IL&FS saga: Here are answers to the Rs 90,000-crore questions investors have been asking

The management of IL&FS is mainly responsible for the default. Poor management decisions resulted in IL&FS financing and getting itself involved in projects that were either unviable or had a long gestation period.

The company, which started out as a financing arm for infrastructure projects, started building them. However, the long gestation period of the projects was not matching with the short-term, high-cost fund that the company was able to raise, thus causing an asset-liability mismatch.

Stress on IL&FS books was visible much before the institution defaulted on its loans, yet the management did not take the issue seriously. Reports say the Risk Management Committee of IL&FS did not even meet for two years.

What caused the default?

While the management and the board of directors of IL&FS have to take the blame, there are other factors too. A slowing economy and rising default resulted in few financiers willing to participate in infrastructure projects. Add to that bureaucratic red-tape and we have the perfect mix for disaster.

While IL&FS stretched itself on generating funds and raising money from the market to feed its numerous subsidiaries, it was let down by the government when it came to releasing funds as part of the concessions.

Under the concession contract, a private partner gets exclusive rights from the government to operate, maintain and sometimes even carry out investment in a public utility for a given period of time. Revenue to the private party comes from the user fee charged to users of the facility while the government gets a fixed sum or a percentage of revenue.

As per the 2018 annual report Receivable against Service Concession Arrangements stood at over Rs 8,500 crore on a consolidated basis. However, company management has been quoted as saying the figure is now as high as Rs 16,000 crore. Under ideal conditions, either of these figures could have helped IL&FS stall the crisis.

Where is the money that IL&FS owes?

That is a Rs 90,000-crore question. The complex structure of the company makes the task more difficult. Market analysts confess that IL&FS is a difficult company to track.

It does not have the most transparent annual report and few analysts track the company closely. The complex structure of the company with 24 direct subsidiaries, 135 in-direct subsidiaries, six joint ventures, and four associate companies are under the umbrella of the parent IL&FS.

Most of the projects resided in special purpose vehicles (SPVs). These entities depended on the parent for funding. The source of funds for IL&FS was cash flows from its operations, borrowing from the market and concessions that the government’s give for project implementers.

The money is lying in various projects that are either completed or are unfinished or have not yet taken off. The government also feels that the money has been siphoned off from the company and has launched an inquiry to look into the failure of the company.

When was the first sign of trouble visible in IL&FS

IL&FS defaulted on inter-corporate deposits and commercial papers earlier this month. On September 4, it came to light that IL&FS had defaulted on a short-term loan of Rs 1,000 crore from Sidbi, while a subsidiary has also defaulted on Rs 500 crore dues to the development financial institution.

But the stress on IL&FS books was visible much before the institution defaulted on its loans. Many experts now say that the Ravi Parthasarathy’s founder and Chairman of IL&FS untimely exit on health grounds in July 2018 was the first telltale sign of trouble.

The entire issue has raised doubts about the working of watchdogs like auditors and rating agency who could not locate the stress in the company and jumped into action only after the default.

Consolidated debt of the company increased from Rs 48,671.3 crore in 2014 to Rs 91,091.3 crore in 2018, as a result, its interest outgo rose from Rs 3,970.7 crore to Rs 7,922.8 crore during the same period. However, operating profit increased at nearly half the pace increasing from Rs 5,087.4 crore to Rs 7,267.3 crore. By 2018 the company was not even making enough to take care of its interest expense, hence the default.

During this period the company was adding both tangible and intangible assets in its book as seem from the depreciation charge that shot up from Rs 372.1 crore to Rs 1,453.7 crore. But these low yielding projects were not generating enough income to prevent the default.

Ironically a company which in the business of Financial Advisory in infrastructure space did not heed its own advice.

Why has the board of IL&FS been sacked?

The IL&FS saga took many by surprise after the government decided to move the National Company Law Tribunal (NCLT) to take over IL&FS by replacing all board members as defaults by the infrastructure group and its subsidiaries triggered concerns about contagion in the financial markets.

Government and other agencies feel that a surgical strike is needed to clear the mess in IL&FS and in order to implement changes need going forward a completely new team is needed. The government superseded the existing board of IL&FS with six new board members.

Kotak Mahindra Bank MD Uday Kotak has been appointed as the Chairman of the board.

In a press conference post the first board meeting of the new team, Kotak said that the board will do what is in the right interests of the different categories of stakeholders by bringing in clarity, rebuild trust and do it in an open, fair, objective manner.

How will the IL&FS mess be cleared?

While the investigating agencies will do its job of finding the culprits the new board has a task in hand of keeping the company running and stopping further defaults. The only way to do it is by finding money wither from within the company or outside to keep the company floating.

Thankfully IL&FS has enough assets in its books, including its posh office, to reduce debt levels and continue with its business. Reports say that the company may sell rights to operate toll roads to National Highway Authority of India (NHAI) and raise immediate money.

There are talks of equity infusion in the company from its shareholders including LIC, SBI, HDFC, Abu Dhabi sovereign fund and Orix of Japan. Raising money through debt option is also one of the ways the company is evaluating to raise money.

A stake sale or a complete selloff is another option that is being discussed in media.