India’s financial market is reeling under high selling pressure, triggering concerns about risks in the country’s shadow banking sector. IL&FS Financial Services, a group company, defaulted in payment and failed to meet the commercial paper redemption obligations which were due on September 14. The company, on September 15, reported that it had received notices for delays and defaults in servicing some of the intercorporate deposits accepted by it. ICRA, an independent and professional investment information, and credit rating agency, downgraded the ratings of IL&FS from A1+ TO D-. IL&FS crisis has jeopardized hundreds of investors, banks and mutual funds and has sparked panic among equity investors.
What is IL&FS?
IL&FS (infrastructure leasing and financial services) is over 30 years old. It is a shadow bank, a financial institution which doesn’t receive deposits like a traditional bank. Since it doesn’t take deposits, it largely escapes regulatory oversight. Its website mentions that it has financed projects worth $25 billion.
Who owns IL&FS?
A brainchild of the late MJ Pherwani, IL&FS was founded in 1987 with equity from Central Bank of India, Unit Trust of India and Housing Development Finance Co to fund infrastructure projects. IL&FS has institutional shareholders including SBI, LIC, ORIX Corporation of Japan and Abu Dhabi Investment Authority (ADIA). As on March 31, 2018, LIC and ORIX Corporation is the largest shareholders in IL&FS with their stakeholding at 25.34 percent and 23.54 percent, respectively. Other prominent shareholders include ADIA (12.56 percent), HDFC (9.02 percent), CBI (7.67 percent) and SBI (6.42 percent).
Crisis looming over IL&FS:
IL&FS has since August 27th been defaulting on payments. In order words, it is unable to meet its repayment obligations.
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 the project level, including road, power and water projects. A major reason behind troubles of IL&FS is complications in land acquisition. The 2013 land acquisition law made many of its projects unviable. Cost escalation also led to many incomplete projects. Lack of timely action exacerbated the problems.
As per The Indian Express report, disputes over contracts have locked about 90 billion rupees of payments due from the government. The company is also impacted by the increased in the interest rates in short-term borrowing.
IL&FS’ investors include banks, insurance companies, and mutual funds. Now, a leading infrastructure finance company like IL&FS defaulting results in loss of confidence and will, experts say, mean that investors will stay away from debt instruments of other Non-Banking Financial Companies and Housing Finance Companies. IL&FS has defaulted on commercial papers or CP, which are considered low-risk investments and so mutual funds are invested in it.
Hemindra Hazari, an independent market analyst, writing in The Wire, says, “With so many luminaries of the corporate world on the board, management oversight and accountability should have been all-pervasive and senior management emoluments should have tracked performance. But a look at the firm’s annual reports depicts a disturbing picture.”
Finance Minister Arun Jaitley has said the government will take all measures to ensure that adequate liquidity is provided to non-banking financial companies or NBFCs, mutual fund houses, and small and medium enterprises or SMEs, after the stock and bond markets were rattled by the IL&FS crisis.
Last month, The National Law Company Tribunal (NCLT) allowed the Government to take control of IL&FS. The last time the Government had moved to take control of a company was in the wake of the Satyam Scandal in 2009.
The government superseded the existing board of debt-laden Infrastructure Leasing & Financial Services (IL&FS) with six new board member, appointing Kotak Mahindra Bank MD Uday Kotak as Chairman of the board. The government also nominated technocrats who have had varied experience in their careers.
All eyes are on the newly constituted board of Infrastructure Leasing and Financial Services (IL&FS), which has been tasked to come up with a rescue plan for the company by tomorrow.