IL&FS Group in Troubled waters

03 Oct

ILFS

IL & FS group (Infrastructure Leasing and Finance) is suffering from huge loss of Rs. 91,000 crore and the only way to come out to sell the assets and raise funds. Out of this around Rs. 57,000 is from Public Sector Banks. Latest news:

Government has taken control of IL & FS Group after obtaining approval from Insolvency and Bankruptcy court in Mumbai
The NCLT (National Company Law Tribunal) allowed the Government to form a new board and bring out a new plan to solve the problems and file a response by 15^th Oct 2018.
New Board will be headed by Kotak Mahindra Bank CEO and MD Uday Kotak along with five other members

What is the Issue?

Infrastructure Leasing and Financial Services (IL&FS) is an unlisted infrastructure lending giant which has over 150 subsidiaries.
The company failed to pay interest to its bond holders, which resulted in the company’s debt being downgraded.
The company primarily defaulted on payment of inter corporate deposits and commercial papers (borrowings) worth about Rs. 450 crores.
Subsequent to this within a span of two month two rating agencies downgraded the company’s long term ratings.
The longest tunnel in the country ie., The Chenani-Nashri tunnel was built by the company and today the company has been downgraded and is no longer eligible to raise funds.
The downgrading drew the attention of Reserve Bank of India.
The company had brought some plans earlier to put things in track which appeared reasonable, but they were late in acting on the plans formulated.
Though the company has assets, the situation can come under control for which the company is now left with the only option of convincing the bondholders.
The largest shareholder in the company is LIC, with a 25.34 percent. Other stake holders are:
- Orix Corporate, Japan with 23.54 percent
- Abu habi Investment with 12.56 percent
- Housing Development Finance Corporation – HDFC with 9.02 percent
- Central Bank of India 7.67 percent and
- State Bank of India 6.42 percent.

Defaults:

ICRA ratings issued a note in July irregularities related to Special Purpose Vehicles in four of its subsidiaries.
In August ICRA downgraded long term rating on Rs. 4,475 crore worth of debt securities from AAA to AA+ taking into account the company’s elevated debt levels.
IL&FS ability to support ITNL operations is said to have come down substantially due to increase in its overall debt levels.
On September 4 IL&FS again defaulted on a Short term loan of Rs. 1000 crore from SIDBI (Small Industries Development Bank of India) and a subsidiary also defaulted Rs. 500 due to the bank which resulted in the bank’s compelling the CGM of its Risk Management Department to resign.

Background:

IL&FS was incorporated in 1987 by Central Bank of India, HDFC and Unit Trust of India (UTI) with an objective of promoting infrastructure projects in the country.
Over the years the company slowly shifted from Project sponsorship to Project Advisory and Project facilitator for projects development and implementation.
Its most business activities reside in separate companies and the company is also registered as a CORE INVESTMENT COMPANY with RBI due to which its restricts its operations are restricted to investing in other group companies.
The company has resorted to induction of strategic partners or sale of assets to external investors, which has resulted in generation of resources.
During FY 2011 to 2014 the company realized profit of around Rs. 1461 crore due to sale of stake in strategic investments as per ICRA report.
Reasons for failure:
Following are the reasons quoted for its failure:
Tight liquidity resulting in increase in Long term debt to equity ratio to 3.08 times as of March 2018.
Non release of Funds in time, worth Rs. 16,000 crore aid to have been locked with concession authorities

Recourse:

Both LIC and SBI have asked IL&FS to raise funds through sale of its assets or non core business which is a precondition set for future funding.
The sale of assets at this juncture might end up in a haircut resulting in loss on sale of assets.
The company also has plans to raise funds through rights issue by September which would amount to Rs. 4000 crore and a further Rs. 3500 crore is expected to be raised through line of credit.