IL&FS- Resurrection of Titans

Background

Infrastructure Leasing & Financial Services (IL&FS) was formed in 1987 as an "RBI registered Core Investment Company" by three financial institutions, namely the Central Bank of India, Housing Development Finance Corporation (HDFC) and Unit Trust of India (UTI), to provide finance and loans for major infrastructure projects. Gradually, as the organization needed better financing, it additionally opened itself to two large international players, namely Mitsubishi (through Orix corporation Japan) and the Abu Dhabi Investment authority. Subsequently, Life Insurance Corporation India, Orix and ADIA became its largest shareholders, a pattern that continues to this day.

The Present

Currently, its institutional shareholders include Life Insurance Corporation of India (LIC), ORIX and Abu Dhabi Investment Authority, with small shareholdings by a few Indian banks. State Bank of India (SBI) was a share holder till 2017, after which it sold its stake in the company. However, it has recently acquired 6.42% stake as a part of debt restructuringof IL&FS. A few foreign investors including Greenspring associates remain investors in its subsidiary companies, especially IL&FS transportation and IL&FS infrastructure services.

What is the crisis?

• IL&FS has over Rs 91,000 crore in debt and is facing severe liquidity crisis. The default in payment of interest by the company has raised concerns over its financial stability. Since September 12, IL&FS has defaulted in payments of interest more than seven times so far.
• IL&FS needs immediate capital infusion of Rs 3,000 crore and has also proposed Rs 4,500 crore as rights issue. The Reserve Bank of India (RBI) also met the shareholders of IL&FS on September 28 to discuss the revival and capital infusion plans for the company.
• At the annual general meeting (AGM) of the company on September 29, shareholders - the State Bank of India (SBI), Life Insurance Company (LIC) and Orix Corporation - agreed to subscribe to the proposed Rs 4,500-crore rights issue.

What has been its impact?

• The market indices, Sensex and Nifty, fell during the trading session due to the IL&FS crisis.
• The defaults in payments by certain group entities of IL&FS have triggered fears of liquidity crisis in the financial markets.
• The NCLT allowed the government to reconstitute the board of IL&FS after market hours on Monday.

What has been done so far?

• The NCLT has appointed a six-member panel to take over the management at IL&FS with immediate effect. The panel will be headed by managing director of Kotak Mahindra Bank - Uday Kotak.
• The government has intiated an investigation by Serious Fraud Investigation Office (SFIO) into the affairs of the IL&FS.The government said it took this extraordinary step under section 241(2) of the Companies Act, 2013 to avoid further mismanagement of the company and in order to protect public interest.

The Future

The annual general meeting of IL&FS held on 29th sept has charted out a path of Rs. 4500 cr. rights issue. However it is not certain how many existing shareholders will subscribe to it. Thus, the uncertainity still remains w.r.t. the resurrection of this Indian Titan.

By: Abhishek Sharma