Cash-strapped IL&FS wants government to bail it out4 min read . Updated: 22 Oct 2018, 10:58 AM IST
Talks of an IL&FS government bailout were necessitated following failed attempts by the company to raise ₹4,500 crore through a rights issue
Mumbai: The Union government may have to bailout cash-strapped Infrastructure Leasing and Financial Services (IL&FS), if latest discussions between the group’s board and the government are any indication, according to three people familiar with the development. This has been necessitated following failed attempts by the company to raise ₹ 4,500 crore through a rights issue. If the government does heed the appeal from IL&FS, this would be its second intervention in the company after having recently superseded the board.
The IL&FS board, chaired by Kotak Mahindra Bank Ltd’s managing director, Uday Kotak, is likely to pitch the centre for a government bailout. While the final contours of the programme are still being prepared, the people cited above said it could be a variant of the US government’s rescue act under the Emergency Economic Stabilization Act following the 2008 financial crisis. In case the government bailout also falls through, the newly constituted IL&FS board will have to work on alternative plans to raise capital.
An email sent to IL&FS on Saturday remained unanswered.
In 2008, post the collapse of Lehman Brothers, the US government started an emergency bailout programme called the Troubled Asset Relief Program (TARP). It was aimed at enhancing liquidity of secondary mortgage markets by purchasing illiquid mortgage-backed securities, thereby reducing potential losses of institutions that owned them.
IL&FS’s plan to raise ₹ 4,500 crore through a rights issue that closed on Friday devolved, the second of the three people cited earlier said on condition of anonymity. This information has not been made public.
“This has come as a setback for the group, facing a series of repayment defaults in the wake of a liquidity crisis. And therefore, the IL&FS board’s move to knock the central government’s door makes sense," the person said.
IL&FS’s rights issue was open from 5 October to 19 October.
“We could not raise capital in the IL&FS rights issue because the management and the board changed and we did not get enough time to be able to reach out to the group’s shareholders, carry out the required road shows, brief all classes of shareholders (including 3,000-4,000 preference shareholders) about the timing, pricing and benefits of subscribing to the issue. The rights issue was heavily under-subscribed," the second person said.
“However, now with the government recognizing the issues faced by the group, we have several other avenues to raise capital. Government bailout is just one option. If it does not work out, we can raise money through a major line of credit, which will be much easier now because the lenders now clearly understand that the government is backing us and is keen to rescue the group, which in turn indicate that the likelihood of their loans going waste is much lower now."
The government may also soon pay part of the ₹ 16,000 crore it owes to the company in lump sum to enable repayments, the person said.
With a debt of at least ₹ 91,000 crore, IL&FS is facing a situation where government intervention, whether through a TARP-like programme or any other alternative scheme, may help, the second of the three people said.
“Trading of IL&FS securities has virtually stopped, making these completely illiquid and the board is acutely aware that more defaults are imminent if the situation is not addressed," the person said.
As of 30 May, IL&FS group’s outstanding short-term debt amounted to ₹ 16,312 crore, according to Bloomberg.
Under TARP rules, beneficiary companies lost certain tax benefits and, in some cases, faced limits on executive compensation and were barred from awarding bonuses to their top 25 highest-paid executives. In a TARP programme, typically, banks pay a certain dividend to the government and buy back the illiquid securities from the government after a certain period.
After defaulting in repayment obligations of at least ₹ 1,200 crore to the Small Industries Development Bank of India in August and September, IL&FS defaulted on other payment obligations as well— ₹ 172.86 crore on inter-corporate deposit, ₹ 14.57 crore in honouring a letter of credit and ₹ 100.54 crore on repayment of principal and interest for a loan facility in October so far, the first person said.
According to available data, mutual fund houses have investments worth ₹ 3,504 crore in IL&FS group companies. Net asset values ( NAV) of at least 25 mutual fund schemes have eroded after credit rating agencies downgraded the ratings of IL&FS debt securities. As a result, most funds have closed new subscriptions in schemes exposed to the IL&FS group and expect serious redemption pressures if the situation continues unabated.
Under a TARP-like bailout programme, the government can buy out IL&FS securities both from mutual funds and those lying with IL&FS. However, such a move will depend on the design of the government bailout programme and the approval the government receives.
“The programme can be designed only after discussing with regulators. It may also require a parliamentary approval, if certain Acts are to be amended," said the first person.
“The board feels that IL&FS will need a repayment moratorium for at least a year from now, by when the asset monetization plan currently in the works will start showing results," the first person said. “One way of making repayments in the interim is to get existing IL&FS shareholders subscribe to fresh preference shares, proceeds from which can be used to make repayments."
This means existing equity shareholders such as Life Insurance Corporation of India (LIC), State Bank of India (SBI), Central Bank of India, Orix and Abu Dhabi Investment Authority can subscribe to fresh preference shares if issued by the group. If new preference shares are issued, these shareholders can buy them to keep their holding at current levels or increase them. This will bring new money to IL&FS books, which can be used to meet some of the immediate repayment obligations.