What triggered IL&FS Crises? Who was responsible for it? Impact of the crises. Measures taken to attenuate the impact.

1. DIGGING INSIDE IL&FS CRISES.
Infrastructureleasing and financial services ltd was founded in 1987. Itis a
non-banking financial company (NBFC) or also referred to as a shadow bank.
To understand the crises we need to understand whatare NBFCs. NBFCs are
those financial institutions which providevarious banking facilities without
actually holding a banking license. The major difference between banks and
NBFCs is that NBFCs can neither accept deposits nor they can create credit. So
various provisions established by RBI arenot applicable on NBFCs, so they
enjoy quite a freedom. NBFCs can lend money to various companies and can
invest it in various financialinstitutions. NBFCs are one of the important pillars
of the economy, as they providefinancial services to Micro, Small, and
Medium Enterprises (MSMEs) and in investment projects.
For working, banks arethe main sourceof finance for NBFCs. NBFCs get
majority of funds (long term) from banks. NBFCs can also raise money from
Money Marketby issuing debt securities like commercial papers (shortterm
less than a year) and inter-corporatedeposits (high interest rates).
IL&FS AND ITS BUSINESS.
The scale of operations of IL&FS was quitevast. Ithad at least 24 direct
subsidiaries and 135 indirect subsidiaries. Two main importantsubsidiaries of
IL&FS wereIL&FS FinancialServices Ltd (IFIN) and IL&FS Transportation
Networks Ltd (ITNL).
IL&FS invested in major infrastructuredevelopmentprojects under Public-
Private Partnership model(PPP). Around 2012, PPP modelwas re-introduced.
Under this model Privatecompanies will help the governmentin infrastructure
development projects and after the completion of the project, the Private
company will hand it over to the Governmentin return for a fixed price or
Private company will be allowed to collect revenuefrom that projectfor
certain period of time (ownership remains in the hand of the Government) and
then it will be handed back to the Government. Building of highways and
collection of toll tax after its completion is an example of PPP model.
IL&FS decided to advantage from this model and invested heavily in these
projects. Generally the maturity of these projects was around 10-15 years. To
finance these projects IL&FS took loans from bank with re-paymentperiod of
7-8 years and after the expiry of this period, IL&FS gotits loan refinanced.
Refinancing of loan means taking another loan to pay back the previous loan.

2. So IL&FS adopted the technique of re-financing to manage its infrastructure
projects. IL&FS also issued commercialpapers to borrow shortterm debt from
money market. Commercial paper issued by IL&FS weregiven 'AAA' rating
(highestrating) by rating agencies due to its then credibility. IL&FS invested all
these funds, raised under shortterm loan, in long term investment projects.
WHEN THINGS STARTED TO CRUMBLE?
In 2014, Land Acquisition, Rehabilitation and Resettlement Act (LARR) came
into effect. According to LARR, companies were required to pay right and fair
compensation for acquisition of land. Due to this act, the cost of infrastructure
projects got escalated by many folds. Many infrastructureprojects of IL&FS
beleaguered and became inviable. IL&FS suffered heavy loss on accountof
these inviable projects, boring a deep hole in IL&FS pocket. Sudden
proliferation in projects costdelayed many of its projects, which further shot
up the cost. Delay in timely action exacerbated the problem. Meagre amount
of funds available with the company (due to long term maturity of projects)
and increasein costincited the company to raisequite a large debt
borrowings. Dueto which the debt-to-equity ratio of the company shot up
from12 to 18.7.
Further the money which was raised by the company through commercial
papers was also invested in long-term infrastructureprojects leading to asset-
liability mismatch (when financial terms of assets and liabilities do not match).
Company even tried to pay-off its long term loan by issuing commercial papers.
Due to continuous increasing cost of projects and huge losses incurred by
IL&FS, itwas not able to fulfil its shortterm debt obligations. In 2018, IL&FS
defaulted on repayment of a short-term loan of ₹1,000 croreto SIDBI. This
default costed IL&FS therecredit rating. ICRA (credit rating agency)
downgraded the long and shortterm debt securities of IL&FS. Over a period of
time IL&FS debtsecurities got 'D' ratting: meaning default. This created a chaos
in the securities market and debt securities of IL&FS started losing their value.
Various investors and mutual funds who had haveinvested in debt securities of
IL&FS losttheir money. In September 2018, IL&FSwas notable to meet its
commercial paper redemption obligation and defaulted on loan amounting to
₹91,000 crore.

