Debt Trade of IL&FS

Now the spotlight is on the IL&FS, a Mumbai based leading infrastructure leasing and financing company that has defaulted on its debt payments. This news has sent shock waves in the burgeoning financial sector of India and sparks question on credit worthiness of the Industry giants.  This news caused widespread turmoil in the NBFC stocks, dwindling them more in the Dalal Street on Friday.

In the present context, IL&FS is unable to service its obligations (including interest) term deposit and short term deposit as reported in Bse filling. It includes default in respect of five bank loans totaling 284.50 crore, consists of Rs 100.60  crore and Rs 50.30 crore obligations due on September 24, while a 62.90 crore due on September 26, as well as Rs 50.20 crore due on September 16 and Rs 20.50 crore due on 25 September are not paid yet. Term deposit obligation of Rs 103.53 crore was to be serviced on September 25 and short term deposit worth Rs 52.43 crore was due on September 27, 2018. IL&FS has also defaulted on Rs 450 crore inter corporate deposit to Small Industries Development Bank of India and also on repayment of number of commercial papers. Keeping it simple, IL&FS has run out of funds therefore these debts defaults are inevitable.

So all the eyes are on the AGM of the IL&FS on September 29, where it will be discussed to infuse more capital in the debt-laden company in the form of Rs 4,500 crore through rights issue and credit line of Rs 3,500 crore from SBI and LIC, to be completed in October. The company would setup a legal framework to start asset sell and also put its corporate office jointly valued at Rs 1,30,000 crore.

Sensing IL&FS in troubled waters, the RBI has stepped in and on Saturday called up prominent stakeholder’s in IL&FS like LIC with stake (25.34%) and ORIX Corporation with stake (25.34%), they are ready to help company in tough times and are likely to raise its stake in the company by subscribing rights issue, whereas Abu Dhabi Investment Authority with stake (12.56%), HDFC bank (9.02%) and Central Bank of India (7.67%) stake may not subscribe this issue.

So a genuine questions arise why everyone is so keen to save this company. The answer lies in a fact that firm’s outstanding debentures and commercial papers accounted for 1% and 2% of India’s domestic corporate debt market and its borrowing of around Rs 57,000 crore is 0.5% of banking system loans. Huge figures enough to spell more trouble for Indian lenders.

This entire incident may lead to cancellation of licenses of smaller 1,500 NBFC’s since these NBFC don’t have adequate capital (Link). It will put brake to various infrastructure projects (Bangalore metro projects,14.5 km 2 lane bi-directional  Zojila tunnel projects, chenani nashri projects ). Domino effect of this defaults is going to be so gigantic that it is likely to be lehman brothers moment of India.

Sensing their  the judgment day to arrive, the Board of IL&FS , who failed to foresee  near term future, quickly  approved the Company’s specific asset divestment plan based on which IL&FS expects to reduce its overall debt by Rs 30,000 crore from total debt of Rs 91,000 crore .

With such brilliant brains and seasoned managerial persons sitting in the epicenter of this complex infra and leasing company, this “Systemically Important Non-Deposit Accepting Core Investment Company”, does not deserve this fate. Management would have prevented company from entangling into such financial crisis. This whole episode of IL&FS has been epitome of sheer negligence and mis-governance by professionals. Now the question is if LIC and other Financial institution’s bailout of this company, which is grappled with lack of transparency, mismanagement, accountability and handing them more public funds, is really worthwhile?

Research Assistant
Pankaj Singh
Green Portfolio PVT LTD

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