Mumbai-based Infrastructure Leasing & Financial Services (IL&FS) has been at the centre of a whirlwind controversy and we explore this story in detail in this Moneycontrol Deep Dive.
Mumbai-based Infrastructure Leasing & Financial Services (IL&FS) has been at the centre of a whirlwind controversy and before we explore this story in detail in this Moneycontrol Deep Dive, let us find out a bit more about the backdrop against which this saga has unfolded.
What is the IL&FS crisis?
The Web Desk of The Week answered this question in a piece published on September 25, 2018.
The crisis unfolded amid an uncertain economic climate. We quote, "India's financial markets have been reeling under high selling pressure in recent days, triggering concerns about risks in the country’s shadow banking sector. The crisis has shaved off Rs 8.48 lakh crore ($116.33 billion) in investor wealth in the last ten days and at the eye of the storm is the Mumbai-based Infrastructure Leasing & Financial Services (IL&FS).
The three-decade-old infrastructure lending giant, IL&FS, is a 'shadow bank' or a non-banking financial company that provides services similar to traditional commercial banks." Unquote.
As the piece goes on to inform, the major shareholders of IL&FS include state-backed Life Insurance Corp of India holding, 25.3 percent stake, Housing Development Finance Corporation with 9.02 percent, Central Bank of India with 7.67 percent and State Bank of India with 6.42 percent. Other key shareholders are Japan’s Orix Corp, holding 23 percent, and Abu Dhabi Investment Authority with 12.56 percent. Further, we learn that the subsidiaries of IL&FS include transportation network building subsidiary IL&FS Transportation Networks Ltd (ITNL), engineering and procurement company IL&FS Engineering and Construction Co. Ltd and financier IL&FS Financial Services Ltd.
Crisis by default
Ao what caused the crisis? We quote The Week, " IL&FS defaulted on a few payments and failed to service its commercial papers (CP) on due date—which means the company has run out of cash or it is facing a liquidity crunch.
The company piled up too much debt to be paid back in the short-term while revenues from its assets are skewed towards the longer term.The subsidiaries of IL&FS include transportation network building subsidiary IL&FS Transportation Networks Ltd (ITNL), engineering and procurement company IL&FS Engineering and Construction Co. Ltd and financier IL&FS Financial Services Ltd. The recent slowdown in infrastructure projects and disputes over contracts locking about Rs 90 billion of payments due from the government have further worsened the condition." Unquote.
Further, says The Week, IL&FS Financial Services disclosed on September 6 that the commercial papers (CP), which were due on August 28, could not be paid on due date and were settled in full on August 31. IL&FS Financial Services has about $500 million in repayments which are due in the second half of this financial year while it has only about $27 million available.
Reuters chips in to state that by the middle of September, IL&FS and IL&FS Financial Services had a combined Rs 270 billion of debt rated as junk by CARE Ratings and a further six group companies had suffered downgrades with a negative outlook on another Rs 120 billion of borrowings.
The default in turn has had a trickle down impact on investors, which include banks, insurance companies, and mutual funds.
Delays and defaults on debt obligations and inter-corporate deposits at this scale can have cascading impact and it is not a small deal, when an entity like IL&FS is unable to service its obligation towards a letter of credit to IDBI Bank Ltd.
Life Insurance Corporation (LIC), which has the largest shareholding in IL&FS, has stated that it is keen to explore solutions for revival but for now, things are looking bleak.
No single solution?
Complex financial conundrums are rarely if ever solved by one shot, simplistic solutions. As Tanya Thomas wrote in Live Mint on December 04 2018, the IL&FS board has stated that the only options left are hiving off and selling entire business verticals to willing buyers, and if that fails, going for asset-level resolution could be an option. This was said in its latest status report to NCLT(The National Company Law Tribunal which is a quasi-judicial body in India that adjudicates issues relating to Indian companies).
IL&FS as has been reported widely, is straddled with ₹91,000 crore debt and is obvious by now, finding a single solution for a crisis of this stature is not realistic.
The Uday Kotak-led board further said in the report that the so-called “group” resolution, which would involve significant capital infusion from credible and financially strong investors, was not feasible. The “group” resolution, explains the piece, includes a condition that investors along with the new board engage with creditors, leading to an overall resolution across the IL&FS group.
Asset-level resolution has been offered as one of the solutions and we quote, "this would involve asset-by-asset solution explored through various methods including (a) significant capital infusion (either from existing or new investors); (b) asset monetisation to retire debt; and (c) resolution/ compromise with the creditors." Unquote.
