Why did the government step in on Monday to clean the Infrastructure Leasing and Financial Services Ltd (IL&FS) mess and not earlier? Because, after its annual general meeting (AGM) on 29 September, it became clear that uncertainty will continue.

While IL&FS’s shareholders approved the fundraising resolutions, they did not commit to subscribe to its rights issue. There was no mention of any temporary line of credit either. A wait-and-watch approach meant more defaults were likely and contagion could spread. That’s why the government stepped in.

What changes now? On Monday, stocks of all listed IL&FS subsidiaries hit the upper circuit after the government’s decision restored some much-needed confidence. Even with no plan in sight, the supersession of the IL&FS board lends a certainty to the group’s future that the AGM outcome could not.

This column mentioned earlier that IL&FS needs an external appointee at the helm, someone who is respected in the financial markets. Uday Kotak ticks that box. His appointment and the experience of the other board members will help boost confidence.

Money is the immediate problem. Consider IL&FS’s stand-alone financials. Its short-term borrowings have increased. It has, in turn, invested a large part in equity and also lent to subsidiaries and associates. Their inability to repay has in turn affected its ability to repay.

As of 31 March 2018, IL&FS’s short-term borrowings and that part of long-term borrowings repayable within a year shot up to 36% of debt, compared to 23% a year ago. At the consolidated level, the IL&FS group will have to repay 25,798 crore by the end of 31 March 2019, out of the total 91,091 crore of debt.

IL&FS and its subsidiaries need access to longer-term funds to refinance current liabilities and meet future fund requirements. How it will get hold of these funds is unclear. One option is to identify current investments that can be sold or a few projects that can be divested to generate cash. Existing shareholders providing a line of credit would be a more stable source. The government could help by facilitating release of stuck payments for its projects. The government has said it is committed to provide liquidity support.

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.

The next step will be to re-examine the IL&FS business model itself of being a financier and a developer/operator of infrastructure projects. In India, this model is fraught with risk that has clearly blown up in IL&FS’s face. 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.

Once this is done, the new board can scout for new investors to bring in fresh equity capital. Hopefully, with the clean-up and risk mitigation done, investors will be willing to invest at reasonable valuations. It could be a single shareholder seeking management control or the current arrangement of several shareholders could continue.

What this form of restructuring will do is not only tide over the current crisis, but also ensure that the IL&FS group turns into a self-sustaining enterprise.

A note of caution is in order for those jumping into the IL&FS group’s listed shares. Any debt restructuring scheme where lenders lose is usually painful for equity shareholders also, and this may be the wrong place to hunt for bargains.

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