Everything you want to know about the IL&FS crisis

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IL&FS trouble
IL&FS Headquarters in Mumbai
Infrastructure Leasing & Financial Services (IL&FS) is a RBI registered Project Finance company. Started by Mr. Ravi Parthasarathy in 1987 in Mumbai and promoted by Central Bank of India (CBI), Housing Development Finance Corporation (HDFC) and Unit Trust of India (UTI), IL&FS is funded by State Bank of India (SBI), Life Insurance Corporation of India (LIC), ORIX corporation of Japan and Abu Dhabi Investment Authority (ADIA). IL&FS has a total number of 348 subsidiaries.

On July 21, 2018 group founder and Chairman Mr. Ravi Parthasarathy resigned citing health Issues, after which the company posted a series of defaults on its debt obligations.

The company's financial arm, IL&FS financial services, on August 28, defaulted on repaying a few hundred crores in commercial papers and paid the same 2 days later. In early September, the group defaults on Rs. 1,000 crore term loan and its subsidiary defaults on dues worth RS. 500 crores owed to SIDBI. Credit rating agencies, ICRA, CARE and Brickwork Ratings downgraded IL&FS' various short term and long term borrowing programmes worth over Rs. 12,000 crore to 'Default' grades. ICRA removes all of the group entities from its rating watch. Soon, Reserve Bank of India (RBI) initiates a special audit.

The company defaults on several short term debt between September 12 to 26, amounting Rs. 440.46 crore in which, bank loans amount to Rs. 284.5 crore, term deposits to Rs. 103.53 crore and Short term deposit of Rs. 52.43 crore. The company sends a letter to its employees on September 12 saying that Rs. 16,000 crore is stuck in claims and termination payments with concession authorities and it had been planning on raising Rs. 45,000 crore through the issue of shares and Rs. 3,500 crore as long term debt from shareholders.

On September 15, former LIC Chairman Mr. SB Mathur takes over as the group's chairman. IL&FS is planning to monetise assets to pare its debt by up to Rs. 30,000 crore over the next 18 months and identifies 25 projects for the same.

IL&FS Chairman
SB Mathur

Securities and Exchange Board of India (SEBI) on September 18 said that it is looking into the IL&FS matter with regards to rating agencies and the impact on mutual funds. On September 21, DSP Mutual fund sells commercial papers of Dewan Housing Finance (DHFL) fearing a debt market crisis due to an IL&FS default. The lead to a contagion effect in equity markets, which crashed nearly 1500 points. After this, Ramesh C Bawa, MD and CEO of IL&FS Financial Services resigns.

Three days later, IL&FS defaults again and loses access to fund raising through commercial paper market for up to six months from the date of repayment of this obligation. IL&FS board seeks relief from National Company Law Tribunal (NCLT) to work out an arrangement with shareholders, creditors and Board of Directors. Small Industries Development Bank of India (SIDBI) threatens to file a case at the NCLT for non-repayment. On September 28, RBI meets top shareholders of IL&FS and raises concern on the crisis.

At the Annual General Meeting (AGM) on September 29, IL&FS decides to raise Rs. 4,500 crore through a rights issue and raises borrowing limit to Rs. 35,000 crore from Rs. 25,000 crore. The company appoints Alvarez and Marsal as specialist agency to execute the debt restructuring plan.

On October 1, NCLT judgement allows government to take control of the company and institute a new six member board with Uday Kotak, India's wealthiest banker, as chairman. The other five are Vineet Nayyar, GN Bajpai, GC Chaturvedi, Malini Shankar and Nanda Kishore. The new board seeks 3-5 months from NCLT to submit resolution plan.

After the first meeting of new board members on October 4, Kotak briefed that the IL&FS crisis is more complex than it looks like as there were 348 subsidiaries of the group, much larger than was told earlier. The company earlier claimed that it had 150 subsidiaries including 50 overseas.

 IMPACT:

  • Unexpected movements in market indices, S&P BSE Sensex and NSE Nifty due to the IL&FS crisis. 
  • Affected the performance of stocks of banks/companies exposed to the IL&FS. 
  • Defaults in payments by its subsidiaries triggered a liquidity in the financial markets.
  • Redemption pressure in mutual funds and adverse impact on sentiment in the stock, money and debt markets, leading to a large systematic risk which in turn lead to good quality debt papers being sold at steep discounts to meet redemption demand. 
Collapse of IL&FS might lead to collapse of many mutual fund companies. IL&FS has helped develop and finance projects worth about 1.8 lakh crore. The Non Banking Financial Company (NBFC), IL&FS is known for building the Chenani-Nashri Tunnel, India's longest road tunnel at 9km.

According to the government, it has infrastructure and financial assets exceeding Rs. 115,000 crore. The group is planning to sell its assets to raise funds to service and repay the huge outstanding debt of Rs. 91,000 crore. Of the total debt, about Rs. 57,000 crore is from public sector banks.

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