When Infrastructure Leasing & Financial Services Ltd started missing deadlines on short-term debt instruments late last month, rating agencies ICRA, India Ratings and CARE belatedly swung into action to abruptly downgrade IL&FS and its subsidiary from a high investment grade all the way down to junk status, indicating actual or imminent default. But the rumblings are unlikely to stay confined to just the stakeholders in the company, including LIC, Central Bank of India, HDFC Ltd and SBI.
Less than four months before the defaults, IL&FS issued four series of non-convertible debentures and raised an aggregate of Rs 735 crore through them. Documents accessed from the Registrar of Companies show that Series 1-A and 1-B were issued in May to raise Rs 260 crore and Rs 200 crore, respectively, at a coupon of 8.9 per cent and 9 per cent, Series 1-C was issued in June 2018 to raise Rs 200 crore at a coupons of 9.05 per cent and 9.15 per cent. However, the Series 1-D issued in August (allotted on August 27, 2018) to raise Rs 75 crore was issued at a coupon of 9.9 per cent, much higher than the rates offered earlier.
While ICICI Bank was the biggest subscriber of their papers as it invested Rs 488 crore out of the total Rs 735 crore, Infosys subscribed to papers worth Rs 100 crore. Maharashtra State Electricity Board’s Contributory Provident Fund subscribed to series 1-D NCDs in August worth Rs 63 crore just before IL&FS started defaulting on its other debt obligations.
With the ratings tumbling following the default in August 2018, over two dozen mutual fund schemes holding around Rs 3,000 crore exposure to IL&FS entities were forced to take sudden write-downs, jolting their investors. Domestic banks and insurers are next in line. Desperate attempts by IL&FS to secure a bailout from its key stakeholders LIC, which is already under fire over a proposal to take over loss-laden IDBI Bank, and SBI could face increasing scrutiny given the current environment.
In fact, IL&FS filing with the capital markets regulator show that the top-10 debenture holders of IL&FS are GIC of India, LIC of India, SBI Employees pension fund, SBI Employees provident fund, Postal Life Insurance Fund, India Long Term Debt Fund, Oriental Insurance Company, NPS Trust and United India Insurance.
The problem, analysts said, is inherent in IL&FS’ structure — an unlisted company with an unwieldy 24 direct subsidiaries, 135 indirect subsidiaries, 6 joint ventures (JVs) and at least 4 associate companies. The parent company does not have a business of its own but acts as an investment company, with the investments being routed through these subsidiaries, primarily in infrastructure and financial services, which, in turn, invest in downstream subsidiaries, associates and special purpose vehicles (SPVs), for executing projects.
The defaults expose the vulnerabilities in IL&FS’ operational model of taking on the financial and project risks on borrowed money. The initial bailout pleas is for about Rs 4,000 crore to meet immediate redemption pressure, but given that LIC already holds 25 per cent in the company, it will need special permission to invest more money and thereby increase stake. The other major stakeholders are ORIX Corporation of Japan (23.54 per cent stake as on March 31, 2018), Abu Dhabi Investment Authority (12.56 per cent), IL&FS Employees’ Welfare Trust (12 per cent), HDFC Ltd (9.02 per cent), Central Bank of India (7.67 per cent) and State Bank of India (6.42 per cent).
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The company’s board is populated with ex-LIC officials, retired IAS officers and representatives from the investee companies, apart from the initial IL&FS team. On July 24, Ravi Parthasarathy resigned as the non-executive chairman of the company on “health grounds”. The board of IL&FS then unanimously appointed Hemant Bhargava, managing director, Life Insurance Corporation of India, and nominee on the board of the company as non-executive chairman with immediate effect. After over two months at the helm, on September 16, Bhargava stepped down citing “conflict of interest” and S B Mathur, former chairman of LIC, was appointed as the new chairman of IL&FS.
Some of the projects executed by IL&FS have faced charges of financial gold plating and irregularities. The IL&FS-controlled Noida Toll Bridge Company, which operated the 8-km Delhi-Noida-Direct toll project, guaranteed a 20 per cent return to equity investors including IL&FS. The premise by the Delhi and UP governments when the land was given for the toll road was that the facility would be returned to them in 30 years. Alleged understatement of toll revenues meant that NTBCL could hold on to the facility well over this concession period. In 2016, the Allahabad High Court ordered the toll plazas to be dismantled and the matter in currently before the Supreme Court.
In case of the Gujarat International Financial Tec-city Company or GIFT City project, the state government leased land at below market rates to a 50:50 joint venture between Gujarat Urban Development, a state government undertaking and an IL&FS-controlled entity. D C Anjaria, a former independent director and audit committee chairman, filed a suit in 2016 alleging various irregularities and praying that a Special Investigation Team be formed to investigate how the interest of the state has been allegedly compromised.
IL&FS is empanelled as one of the Project Management Consultants for the Integrated Processing Development Scheme (IPDS) and the Scheme for Textile Industry’s Workers’ Accommodation of the Ministry of Textiles. IL&FS was one of the empanelled PMCs for seven projects under this scheme. Incidentally, after complaints last year, the Centre had sought response of IL&FS for one of the projects — Vraj Integrated Textile Park — regarding “violation of guidelines/criteria of the Scheme for Integrated Textile Park (SITP) by the Special Purpose Vehicle (SPV) of the said park”. The SPV and PMC were directed to get those non-textile units which were not part of the approved project of Vraj Integrated Park relocate outside the textile park area sanctioned under the SITP.
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IL&FS was incorporated in 1987, initially promoted by Central Bank of India, HDFC and the erstwhile Unit Trust of India. Incidentally, the company is designated as Systemically Important Non-Deposit Accepting Core Investment Company. Over the years, IL&FS inducted institutional shareholders including LIC, Japan’s ORIX Corporation, SBI and the Abu Dhabi Investment Authority.
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IL&FS was incorporated in 1987, initially promoted by Central Bank of India, HDFC and the erstwhile Unit Trust of India. (Representational Image)