Moneycontrol's Beena Parmar wrote on December 4 as well about the IL&FS board' s progress report to NCLT where cost cutting measures such as assessment of liquidity, manpower optimisation etc have been mentioned, apart from evaluation of domestic and overseas assets and their sale for resolution.
The new board had taken charge after NCLT approved a resolution of the liquidity crisis at IL&FS given its huge debt.
Specific cost-cutting measures include reducing operating costs by terminating non-essential real estate premises, closure of offices at various locations and leasing out offices of IL&FS Financial Services, salary rationalisation and separation of superannuated consultants .
“These steps will yield an approximately 50 percent savings in the wage bill of the IL&FS Group. Several other initiatives are being initiated and that will bring down total manpower of the IL&FS Group by approximately 65 percent and wage cost by 50 percent respectively," the report said.
Bloomberg Quint also reported on December 4 that lowering manpower by 65 percent would reduce its Rs 1,066-crore wage bill by half, and cutting salaries and discontinuance of consultancy services of retired employees, would save another Rs 100 crore a year.
A person on the condition of anonymity told Bloomberg Quint that the group employs about 4,500 people.
On November 29, Money Life had also reported that IL&FS has initiated the process to sell its renewable energy business and has invited expression of interest (EoI) proposals from prospective buyers. IL&FS's assets from the renewable energy business put on the block include, operating wind power generating plants with aggregate capacity of 873.5MW, and its under-construction wind power generating plants with aggregate capacity of 104MW. Its asset management services for the wind power generating plant, business division that carries out project development and implementation of wind power plants will also be sold.
Long term solutions
Moneycontrol's recent coverage also informs that IL&FS' resolution advisor Alvarez & Marsal (A&M) will evaluate the short and medium-term liquidity and develop 13-week cash flow estimates for the next 12 months at each entity level along with its debt serviceability potential. More than 165 entities have been reviewed and close to 100 entities have operational cash gap till 31st March 2019.
And to achieve a long-term solution, says Moneycontrol, A&M is in the process of:
(i) reviewing the existing capital structure of entities within the IL&FS Group;
(ii) assessing incremental funding requirements for capex / working capital at the relevant entity level;
(iii) classifying entities based on debt serviceability and viability;
(iv) assisting in identifying entities suitable for monetisation; and
(v) identifying encumbrances created on assets of various entities within the IL&FS Group and approvals for divestment at holding company level (i.e. IL&FS), business vertical/ platform level and at the level of the operating SPVs.
In the meanwhile, the past is catching up with IL&FS' former directors. On December 3 , Moneycontrol's Tarun Sharma and other news sources had reported that NCLT had attached properties of 9 former IL&FS directors and sought disclosure of all assets within the country and overseas.
The tribunal has directed them to disclose movable and immovable assets and ensure no one creates any third party rights on these properties.
According to the Moneycontrol piece, " The Ministry of Corporate Affairs named Chief Investment Officer of IL&FS, Vibhav Kapoor; K Ramchand, Managing Director of IL&FS Transportation Networks (ITNL); RC Bawa, Managing Director of IL&FS Financial Services; Rengarajan, Managing Director and CEO of IL&FS Securities Services; Pradeep Puri, Director and member of committee of directors responsible for sanctioning loans, and Mukund Sapre, Executive Director of ITNL. Ravi Parthasarathy, Hariharan and Arun Saha are the three other former directors whose properties have been seized." Unquote.
The MCA counsel had argued in court that IL&FS had used a circuitous way to pay off loans of its own entities to meet RBI guidelines and used this method to obtain a high credit rating, and high managerial remuneration. On the one hand, percentage increase in the remuneration of Ravi Parthasarathy in FY18 was 144 percent, while on the other, average percentage increase in salaries of employees in the same year was 4.44 percent.
IL&FS former directors' counsel however argued that while the old board took business decisions that may have gone wrong, steps have been taken to solve the debt situation through an asset sale. Explaining the missteps in the past, it was said that earlier the business model was followed in a project-specific subsidiary way and all the accounts of all the years are fully audited.
MCA counsel Sanjay Shourie however raised concern on alleged wrongdoing in employee welfare trust (EWT) and we quote, "Of the Rs 440 crore of welfare trust, only 1 percent went to the employees. In 2014 -- as part of restructuring, IL&FS’ merger with Piramal was contemplated. Employees trust held 1.50 crores shares of IL&FS Ltd. and trustees distributed 90 percent of the EWT holding of 1.35 crores to select employees. The SFIO investigation reveals EWT took loan to purchase shares of IL&FS and group companies despite knowing of no way to repay.” Unquote.NCLT Mumbai will next hear the matter on January 16, 2019 and we will keep bringing you all the updates as the story unfolds.