IL&FS Liquidity Crisis


Ajit Kumar AJIT KUMARWISDOM IAS, New Delhi.

What is IL&FS?  
Infrastructure Leasing & Financial Services Ltd (IL&FS Ltd), is a RBI registered core investment company (CIC) which serves as the holding company of the IL&FS Group.

It is a Mumbai-headquartered company.

The group comparises of at least 24 direct subsidiaries, 135 indirect subsidiaries, six joint ventures and four associate companies (169 subsidiaries and associates).

IL&FS Ltd projects run in the areas of, transportation, energy, maritime, water & wastewater, urban asset management, financial services, environment, education & technology, and skill development
 

Genesis and Evolution 
IL&FS was incorporated in 1987, initially promoted by the Central Bank of India (CBI), Housing Development Finance Corporation Limited (HDFC) and Unit Trust of India (UTI).
 
Over the years, it has broad-based its shareholding and inducted institutional shareholders including State Bank of India, Life Insurance Corporation of India, ORIX Corporation Japan, and Abu Dhabi Investment Authority (ADIA).

As on March 31, 2018, LIC and ORIX Corporation are the largest shareholders in IL&FS with their stakeholding at 25 % and 23 %, respectively. Other prominent shareholders include ADIA (12 %), HDFC (9 %), CBI (7 %) and SBI (6%). 


What hit IL&FS Crisis Timeline  
In Jul-18, IL&FS subsidiary IL&FS Transport has delayed Rs 450 Crores of repayment to SIDBI. This is where the IL&FS Crisis started.

In Jul-18 end, its founder and Chairman Mr.Ravi Parthasarathy has stepped down citing health reasons.

In Aug-18, it has again defaulted two commercial papers to mutual fund AMCs and then later paid in 2 days late.

In Early September, IL&FS defaulted Rs 1,000 Crores loan repayment to SIDBI. It has defaulted several times during September for various loan repayments.

ICRA, CARE and BWR has downgraded its ratings from AA+ to “default” or “junk”. This is the worse of such ratings.
RBI initiated special audit about this company.

15th September, Former LIC Chairman, Mr.SB Mathur has taken charge as Chairman of IL&FS.

SEBI has intervened very late in this case. Two weeks back it said it would look into this matter and assess risk on various mutual fund schemes.

Last week of September, RBI has raised concerns about IL&FS company management and met its top shareholders.
On 1st October, NCLT has allowed Govt of India to take control of the company and its matter.


What Happened to IL&FS?
 

IL&FS takes a short term loans and provides long term funding to projects. There was the “Risk Management team” within the company which was supposed to do “risk assessment” frequently due to such unique business model. However, Risk Management team has not met in the last 4 years from 2015-2018 even once.
The group is sitting on a debt of about Rs 91,000 crore, out of which Rs 57,000 crore are bank loans alone. Of this, nearly Rs 60,000 crore of debt is at project level, including road, power and water projects.

Asset –Liability Mismatch

Infrastructure projects took longer time

There are series of incidents happening that indicates mis-management in the company.

One cannot rule out even if there is Scam in IL&FS Crisis.
 

Reasons of Crisis
Wild expansion (even internationally)during infra boom.

Aggressive bidding (IL & FC overleveraged. Borrowing 10 rupee having 1 rupee asset is called leverage).

Too much loans – particularly shoet-term loans.

Bad corporate governance – No reduced expenditure even after less earnings.

Retired government servants were employed.

Expenditure in non-core business.

A major reason behind troubles of IL&FS is complications in land acquisition. The 2013 land acquisition law made many of its projects unviable. Cost escalation also led to many incomplete projects.
No early warning system.

Lack of timely action exacerbated the problems. 

Lower rating by rating agencies.

11PSBs put into PCA by RBI.

No regulation by RBI, SEBI, Ministry of Finance.

No Bankruptcy code for financial institutions.

Debt market is not very developed in India, it is illiquid market.
 

Government’s Intervention 
The National Company Law Tribunal (NCLT) also approved the induction of six directors recommended by the government.
 
Thus, the government intervened in the IL&FS crisis on Oct 1, 2018, superseding its board and appointing new members, with banker Uday Kotak as chairman. The other members of the revamped IL&FS Board are Vineet Nayyar, IAS (retired); G.N. Bajpai, former Chairman, SEBI; G.C. Chaturvedi, non-executive chairperson, ICICI Bank; Dr. Malini Shankar, IAS; and Nand Kishore, former IA&AS officer.
 
The finance ministry official said the priority for the board will to assess the company's financial situation and report the same to the government over the next 15 days.

The government has also ordered an investigation by the Serious Fraud Investigation Office into the affairs of group and its over 160 subsidiaries.
 
