Corporate governance series- Part 6: IL&FS crisis explained -Gaurav Bansal

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  • Published
    10th Jan, 2019

What is IL&FS?                                                     
IL&FS Ltd, or Infrastructure Leasing & Finance Services, is a core investment company and serves as the holding company of the IL&FS Group, with most business operations domiciled in separate companies which form an ecosystem of expertise across infrastructure, finance and social and environmental services. IL&FS was founded in 1987 with equity from Central Bank of India, Unit Trust of India and Housing Development Finance Co to fund infrastructure projects when peers IDBI and ICICI were focused more on corporate projects. 

The company describes itself as the pioneer of public private partnerships, with a portfolio of about 13,100 kilometers of roads. Shareholders include India’s largest insurer, Life Insurance Corp.; its biggest lender, State Bank of India; and Japan’s Orix Corp. Its 169 subsidiaries, associates and joint ventures, make it too complex for any watchdog or credit-rating firm.

What’s gone wrong?

  • Its cash flow is short on receivables, i.e., the corporation has run short of cash.
  • New infrastructure projects in India are stuck because of lack of Pvt sector interest in PPP, on top of that, some of IL&FS’s own construction projects, including roads and ports, have faced cost overruns amid delays in land acquisition and approvals.
  • IL&FS payable interest rates have soared to multi-year highs for short-term borrowings.
  • Disputes over contracts have locked about 90 billion rupees of payments due from the government.


IL&FS Financial Services has about $500 million of repayment obligations over the next six months. Its debts total about $12.6 billion.

Why are individual investors affected?

Some of the missed payments, which started in August 2018, were on commercial paper, or short-term unsecured debt.

Money managers have marked down holdings of IL&FS debt and one financial company temporarily halted inflows into some affected funds. Banks, mutual and pension fund managers, insurers and individuals are bracing for further losses.

Among the concerns for investors is that IL&FS has made loans to its own units. The company is also in default on short-term borrowings known as inter-corporate deposits.

Commercial paper is a key component of money-market mutual funds, which have surged in popularity in response to low bank deposit rates and persistent inflation.

What’s been the impact?

The repayment crisis is helping to stoke borrowing costs in India’s credit markets, with the average yield on one-year corporate notes jumping to the highest since 2015. It’s raising questions about the affordability of some of Key infrastructure projects. Those include awarding works of around 20,000 kilometres of national highways and ring roads in 28 major cities this fiscal year. And it’s got investors worried about leverage at other shadow banks, prompting a surge in volatility among financial stocks.

What next for IL&FS?

Rolling over debt won’t be easy. In Sept. 2018 the Indian unit of Moody’s Investors Service cut the ratings on several IL&FS debt instruments to a level that signifies actual or imminent default.

IL&FS is seeking to raise more than $4.2 billion selling assets, It’s also planning to raise the group’s share capital. To be sure, many powerful players have a deep interest in preventing the group’s collapse, including those blue-chip and sovereign-backed shareholders. Indeed, the parent company is categorized by the Reserve Bank of India as systemically important, meaning it’s less likely than a regular company to be allowed to fail.

What’s likely to happen?

  • IL&FS should sell assets and bring in strategic partners in a timely manner.
  • India’s Moody’s unit says IL&FS is “vulnerable to a lumpy deterioration in asset quality.”
  • In its latest status report to the National Company Law Tribunal (NCLT), the new board of Infrastructure Leasing and Financial Services (IL&FS) has said that finding a single solution for the IL&FS crisis and its ?91,000 crore of debt is not possible.
  • The only options left, according to the IL&FS board, was hiving off and selling entire business verticals to willing buyers or if that failed, going for asset-level resolution—which would involve asset-by-asset solution explored through various methods including (a) significant capital infusion (either from existing or new investors); (b) asset monetisation to retire debt; and (c) resolution/ compromise with the creditors.

Cost-cutting measures

  • The board is implementing cost-cutting measures, including salary rationalisation, letting go of superannuated consultants, and discontinuation of certain businesses and verticals, which will save IL&FS about Rs 100 crore annually.
  • Phase 2 of manpower cost-cutting initiatives including talent restructuring and amalgamation of roles, which will yield an approximately 50% savings in the wage bill of the IL&FS Group. The report by company mentioned that several other initiatives are being initiated and that will bring down total manpower of the IL&FS Group by approximately 65% and wage cost by 50% respectively.
  • IL&FS will also terminate lease rentals on guest houses used by group companies.

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