Page 37 - 31OCT2018E

BANKING

What went wrong with IL&FS? structure Development Finance Corpo-

rations were created so as to cater for
long-gestation projects and for refinanc-
ing bank loans to infra projects. Slowly,
The chartered accountants’ apex body has sought an explanation from firms that carried out statutory however, all these institutions were at-
audit of crisis-hit IL&FS group during the past few years amid concerns about liquidity crunch tracted by the idea of ‘universal banking’,
and eventually all of them transformed
in the financial system, writes BHARAT HITESHI into commercial banks.
The irony is, IL&FS seems to have en-
he government has seized infancy. Its original stakeholders were reduced the travel time between Jammu tered and encountered serious problems
control of the IL&FS board UTI, HDFC and the Central Bank of India. and Srinagar by a spectacular two hours. as an infrastructure financier for many
recently. As situation turns IL&FS has institutional sharehold- In the process, the IL&FS group grew years, it could not but have been acutely
murky, the Institute of Char- ers including SBI, LIC, ORIX Corpora- into a true behemoth, formidable but also aware of the many serious problems
T tered Accountants of India tion of Japan and Abu Dhabi Investment unwieldy and extremely complicated in the whole infra sector is laden with. In-
(ICAI) said it has issued notices to audit Authority (ADIA). As on March 31, 2018, its architecture, comprising over 200 credibly, however, it plunged headlong
firms that conducted statutory audit LIC and ORIX Corporation are the larg- business units/arms each of which drew into the turbulence itself, daring it do its
works of IL&FS group in the past few est shareholders in IL&FS with their sustenance from the parent/holding worst, as it were. It is here that the com-
years. The institute, however, has not stakeholding at 25.34 per cent and 23.54 company (IL&FS Ltd) but did not easily pany’s board comes into sharp focus. It is
disclosed the specific details. In the re- per cent, respectively. Other prominent lend itself to a close examination. Only always the board’s brief to direct policy
cent past, there have been news reports shareholders include ADIA (12.56 per three of IL&FS’ subsidiaries are listed as well as to oversee the implementation
regarding diversion of loan money in cent), HDFC (9.02 per cent), CBI (7.67 per companies — none of the SPVs is a listed of agreed policy.
IL&FS and its subsidiary companies, the cent) and SBI (6.42 per cent). entity — and the intermeshing of their The defaults also jeopardised hundreds nificantly, because bank loans are bench- It is completely unbelievable that a
ICAI said in a statement. “The Discipli- It was a government-sponsored en- financials makes the group quite opaque of investors, banks and mutual funds as- marked to some underlying which may board packed supposedly with some
nary Directorate of the ICAI, upon com- terprise in the private sector. Over the to any meaningful scrutiny. sociated with IL&FS. change dramatically in course of the pro- of the best and brightest in brains (R.C.
ing across such news report has suo decades, the company reinvented itself The holding company managed to The defaults sparked panic among eq- ject’s implementation and debt servicing. Bhargava, Michael Pinto, Jaithirth Rao,
motu taken cognizance of the matter and in every which way imaginable. The show itself in good light even as the uity investors even as several non-bank- The financing of infrastructure is of- S.B. Mathur, Rina Kamath) failed so out-
pro-actively issued notices to the statuto- company had also outgrown its original group as a whole had been sinking under ing financial companies faced turmoil ten plagued by all these risks, because if rageously in its basic duties. The board
ry auditors on October 4, 2018 for the rel- mission, mutating into a major infra- the dead weight of unfinished projects amid a default scare. During 2017-18, the the project cash flows are low or delayed, had nominees of SBI, LIC and CBI as
evant years of the concerned company structure player itself, no longer content and dramatically rising liabilities. Over net group loss was 21 billion while, in the debt servicing cannot help being tardy well and it is inconceivable how these
seeking their explanation in the matter,” with financing of infrastructure alone. the three years from 2014-15 to 2017-18, same year, short-term debt alone went or erratic. But even more importantly, institutional directors merely looked
it said. The institute has also written to “From concept to execution” became its consolidated debt rose 44% to nearly $13 up by 136 billion. The holding company’s there is a fundamental flaw in funding askance while the senior management