The board will look into long-term debts of the company and find out options to restructure the same.
 
The government stands fully committed to ensure that needed liquidity is arranged for the ILFS from the financial system so that no more defaults take place and the infrastructure projects are implemented smoothly.
 
It looks the liquidity crisis will not lead to insolvency.
 

Loser in the Crisis
Value destruction of IL & FC.

Mutual Fund investors who are investing in Mutual Fund Schemes would be the biggest losers. Mutual Funds are investing in commercial papers, NCDs, Corporate Deposits with such companies in large size.

Investors of stock markets are also the biggest losers. Many infra company stocks have fallen up to 60% of its share prices.

Bond Market  (holder want to sell bonds)
NBFCs not getting loan from market. NBFCs market collapsed substantially temporarily.

If Govt of India would not have taken the control of IL&FS board, entire Indian mutual fund industry would have been collapsed.

Consequently whole of the economy might get adversely affected.
Rating agencies will lose people’s faith.
 

Related Terms
 
(i) Core Investment Company (CIC):  A CIC is a Non-Banking Financial Company with asset size of Rs 100 crore and above. The company carries on the business of acquisition of shares and securities and which (a) holds not less than 90 per cent of its net assets in the form of investment in equity shares, preference shares, bonds, debentures, debt or loans in group companies and (b) its investments in the equity shares in group companies constitutes not less than 60 per cent of its net assets as on the date of the last audited balance sheet.  This Concept was originated in order to safeguard NBFCs which are formed for group investments from stringent RBI procedures. 

(ii) Holding Company : Type of business organization that allows a firm (called parent) and its directors to control or influence other firms (called subsidiaries). The company exists for the purpose of owning other companies and typically does not produce goods or offer services other than through its subsidiaries.
 
(iii) Direct Subsidiaries: A "direct" ownership is obvious where a parent company directly owns shares of the subsidiary. So, for example, two companies, A and B , Company A owns shares of Company B. 

(iv) Indirect Subsidiaries: "indirect" ownership would be where a company owns shares of another (one or more) company and that company owns shares of the subsidiary. For example, three companies, A, B and C: Company A owns all shares of Company B which owns all of the shares of Company C. This would be an indirect whole ownership of Company C by Company A.

(v) Joint Ventures: A joint venture (JV) is a business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task. This task can be a new project or any other business activity. In a joint venture (JV), each of the participants is responsible for profits, losses and costs associated with it.

(vi) Associate Companies: means a company in which another company has a significant influence, but which is not a subsidiary company of the company having such influence and includes a joint venture company. The expression “significant influence” means control of at least twenty percent of total voting power, or control of or participation in business decisions under an Agreement, The expression “joint venture” means a joint Agreement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement.


(vii) Commercial paper: Promissory note (issued by financial institutions or large firms) with very-short to short maturity period (usually, 2 to 30 days, and not more than 270 days), and secured only by the reputation of the issuer not by any asset. Rated, bought, sold, and traded like other negotiable instruments, commercial paper is a popular means of raising cash, and is offered generally at a discount instead of on interest bearing basis.

Non-Banking Financial Company (NBFC)

NBFC is a company registered under the Companies Act, 1956 (now 2013) engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business but does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property. A non-banking institution which is a company and has principal business of receiving deposits under any scheme or arrangement in one lump sum or in installments by way of contributions or in any other manner, is also a non-banking financial company (Residuary non-banking company).
Differences with a bank:
(i) NBFC cannot accept demand deposits;
(ii) NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself;
(iii) deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks.


Different types of NBFCs are as follows:

(i) Asset Finance Company (AFC)
(ii) Investment Company (IC)
(iii) Loan Company (LC)
(iv) Infrastructure Finance Company (IFC)
(v) Systemically Important Core Investment Company (CIC-ND-SI)
(vi) Infrastructure Debt Fund
(vii) Non-Banking Financial Company - Micro Finance Institution (NBFC-MFI)
(viii) Non-Banking Financial Company – Factors (NBFC-Factors)
(ix) Mortgage Guarantee Companies (MGC)
(x) NBFC- Non-Operative Financial Holding Company (NOFHC)
 
(ix) Mutual Fund

Mutual funds are the most popular investment types for the everyday investor. It is an investment vehicle made up of a pool of money collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and other assets.
Mutual funds give small or individual investors access to professionally managed portfolios of equities, bonds and other securities.
The underlying security types, called holdings, combine to form one mutual fund, also called a portfolio.
In simpler terms, mutual funds are like baskets. Each basket holds certain types of stocks, bonds or a blend of stocks and bonds to combine for one mutual fund portfolio.



Saturday, 03rd Nov 2018, 06:03:00 PM

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