Infrastructure Leasing and Financial Services (IL&FS) is an Indian infrastructure development and finance company which can finance any infrastructure project in India. It was formed in 1987 as an RBI registered Core Investment Company. Currently, its institutional shareholders include Life Insurance Corporation of India (LIC), ORIX and Abu Dhabi Investment Authority, with small shareholdings by a few Indian banks. IL&FS has several projects in different sectors including transportation, health, e- governance, finance, power, cluster development, tourism, urban infrastructure, waste water, environment, education and tourism.
IL&FS was the principal lender behind the construction of the 9.28 km long Chennai-Nashri Tunnel, located on the route of NH 44 in Jammu and Kashmir. IL&FS is not a bank but is a non- banking financial company (NBFC) that provides finance to big projects. So what exactly is their working model, how do they fund themselves to fund others? Initially they borrow money and use the same to finance other big projects. Long term borrowing is taken through banks whereas short term borrowing is done through issuing of debt instruments like bonds, non – convertible debentures, certificate of deposits, commercial papers, mortgages, leases or other agreements between a lender and a borrower.
The loans that are given by NBFCs act as assets for NBFC but the infrastructure projects to which they give loans usually take long time to realize. Hence NBFCs get returns on their assets over a very long period of time. The pressure starts building up when the short term lenders do not get their invested money back from NBFCs. And here starts the IL&FS crisis. At present, IL&FS has a consolidated debt of close to Rs 1 lakh crore and it is not able to repay its liabilities and has missed deadlines on its debt obligations beginning August 27, 2018. It has already defaulted on around Rs 450 crore worth of inter – corporate deposits to Small Industries Development Bank of India and more default are likely to come.
Rating agencies like ICRA, India Ratings and CARE abruptly downgraded IL&FS and its subsidiary from high investment grade to junk status, indicating actual or imminent default. Many corporates, mutual funds and insurance companies have invested in CPs and NCDs of the IL&FS group and there is fear that in wake of the default, their funds could be locked in IL&FS debt instruments, leading to a liquidity crunch, because of which, investors will likely not invest and the company’s condition will degrade further on.
The crisis of one company spread across the sector and the situation started hurting the NBFCS and also affected the stock market.
- In response, RBI took immediate step to improve the liquidity in the market like infusing up to 36000 crore via open market bound purchases.
- On 1st October, 2018, the Government of India took steps to take control of the company and arrest spread of the contagion to the financial markets.
- A new board was constituted as the earlier board was deemed to have failed to discharge its duties. New board includes Uday Kotak from Kotak Mahindra Bank and some other well-known Bankers.
The bigger task will be the clean-up. A thorough investigation will be needed to identify exactly what went wrong, fix responsibility and take action against the existing management.
Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of IndusGuru Network Partners