the Reserve Bank of India and the Seri- byword and the focus shifted from spon- billion and the debt-to-net worth ratio market standing was leveraged by every of infrastructure because the lion’s share dictated terms. Indeed, the board was so
ous Fraud Investigation Office seeking soring a project to facilitating, even actu- climbed to a staggering 13:1. Analysts subsidiary and each SPV to raise more of the financing is accounted for by com- self-indulgent that its risk management
details about IL&FS issue. ally implementing it. Its operating model have indeed shown that even these num- and resources at a steady clip. mercial banks. Now, project loans are committee never thought it necessary to
was also a giddy amalgam of subsidiaries, bers may be off the mark, that the group’s As we know the infrastructure financ- typically long-duration exposures, while meet after July 2015.
Genesis associates and special purpose vehicles net worth may have completely eroded if ing is a tough enough job at the best of an Indian bank’s corpus of funds has an
The Infrastructure Leasing & Finance (SPVs) many of which were set up around we factor in all the intangible assets and times and when it is coupled with dirty- average maturity of no more than three Is there road to revival?
Services, is a core investment company a specific project, such as a road, a bridge the quasi-equity funds that have been ing one’s own hands by actually execut- years today. This mismatch between The impasse at IL&FS is unlikely to be re-
and serves as the holding company of or the celebrated Chenani-Nashri High- generously treated on par with equity in ing infrastructure projects, the problems the sources and the utilisations of bank solved soon, or with just about minimal
the IL&FS Group, with most business way Tunnel, the country’s longest (9.3) the group’s balance sheet. could only multiply manifold. funds is fraught with serious liquidity loss to the stakeholders. The Mumbai-
operations domiciled in separate com- road tunnel on NH 44 in J&K which has All infrastructure projects typically risks. And delinquencies in infra loans headquartered company has identified
panies which form an ecosystem of ex- Why of crisis? come loaded with a generous basket have been the single most important at least 25 projects for sale, which include
pertise across infrastructure, finance The IL&FS Financial Services, a group of risks that most other business ven- cause of bank NPAs in recent years. some road and power projects. It is learnt
and social and environmental services. There is a company, defaulted in payment obliga- tures manage to steer clear of: long and Till the 1980s, India had what were that the company has already received
The IL&FS IL&FS’s mandate was to fi- fundamental tions of bank loans (including interest), protracted implementation; natural then called ‘Development Financial In- firm offers for 14 projects. The govern-
nance the building and maintenance of term and short-term deposits and failed calamities or some other unforeseen stitutions’ — like the IDBI, the ICICI or the ment has moved National Company Law
infrastructure projects that were meant flaw in funding to meet the commercial paper redemp- contingencies; delayed for regulatory ap- IFCI — that had been set up primarily as Tribunal (NCLT) today to supersede the
to be commercially viable in the long run tion obligations due on September 14. On provals; escalation of costs well beyond vehicles of project funding. Traditionally, IL&FS board and change the company
like toll roads, ports, power generation of infrastructure September 15, the company reported that the original estimates and the need for the commercial banks were engaged in management. A rescue-plan by the Cen-
and/or distribution facilities and so on. because the lion’s it had received notices for delays and mobilizing and servicing of additional financing short-term (mainly working tre is urgently needed. It has already pro-
At its inception in 1987 as a ‘core invest- defaults in servicing some of the inter debt; inadequate, or at any rate slow rev- capital) needs while the resources of posed to appoint 10 nominee directors
ment company’ registered with the RBI, share of the financing corporate deposits accepted by it. Con- enue/cash generation; and finally, often these DFIs were harnessed for longer- who will report to the NCLT for relevant
it could look mainly at private sector is accounted for by sequent to defaults, rating agency ICRA a change in the business environment term loans. Equity, long-term deposits plans for the road ahead.
ventures, because the public-private- downgraded the ratings of its short-term that nobody ever anticipated. Naturally, and debentures funded these institu-
partnership (PPP) model was still in its commercial banks and long-term borrowing prograramme. the servicing cost of a bank loan rise sig- tions. Later, corporations like the Infra- LETTERS@TEHELKA.COM

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