Revamp plan for IL&FS

Click here to know more on IL&FS defaults.

Why in news?

The government recently stepped in to take control of crisis-ridden Infrastructure Leasing & Financial Services Ltd (IL&FS) by reconstituting the board of the firm.

Why it was done?

• IL&FS Financial Services had defaulted on bank loans, including interest of Rs 284.5 crore to five banks.
• The company also said it defaulted on repayments of Rs 103.53 crore of term deposit and Rs 52.43 crore of short term deposit.
• Over Rs 5,700-crore worth of debt is due for repayment over the next one year.
• It also did not make any concrete announcement about the fund infusion plan before shareholders at its annual general meeting recently.
• Hence the government moved NCLT and the tribunal approved the government’s proposal to bring in a new six-member board to run the affairs at IL&FS.

What are the tasks before the board?

• It was said to be an attempt to restore the confidence of financial markets in the credibility and solvency of the infrastructure financing and development group.
• This would require a combination of measures including asset sales, restructuring of liabilities and fresh infusion of funds.
• The NCLT bench has told the new board members to unanimously elect a chairman from among themselves and to submit a report on its findings and a road-map for the debt-laden company.
• The new board will review the operations and funding plan of the IL&FS group and work out a restructuring proposal.
• It is also likely to revamp the boards of subsidiaries and associate companies.
• The board should commission a forensic audit on IL&FS’ books to arrive at the true liquidation value of its assets, seek moratoriums on its short-term dues and arrange for liquidity until a resolution mechanism can be thrashed out.
• It should also ensure that the firm’s assets are liquidated in an orderly manner, so that it doesn’t implode on the financial system.
• The Centre and the RBI, on its part, should contain the systemic fallout of IL&FS defaults on the bond markets, by opening a special liquidity window for NBFCs or mutual funds.

 What is the task ahead?

• IL&FS and its subsidiaries need access to longer-term funds to refinance current liabilities and meet future fund requirements.
• Selling current investments, divesting few projects, ensuring line of credit from existing shareholders would all be a more stable source.
• Also, there is a need to re-examine the IL&FS business model itself of being a financier and a developer/operator of infrastructure projects.
• An option could be to separate the financing and infrastructure business into two separate legal entities.
• It will also mean that investors will have to contend either with the project risk or the financing risk and not both.
• This will also make it easy to find investors, who specialize either on the infrastructure or financing front.
• Hence, the task is not only to tide over the current crisis, but also ensure that the IL&FS group turns into a self-sustaining enterprise.

What are the concerns?

• Though IL&FS may be deemed ‘systemically important’ on paper, it as an entity which is not listed and doesn’t accept public deposits.
• Hence, it would be hard to justify using taxpayer money to bail out this shadow bank.
• The role of rating agencies merits sharper regulatory scrutiny, given that stress was evident from IL&FS’ financials for the last three years.
• They assign it high investment grade ratings until confronted with defaults.
• Hence, SEBI must consider stringent penal measures, such as fines or license revocation for rating agencies that repeatedly fail in their fiduciary duties to investors.

Source: Business Line, Livemint