It is not yet clear whether it can be called a full scale ‘contagion’, but it is certainly a galloping crisis. Infrastructure behemoth IL&FS, after a series of payment defaults in August, was exposed with a debt overhang of over Rs 91,000 crore. Considering the way the banking and financial system is networked, IL&FS’ inability to meet its commitments is now triggering a crisis in other parts of the system.
It first started with a fund offloading of nearly Rs 300 crore commercial paper of Dewan Housing Finance on doubts that the non-banking finance company (NBFC) has a liquidity problem. This created a stampede in the stock market with other NBFCs like Indiabulls Finance facing a meltdown. The virus has spread to other financial stocks as well. There is bearishness all around, markets are on a free fall.
Risk Event-Driven Distressed Intelligence (REDD), a market tracker, estimates that as much as Rs 30,000 crore of IL&FS’ loans may have to be written off by lenders. The crisis has tightened money supply with banks chary about refinancing NBFCs. Retail lending has slowed up too, and loans being handed out to consumers of cars and homes are facing crunch time. One can see where all this is headed: an all-round slowdown.
GARGANTUAN STRUCTURE
Much of the hidden crisis has to do with the way IL&FS is structured. It had become a maze of 175 subsidiaries and 66 joint ventures, which REDD Intelligence estimates has liabilities of Rs 1,32,00 crore. Many group subsidiaries lent to each other with intra-group liabilities as high as Rs 25,500 crore. Things were further confounded by subsidiaries who had direct investments from state-owned banks and FIs.
Such a maze of interconnected subsidiaries and intra-group lending “masks the end use of the funds,” admitted SEBI chairman Ajay Tyagi.
Everyone thought it was a blue-chip company that could do no wrong. It was partly the pedigree that created the veil. LIC owned 25 per cent of the stock; Orix of Japan 23.5 per cent, Abu Dhabi Investment Authority 12.6 per cent and HDFC 9 per cent. People thought IL&FS was in good hands. The flip side: self-interest should have had these worthy investors looking at the IL&FS books more closely.
The new company board that has taken over is hard-pressed to come up with a revival plan. It will include sale of assets, 40 per cent of which are held by IL&FS Transportation Networks. Lenders will be asked to take haircuts. It will also include getting the government’s highway and road projects to cough up over Rs 20,000 crore or more stuck in arbitration. Long-term, the new board will try and fix corporate governance and risk managements.
Lenders will play along for a while as this government-backed revival plan is the best chance they have to rescue their money. But raising a fresh round of funding from existing shareholders through a rights issue is not happening any time soon.
The government is standing by, but it says it won’t pump in money. It looks like a bleak scenario for those who invested in IL&FS.
THE TAKEAWAYS
Should this company survive? What are the takeaways?
No one seems to have learnt from the Satyam Computers scandal. One of the culprits that emerged is the auditing firm PricewaterhouseCoopers. For being complicit, in January this year, SEBI barred it from auditing accounts of any listed firm.
In the IL&FS case too, the auditors, SRBC & Co need to be investigated. The government has stated informed the NCLT that SRBC had “drawn the board’s attention to the existence of material uncertainty over the company’s ability to continue as a going concern and the management plan to raise funds.” When was the red flag raised? Were the lenders and stakeholders aware?
Infrastructure — roads, bridges, homes and waterways — are seen as engines of growth; but few are willing to put money in it due to the long gestation periods, high investment and high risk involved. IL&FS tried to reverse that as a financier of mega infrastructure projects. With the current fiasco, will there be any stomach left for this sector?
After all the due diligence is over and the ‘culprits’ chased down, the bigger question will be: Is saving IL&FS a prudent corporate decision; or will we be throwing more good money after bad?
A30K crore of IL&FS debt may have to be written off by lenders, according to market tracker REDD Intelligence
A91K crore is estimated to be the total debt overhang of IL&FS
A1,32,00 crore is estimated to be the total liabilities of IL&FS’ maze of 175 subsidiaries and 66 JVs.