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.
FALL OF THE TITAN
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.
WHO IS TO BE BLAMED
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.
WAY FORWARD
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.
