IL & FS Crisis
This is a guest blog by Manish.
What is IL & FS?
IL & FS stands for Infrastructure Leasing and Financial Services limited, which is a ‘shadow bank’ or a non-banking financial company that provides services similar to traditional commercial banks.
IL&FS was formed in 1987 as an “RBI registered Core Investment Company” by three financial institutions owned by the government of India, namely the Central Bank of India, Housing Development Finance Corporation (HDFC) and Unit Trust of India (UTI), to provide finance and loans for major infrastructure projects. Gradually, as the organization needed better financing, it opened itself to two large international players, namely Mitsubishi (through Orix corporation Japan) and the Abu Dhabi Investment authority(ADIA). Subsequently, Life Insurance Corporation India, Orix and ADIA became its largest shareholders.
LIC : 25%
ORIX Corporation, Japan (a part of Mitsubishi Keiritsu): 23%
IL & FS Employees’ welfare trust : 12
Abu Dhabi investment authority : 12%
HDFC Ltd : 9
Central bank of India : 7%
State Bank of India : 6%
What IL & FS Does?
From concept to execution, IL&FS provides a complete array of services necessary for successful project completion — from visioning, documentation, development and finance, to management, technology and execution.
With strong core skills across its distinct businesses, IL&FS group has spread its expertise nationwide in varied sectors including roads, water, power, ports, area development and social and environmental infrastructure.
What Ails IL&FS?
As infrastructure became the central theme in the past two decades, IL&FS used its first step to lap up projects. The group with at least 24 direct subsidiaries, 135 indirect subsidiaries, six joint ventures and four associate companies is sitting on a debt of about Rs 91,000 crore. Of this, nearly Rs 60,000 crore of debt is at project level, including road, power and water projects. A major reason behind the troubles of IL&FS is delay in land acquisition. The 2013 land acquisition law made many of its projects unviable. Cost escalation prevented completion of many projects. Lack of timely action exacerbated the problems.
There could be redemption pressure on asset management companies having Rs 2,800 crore worth exposure to IL&FS bonds from corporate clients who have invested in this Rs 16 trillion debt industry.
In the wake of the IL&FS crisis, “as many as 1,500 smaller NBFCs may had their licenses cancelled because they did not have adequate capital.
The defaults by IL&FS have shut it out of the market, leaving it at the mercy of shareholders — who have yet to sign off on the Rs 4,500-crore rights share sale. The Mumbai-headquartered company has identified at least 25 projects for sale, which include some road and power projects. The company has already received firm offers for 14 projects. With the asset sale plan, it would be able to bring down debt by about Rs 30,000 crore. But the problem is that the completion would take about 18 months.
The NCLT approved the government’s request for change in board of management. Government appointed Uday Kotak, C.S. Rajan(former chief secretary of Rajasthan),P. Mukherjee( a 1980 batch official of Indian Audit and Account Service) as its new members.
This debt of a major Indian infrastructure investment company of about Rs 1 lac crore has adversely affected the entire share market, particularly infrastructure shares. The cost of debt for infrastructure and real estate is likely to shoot up in the country, thus lowering the existing rate of growth further. With oil prices shooting up & Rupee depreciating growth & employment generation will be further strained.
The crisis has been a result of multiple causes like delays in project execution, liquidity crunch and market sentiment. IL & FS desperately needs cash to start completing projects. It has become very difficult for it to borrow funds & to get equity at a fair cost owing to the market sentiment. Infusion of equity seems the only option followed by speedy execution of stalled projects. Indian government has to get involved and it has. With elections round the corner, and Modi with his back to the wall, it remains to be seen whether he can act smartly and decisively.