects. As of March 2018, the largest shareholders are LIC (25%), ORIX Corporation, Japan (23%), IL&FS Employee Welfare trust (12%), and Abu Dhabi Investment Authority (12%). HDFC (9%), Central Bank of India (7%), State Bank of India (6%) and other investors (6%) make up the rest.

The conglomerate operates with 256 group companies including subsidiaries joint venture companies, and associate entities, with some of these being listed. As per the consolidated balance sheet as at 31 March 2018, the group carries a total debt of Rs. 91,000 crore including short-term debts of Rs. 25,000 crore. Of this, some Rs. 57,000 crore is due to PSU banks. According to the government, the group has assets worth Rs. 115,000 crore.


In June 2018, an IL&FS subsidiary, IL&FS Transportation Networks delayed repayment of Rs 450 crore of ICD to SIDBI, following which rating agencies downgraded the papers from AAA to AA+. A month later Chairman Ravi Parthasarathy stepped down citing health reasons. Subsequently, various companies within the group either delayed or defaulted in servicing debts, NCDs, and commercial paper. This led a further downgrade to D, aka junk.

The crisis had a contagion effect on both the bond and the stock market. For instance, the debt scheme DSP Credit Risk from the House of DSP Mutual Fund was holding IL&FS Commercial Paper (CP). This triggered a run for redemption on the fund. To meet the redemption pressure, DSP MF sold AAA rated 9.1% paper of DHFL at a steep discount. This lead to a ripple effect on the stock market where housing finance companies like DHFL, India Bulls Housing, etc. started cracking. The market assumed the worst for DHFL. Meanwhile, rising crude oil prices, falling rupee, and global trade wars were adding oil to fire, resulting in a crash at Dalal Street. In September market tanked Rs. 15 lakh crore.

All this to higher yields in the bond market, which meant bond prices fell. This impacts most of the investments held by conservative investors and senior citizens who rely on these funds for their regular spends during retirement. It has led to a liquidity crunch in the debt market. In September government-owned North Eastern Electric Power Corp’s (NEEPCO) proposed the bond sale of Rs. 300 crore received only one bid Rs. 13 crore with a 9.25 per cent yield as investors shied away from making any fresh investments.


It was the usage of short-term debts for the long-term projects, which lead to the fall of IL&FS. So who is to take the rap?

To start with, the Board was so self-indulgent that its risk management committee never bothered to meet since 2015. The stepping down of Ravi Parthasarathy, just before the series of defaults also raises questions. More importantly, nominee directors of SBI, LIC and CBI, who are expected to keep an eye on the affairs could not warn the company on the impending default. Credit Rating agencies like ICRA, Care and India Ratings cannot hide their culpability in failing to do basic due diligence and have a check on the group’s structure, its source of funding, usage of funds, mismatch of asset and liability, etc. Questions are also being raised about how the statutory auditors failed to raise the red flag until it was too late.


The government suspended the management of IL&FS and appointed six new directors. But it will be difficult for the new board to understand the complex structure of the group, monetize the assets, and arrive at various sources of funds to honor debt commitments. The government may not be able to bail out IL&FS on its own given other issues like falling rupees and rising crude prices. So the next best option left for the government in an election year is either ask the banks to have a haircut or request LIC to takeover IL&FS.

Let IL&FS die a corporate death

L’affair IL&FS is not the first of the scams we have seen. There have been many in the private sector and the universe of the PSU banks has been a haven for scams. IL&FS had pedigree promoters and a maverick CEO who then changed shareholders and ensured that there was a thick veil between him and the world. The shareholders and their directors are guilty of negligence in letting an unfettered rein to the CEO.

Throwing good money after bad…

As the sordid saga unfolds, it is disturbing to see a ‘rescue’ plan being put in place by the government that seems to have panicked. The RBI had labeled IL&FS as a ‘systemically’ important NBFC but then its supervision has been a total failure. A team with zero expertise in infrastructure were allowed to survive unquestioned for three decades and borrow a lakh of crore of rupees! And we have a fiduciary agency like LIC buying equity in an unlisted entity and then stepping in to rescue, throwing good money after bad. Everywhere it has been a failure of responsibilities.

A structured fraud…

And the blame is being pinned on the rating agencies! It is like blaming the film critic for a review that does not match the film. While they are guilty, we are foolish to hang the crime on them. The money managers have no business to base an investment decision solely based on some alphabets expressed by a rating agency. If anyone is to be punished, it should be the investment managers who bought debt in this company without doing their homework. Of course, I would also like to impose a substantial monetary penalty on the rating agencies for their negligence. The only excuse for such a sharp drop in ratings would have been a structured fraud. Here, it is clearly a case of poor credit judgment and negligence in surveillance of a grade assigned.

I am against the ‘rescue’ of such an organisation. It is not a PSU bank where public deposits are at risk. This is not a socially important enterprise. Let it fail and go into bankruptcy. Appoint an administrator who will have the twin tasks of closing down the shop and investigate the frauds. Let the SFIO step in. The focus should be to sell it like any other Bhushan Steel. If IL&FS is worthy of a rescue, so is every infrastructure company in the private structure that has gone under and so much of bank loans have been written off. Kingfisher Airlines was more useful to the public.

The ‘rescue’ act by the government seems to be a cover-up to protect some people.

Why this tearing hurry to rescue?

As per reports, the assets could realise 70K crore. The loans could be around 100,000 crore. A Rs 30,000 crore hit will be distributed between banks and mutual funds. Why is there such a tearing hurry to ‘rescue’? Each of its running projects can be sold at a price. The projects yet to take off can be sold to another bidder. Surely, the hole in the balance sheets cannot be filled by any facetious ‘rescue.’

Look at the rescue act. A board with no experience in infrastructure has been put in place in a hurry. Now probably they will choose a CEO who is an ‘establishment’ man. And then LIC will step in, and maybe some shareholders will contribute some more capital and loans rescheduled. However, people for whom the outcome may not be relevant will do this. And banks will be forced to restructure debt and we will pretend as if nothing has happened.

The company has a sick culture that should not be allowed to continue. Creating a maze of companies and putting low-level employees on the board, building a network of connects and writing less than profitable business, including graft in many areas are not things that need ‘rescue.’ The government has panicked. There is no comparison to Satyam. Satyam had no debt. It had a good business. Here, there is a mountain of debt and no one is sure if the business is viable.

Every past business, whether it be the NOIDA Toll Bridge or the Tirupur project of IL&FS, it has been shrouded in mystery and cost escalations that were several times the estimates.

Let IL&FS die a corporate death. Do not let the wound fester. – R Balakrishnan

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