IL & FS Crisis | Latest Burning Issues

Table of Contents

IL&FS

Infrastructure Leasing & Financial Services Limited (IL&FS) is an Indian infrastructure development and finance company.

ORIGINS

IL&FS was formed in 1987 as an “RBI registered Core Investment Company“ Currently, its institutional shareholders include Life Insurance Corporation of India (LIC), ORIX and Abu Dhabi Investment Authority, with small shareholdings by a few Indian banks

PROJECTS

IL&FS has several projects in different sectors including Transportation, Area Development, e-Governance, Health Initiatives, Cluster Development, Finance, Power, Ports, Water and Waste Water, Urban Infrastructure, Environment, Education, and Tourism. IL & FS was the principal lender behind the construction of the 9.28 km long Chenani-NashriTunnel, located on the route of NH 44 in Jammu and Kashmir.

NBFC

Non-Banking Financial Companies – IL&FS is one How they fund themselves? Banks (Long term borrowing) & Indian NBFCs issue debt instruments like bonds, nonconvertible debentures (NCDs), certificates of deposits, commercial papers (CPs), mortgages, leases, or other agreements between a lender and a borrower. (short term borrowing)

NOTES

CPs and NCDs are two widely used debt instruments used by corporates to raise money.
The IL&FS group defaulted on CP, which is an unsecured money market instrument issued in the form of a promissory note with a maximum validity of one year.

ASSET LIABILITY MISMATCH

Loans given by NBFCs – Assets
Infrastructure projects take a long time in India
So NBFCs have taken short term loans to fund long term projects

HOW DID THE IL&FS DEFAULT PLAY OUT?

The infrastructure lender has a total consolidated debt of close to Rs 1 lakh crore, and it started to miss deadlines on its debt obligations beginning August 27, 2018.
It has already defaulted on around Rs 450 crore worth of inter-corporate deposits to Small Industries Development Bank of India (SIDBI), and more defaults are likely in the coming weeks. CRISIS Following the defaults, rating agencies ICRA, India Ratings and CARE abruptly downgraded IL&FS and its subsidiary from high investment grade (AA plus and A1 plus) to junk status, indicating actual or imminent default.

HOW HAS THIS SITUATION HURT NBFCS?

Many corporates, mutual funds, and insurance companies have invested in CPs and NCDs of the IL&FS group, and there is fear that in the wake of the default, their funds could be locked in IL&FS debt instruments, leading to a liquidity crunch.

STEPS TAKEN RBI

understood that there is a need of liquidity in the market RBI to infuse up to Rs 36,000 crore via open market bond purchases

THERE WAS A QUESTION ASKED IN PRELIMS 2013

In the context of Indian economy, ‘Open Market Operations’ refers to

A) Borrowing by scheduled banks from the RBI
B) Lending by commercial banks to industry and trade
C) Purchase and sale of government securities by the RBI
D) None of the above

DIRECT INTERVENTION BY GOVERNMENT

On 1st Oct, 2018, the Government of India took steps to take control of the company and arrest spread of the contagion to the financial markets.
A new board was constituted as the earlier board was deemed to have failed to discharge its duties. New Board Include Uday Kotak from Kotak Mahindra Bank and some other well known Bankers.

STEPS

The government has superseded the IL&FS board and appointed six new directors—including Uday Kotak and ICICI Bank’s G.C. Chaturvedi—to restore confidence in the financial markets
National Company Law Tribunal (NCLT)

WHAT NEXT?

The bigger task will be the clean-up. A thorough investigation will be needed to identify exactly what went wrong, fix responsibility and take action against the existing management.
If the new management does discover a deep rot, involving write-downs or provisions, it may cause some short-term hurt. Debt restructuring may become necessary.