The recent case of IL&FS has stuck the corporate world hard especially infrastructure leasing and financing industry. The issues at hand are much deeper than what it appears. The presentation is an attempt to make people understand the case in a simple way.
2. IL&FS
• Infrastructure Leasing and Financial Services (IL&FS), a sprawling
financier of roads, bridges and power plants. It has almost always
been investment grade.
• It operates through more than 250 subsidiaries including IL & FS
Investment managers, IL & FS financial services and IL & FS
Transportation networks India Limited (ITNL).
• Major Shareholders include
• LIC
• Mitsubishi through Orix Corporation Japan
• Abu Dhabi Investment Authority
3. Company Information
• The company claimed to have 23 direct subsidiaries, 141 indirect
subsidiaries (including special purpose vehicles for different
projects), 6 joint ventures and 4 associate companies, each of
them is further subdivided into additional legal entities, with
much cross ownership as well as ownership by investment vehicles
of various governments.
• However in the recent interview Uday Kotak stated that the
company has as many as 348 subsidiaries.
4. The Problem??
• The key reason was the way IL&FS is structured. A debt of 91,000
crore against the equity capital of 9.83 crores.
• The parent would raise debt that would then be infused as equity
in each subsidiary. The subsidiary would then use that equity
(which was debt on the parent IL&FS’s books) to raise more debt.
• This created a mismatch in the asset liability part.
5. • Another reason was the slow rate of approvals and government
banks distancing themselves from long term loans due to increase
in NPA.
• This resulted in short term financing being used for long term
projects. And IL&FS started facing cash flow issues and losses due
to various projects stuck at different levels. At the same time,
short-term debt and interest had to be paid when it comes due
6. What company did?
• IL&FS board did try and take corrective action. There were plans
to start selling assets. Term sheets were prepared, bankers
engaged and proposals invited. However, the sales couldn’t be
completed in time to avert a default.
• In Sept, the company defaulted on 300 crore loan from SIDBI.
• Another plan was to raise ₹4500 crore rights issue as well as ₹3500
crore line of credit for working capital requirements.
• NCLT was approached under section 230 of the Companies Act to
establish a structure to the asset sales.
7. Questions the case asks?
• Even though independent directors were on the board the issues
cropped up. What is the actual duty of independent director and
will this case allow them to have more power?
• If there was such high mismatch in asset liabilities, why were
IL&FS investment grade. The rating regime in India needs to go
through change.
• Can Satyam style takeover avoid such instances in future?
8. Road Ahead
• The government in Satyam styled fashion have superseded the
board. The new members are
• Mr. Uday Kotak, MD and CEO of Kotak Mahindra Bank
• Mr. Ghyanendra Nath Bajpai, Former chairman LIC, SEBI
• Ms. Malini Shankar, IAS
• Mr. Vineet Nayar, Executive Vice Chairman of Tech Mahindra
• Mr. Girish Chandra Chaturvedi, Non Executive Chairman of ICICI Bank
• Mr. Nand Kishore, Former Deputy Comptroller and auditor general
9. • The NCLT has given immunity to the newly appointed six directors
against the past deeds of the board members. It has also allowed
the new directors to appoint a whole time director/managing
director.
• Uday Kotak is the new chairman of the board while Mr. Nayar has
been selected as Vice-Chairman and managing director of the
company.
• The new board will present roadmap to revive the infrastructure
group of companies before the NCLT on or before October 31.
10. • According a money control report the new board is hiring a
professional agency to have a complete picture of the IL&FS, and
then only the plans can be discussed.
• SFIO is looking into the company as well as the auditors S.R.
BatliBoi and Co. The report has to be submitted in a month`s
time.
• The critical infrastructure projects have to be met with and
according to some estimates the company need close to 100 crores
a month to stay afloat.
11. Conclusion
• IL&FS case will lead the way for infrastructure leasing and
financing scenario in India.
• The rating regime in India have to reviewed as it was investment
grade despite the asset liability mismatch while as soon as default
started the rating was changed.
• The role of independent directors will also need to be reviewed.
