This Article is From Oct 04, 2018

10-Point Guide To The IL&FS Fiasco And How It Impacts Everyday People

The latest social media jibe on the rupee goes something like this: once it crosses 75 to the dollar, it will be become part of the Marg Darshak Mandal, the BJP's panel of retired statesmen. There are few cracks, however, at the IL&FS crisis, which threatens potential collapse for the markets and the country's financial network. Here's a 10-point guide to what exactly the crisis is all about and how it could affect people like you and me:

1) Infrastructure Leasing and Financial Services (IL&FS) is a major infrastructure financing and construction company. Till end September it had defaulted on debt obligations totalling Rs 3,800 crores.

2) What happened? IL&FS is a private firm but with over 40% of the shares held by government-owned firms which means the government needs to ensure the solvency of IL&FS to maintain financial stability in the country. IL&FS has infrastructure and financial assets worth more than Rs 1,15,000 or $15.77 billion but its debts are the result of "mismanaged borrowings in the past," the government has said.

3) How much debt, exactly? IL&FS and its subsidiaries have a total debt pile of nearly $12 billion or Rs 91,000 crores. So is it Satyam 2.0? Not quite - or at least, not yet. Several references have been made to the 2009 scam when Satyam promoter Ramalinga Raju admitted to defrauding his company of over a billion dollars. On IL&FS, the government says the management had "lost total credibility" given the fact that "huge managerial pay-outs were made despite a looming cash crunch." The government has ordered a fraud inquiry for IL&FS.

4) So the government has this week replaced the board of IL&FS with six selected nominees and said it would ensure IL&FS has the liquidity needed to ensure no more defaults take place and the infrastructure projects are implemented smoothly. India has rarely stepped in to take control of a private company. The government's attempt to take control of real estate major Unitech Ltd. late last year was stalled by the Supreme Court. The new six-member IL&FS board will prepare a revival plan, but it is becoming clear some of its lenders will need to suffer major losses, claims Reuters.

5) Who or what is to blame? The government blames the board and management. Interestingly, Ravi Ramaswamy Parthasarathy who is one of the longest-serving Whole Time Directors resigned in July as the group's chief. Just weeks later, in August, group companies began defaulting on loan repayments to the tune of hundreds of crores. What - a business model where short-term loans were taken to pay for long-term projects and essentially, the long-term projects weren't earning enough or fast enough to pay off the short-term loans. It has now transpired that the company had leveraged itself 13x - "the borrowing of about Rs 91,000 crores is on the base of equity capital and reserves of about Rs 6,950 crores", as per the government. 

6) The group needs about 4,000 crores fast to pay loans. That money is likely to come from LIC and SBI, state-owned firms which together hold over 30% equity in IL&FS. This may not seem much but remember that a massive, respected firm not being able to repay its loans has shaken the confidence of investors. Nobody is sure how deep or widespread is the rot. IL&FS had compromised on corporate governance and risk management norms, the government has said.

7) How does this affect the common person? While the 4,000 crores needed urgently to pay IL&FS' debts is really not much for cash-rich giants like LIC and SBI, the concern is how often will they be called to save too-big-to-fail firms? Recently, LIC began the takeover of IDBI for an estimated 13,000 crores to save the government bank from collapsing. Of course, LIC and SBI are cash rich on the back of, to a fair extent, small investors' savings. If you have investments in stock markets and equity mutual funds, these have taken a pounding in the last few weeks. In September alone, BSE-listed companies lost Rs 14 lakh crore in market capitalisation.

8) Debt investments - from secure to shaky? Debt investments have been a by-word for secure returns. But IL&FS, which went from the top-most 'AAA' ratings to 'D' or Junk, has spooked investors into wondering if there is enough cash or liquidity in the markets in case they want to sell their investments or bonds in other corporations. Finance gurus have noted that the Public Provident Fund, that refuge of lakhs of small investors looking for a secure return of around 8%, has 'serious exposure' to IL&FS. Fixed income funds are another worry.

9) Has the government's response been swift? This is being hotly debated. On one hand the NDA blames the UPA, on the other questions are being raised how come government regulators failed to detect any sign of trouble in the last four year. That apart, on September 24th, a finance official said the group is independent of the government and it needs to resolve it's issues on its own. By the 30th the ministry was writing a panic-stricken note to replace the (mis)management. The take over happened within 24 hours.

10) What have IL&FS' big contributions been? The Delhi-Noida Toll Bridge, IL&FS Tamil Nadu Power Company, the all-weather tunnel in Patnitop between Jammu and Srinagar; among other nation-building projects, it's constructing the ambitious and challenging tunnel at Zoji-La at over 11,000 feet to make the Srinagar-Kargil road open even in winter. Which is why the government says if it doesn't have access to funds now it would be "quite damaging to the overall infrastructure sector, financial markets and the economy". Government support now should help to restore confidence, specially as it says other economic fundamentals are strong. However, add the IL&FS crisis to the weakening Rupee, rising oil and interest rates - and it isn't a pretty picture.

(Chetan Bhattacharji is Managing Editor at NDTV)

Disclaimer: The opinions expressed within this article are the personal opinions of the author. The facts and opinions appearing in the article do not reflect the views of NDTV and NDTV does not assume any responsibility or liability for the same.

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