Government has done well to contain the IL&FS contagion by superseding the company’s board of directors and taking over controls at this debt-ridden mess for the next few quarters. But as the skeletons continue to tumble from the IL&FS (Infrastructure Leasing & Financial Services) cupboard, it is becoming clear that the task at hand is even more complicated than thought earlier.
Not just due to the complexity of the operations of IL&FS and its crumbling financials, but also because of the huge amount of funds needed to get this group back on its feet. The previous estimates of how much it owes the banks and other institutions are being challenged as the figure gets inflated, and this had raised the prospect of a huge amount of money needed to keep the company from collapsing.
A report by stressed debt specialist Redd Intelligence estimates that up to Rs 30,000 crore may be needed as equity infusion for the stressed IL&FS group. How significant this amount is can be gauged from these comparisons: it is three times the Budgeted allocation this fiscal for the Pradhan Mantri Jan Arogya Yojana, touted as the world’s largest health insurance scheme for the poor.
This amount is also more than half the total health budget of the country and about 55% of the funds the Centre allocated to the rural jobs programme, MNREGA, in 2018-19.
Where will so much money come from? Selling off assets owned by the IL&FS group may bring in some money but at least some part of this infusion may also be financed from the taxes you and me pay, once again exposing the risks the aam aadmi is unknowingly taking when the system chooses to let complex operations such as IL&FS run on without mandatory checks.
Redd has said in its report that “We estimate the equity required to right size the balance sheet is Rs 295 billion (Rs 29,500 crore), equal to the standalone borrowings of IL&FS and ITNL (subsidiary). Excessive holding company leverage was used to finance parent contributions in operating subsidiaries”.
That the task of turning around IL&FS is anything but easy has been acknowledged by the new board of directors brought in to oversee the company’s affairs. The new chairman Uday Kotak, a banking veteran and known trouble shooter, said after the very first board meeting last week that the board had discovered 348 entities of the IL&FS group, which was “significantly higher” than the number known earlier. Kotak also indicated that the debt of the group could be much more than the Rs 91,000 crore figure, which was an estimate till March 31.
And Redd says that the group’s total liabilities could be higher by Rs 26,000 crore than what was reported earlier. “IL&FS has total group assets of Rs 1.65 trillion (Rs 1,65,000 crore) versus reported consolidated assets of Rs 1.06 trillion (Rs 1,06,000 crore) and total group liabilities of Rs 1.32 trillion (Rs 132,000 crore) versus reported consolidated liabilities of Rs 1.065 trillion (Rs 1,06,500 crore), indicative of inter group liabilities of Rs 260 billion (Rs 26,000 crore) and equity investments in group companies of Rs 229 billion”.
IL&FS has 13,493 km in road assets, operates 2800 MW of power plants and has a non-banking finance subsidiary with assets of Rs 218 billion (Rs 21,800 crore).
But will these assets be enough to cover the liabilities? Not by a long shot. The debt is more than thought, funds’ requirement is higher than anticipated, selling off assets to get much needed cash into the company may not be a solution as these assets are likely to be pledged to borrowings. How the government-appointed board will proceed in the face of these seemingly insurmountable difficulties remains to be seen.
But it is clear that propping up IL&FS is not merely in the interest of the non banking finance company (NBFC) sector. It was critical in preventing a run on the country’s equity as well as bond markets. ILFS’s imminent collapse had also stoked fears of outflows from the mutual fund industry, which has a large exposure to such financing companies, and has seen massive outflows already, never mind the government’s takeover.
The IL&FS crisis was revealed when the parent and some related entities began defaulting on repayments of debt over the last few months. None of the ratings agencies, stakeholders or the erstwhile board of directors raised any concerns before the defaults began, taking the system by surprise.
A large chunk of the impact, in case IL&FS were to collapse or in default on more repayments, was seen on state-owned banks. This was also a factor in the government takeover. A report by brokerage Elara has listed out Punjab & Sind Bank, UCO Bank, United Bank of India, Bank of India, Vijaya Bank, Syndicate Bank, Allahabad Bank, Bank of Baroda, Punjab National Bank and Union Bank as having exposure in IL&FS.
The analysts have said that regional and mid-size state-owned banks would witness significant impact in terms of likely erosion in networth. In fact, mid-sized state owned banks and smaller private banks are likely to take the maximum hit in case of defaults.
In the IL&FS Group state insurer LIC and Japan’s ORIX Corporation were the largest shareholders at 25.34% and 23.54% respectively as of March 31 this year. Other prominent shareholders included ADIA (12.56%), HDFC (9.02%), CBI (7.67%) and SBI (6.42% ).