3. IMPACT OF THIS CRISES.
After the crises of IL&FS was unveiled, wholeeconomy and investors were
staggered. This crises jeopardizethe sharemarket. Value of shares of various
companies who invested in IL&FS stumbled, as they lost 15%-16% of their
value. Various mutualand pension funds who had invested in debt instruments
of IL&FS losttheir money and faced huge redemption pressurefrom their
holders. In short, savings of common public wereat stake.
The banks who had given loan to IL&FS werenot able to recover them. The
losses wereso big that it upheaval the banking system. So the effects of the
crises werehorrendous, especially for the financial system.
IL&FS crises caused illiquidity in the marketas many banks, mutual funds and
other financial institution losttheir money directly or indirectly. IL&FS crises
created a domino effect in the economy as various institutions started to fell
one by one.
The crises was quite similar to The Financial Crises of 2008(U.S) and if left
untreated it could bring down the whole financial system of the economy.
MEASURES TAKEN TO ATTENUATE THE IMPACT.
To find a safe escaperoute, governmentand RBI intervened in the situation.
The board of directors of the company was removed by an order passed by
National Company Law Appellate Tribunal (NCLAT). New board of director was
appointed by the governmentincluding Mr. Uday Kotak as its chairman. The
purposebehind appointment of new board was to look into the affairs of the
company and to devise a strategy to pull out the company out of the crises.
An external forensic audit was also done to snag any possiblefraud and to
check the validity of financial accounts.
Further the majority shareholders of the company wereasked to providea
bailout package for the company by accepting right issueworth ₹4500 crore.
But still permissions haveto obtain for such rightissue.
The company is also trying to recover its cost from various projects that has
been executed by it. The company also held talk with National Highway
Authority of India (NHAI). NHAI willpay ₹700 crores to IL&FS for theprojects
executed by the company.
RBI, realising the gravity of situation, infused liquidity in the market by
conducting open market operations (buying of governmentbonds in order to

4. infuseliquidity in the market). Itwas decided that RBI will infuse ₹10,000
crores to maintain the liquidity in the market.
RBI latter introduced 'PARTIAL GUARANTEESCHEME' for NBFCs. Under this
scheme public sector banks(PSBs) wererequired to invest ₹1 lakh
crore(cumulatively by PSBs) in pooled assets of financially sound NBFCs having
a rating of 'AA' or above, in return RBI will providefor losses suffered by
PSBs(for investmentin NBFCs) up to first10% for a period(oncein six months)
of 24 months. This scheme provided guarantee to PSBs and insured sufficient
liquidity in the market.
RECOGNIZING THE CULPRITS.
Mainly the Board of directors and their ineffective management techniques
were responsiblefor this downfall. The board was unable to devise effective
policies to cope up with the increase in costof projects. Further, the top level
management continued to draw handsomesalaries, even when they realised
the debt situation of the company.
Fromvarious reports it also became clear that top level management had
invested the funds of the company in futile projects. When the audit reports of
the company werescrutinized, it came out that the risk assessment
department arranged only few meetings over a period of 7-8 years. Thus there
was poor risk assessmentdueto which the company was not able to assess the
amount of risk it was taking.
The company committed various other blunders. IL&FS was investing funds
raised from money market (smallterm debt) in form of CP and inter-corporate
debt in investment projects with long maturity date. The company even used
these funds to pay-off its long-term debt creating assetliability mismatch.
There were somefactors, though exogenous to the company, butwere
responsiblefor the crises. The implementation of LARR affected the viability of
its various infrastructureprojects as itincreased the cost of projects, hitting
the profitability of the company.
Itis also believed that auditors werealso responsiblein this downfallto some
extent as did not performtheir duty with much diligence. Auditors relied on
the information provided by the management while auditing the accounts of
the company. Dueto which they werenot able to introspect the actual and
real state of affairs of the company. They werenot able to snag the assets

5. liabilities mismatch of the company. Furthers the auditors who were
responsibleto providefair position of company's subsidiaries, failed to do so,
turning the situation into a greater tailspin.