IL&FS defaults on IDBI Bank LC payment; CEO of company's financial services arm resigns

Infrastructure Leasing & Financial Services (IL&FS) has defaulted on payment of an IDBI Bank letter of credit (LC) due on September 21.

Separately, Ramesh Bawa, Managing Director and Chief Executive Officer of its subsidiary IL&FS Financial Services has resigned with immediate effect.

IL&FS also informed that Aditya Birla Finance, one of the creditors of the two project special purpose vehicles, has filed an arbitration application under section 9 of the Indian Arbitration and Conciliation Act, 1996 before the Delhi High Court.

Pending constitution of the arbitral tribunal, the High Court has passed interim orders injuncting the Company from transferring or creating third party interest in their unencumbered assets till the next date of hearing fixed on December 7, 2018.

IL&FS is seeking legal advice to defend the interim order.

"The Company was unable to service its obligation in respect of LC (letter of credit) payment to IDBI Bank due yesterday which was non-banking day and hence payable today i.e. on September 21, 2018,” said the company that has defaulted on at least two interest payments to its bondholders since August, in a release to the stock exchanges.

After the consecutive defaults, the company had announced it will not access the commercial paper market up to March 18, 2019, in compliance with the Reserve Bank Commercial Paper (CP) Directions, 2017.

The company was unable to honour CPs which were due on September 14, 2018, in full on the due date, and later also defaulted on repayments due on September 18.

Background

The infrastructure financier and some of its subsidiaries defaulted on the repayment of commercial papers (CPs) that matured over the past two months and were downgraded to ‘junk’ category by three rating agencies.

IL&FS’ outstanding debentures CPs accounted for 1 percent and 2 percent, respectively, of India’s domestic corporate debt market as of March 31, according to Moody’s Investor Services.

Its loans from banks constituted around 0.5 percent to 0.7 percent of banking system loans, it said.

The liquidity problems at IL&FS are raising concerns about the impact on Indian lenders, which are already struggling to clean up the bad loans worth over Rs 10.5 lakh crore accumulated in their balance sheets due to exposure to large corporates.

Additionally, the group’s complex corporate structure makes problems worse -- it has 169 subsidiaries, associates and joint ventures, Moody’s pointed out.

It added that the liquidity crisis was triggered due to distress is its infrastructure business including road projects, which have been plagued by problems such as traffic shortfalls below projections, cost overruns and compensation disputes with regulators.

On September 20, five of the company's directors including four independent - Renu Challu, Surinder Singh Kohli, Shubhalakshmi Panse, Uday Ved - and one non-executive director Vibhav Kapoor had resigned.