Mumbai: Infrastructure Leasing and Financial Services Ltd’s (IL&FS) 29 September annual general meeting (AGM) was to lend clarity on what was next for the company and its subsidiaries, which have defaulted on debt repayments. Here’s a look at what has been cleared up and what remains uncertain.

IL&FS’s Rs4,500 crore rights issue has been approved. But the proof will be in its subscription. News reports say three shareholders—Life Insurance Corp. of India, Orix Corp. and State Bank of India—are willing to invest. But they have not said so explicitly.

Even if they do invest, if the remaining shareholders, who own a 44.7% stake, don’t participate, it leaves IL&FS with a shortfall of 2,012 crore. Of course, the subscribing shareholders can buy these shares also, though the possibility seems remote. The rights issue is expected to be complete by October-end, bringing clarity on who subscribed and the amount raised.

Till then, the question of whether IL&FS and its subsidiaries will continue to default remains, which means the possibility of the contagion spreading also remains. The day of its AGM also saw IL&FS disclose a few debt defaults.

Broadly, it seems the task of restructuring IL&FS has been left to its new management. The bigger shareholders may provide funds through the rights issue but for the rest, it has to fend for itself. That reduces the moral hazard associated with a bailout but on the flip side, it could leave the market wondering what happens next.

The IL&FS management did outline a broad plan. They will attempt to arrange for short-term liquidity. Shareholders passed an enabling resolution for a 15,000 crore non-convertible debenture (NCD) issue and also approved an increase in its borrowing limit by 10,000 crore to 35,000 crore. The rights issue should bring in equity funding. Then it wants to sell assets and return the business to normalcy. It has appointed a turnaround specialist to draw up a detailed restructuring proposal, part of which will be asset sale.

It intends to pursue a scheme of restructuring under company law and will seek a moratorium on debt repayments, giving it time to set its house in order. Once shareholders and creditors approve the restructuring proposal, it will execute the plan and raise funds through disposal of assets. The capital raised will be used to pay down debt and correct the stressed financial position.

This will not be an easy process as lenders will move to secure their interests and the whole process may get stuck in litigation on whether IL&FS can use the company law route to do a debt restructuring process.

In sum, the rights issue process is approved but how much money would be raised is a question mark. Short-term liquidity constraints may continue. It is premature to comment on the restructuring process but the value it identifies for the assets to be sold could give some comfort to shareholders on the quantum it can raise to meet its obligations.

This may, therefore, mean that the market will be back to worrying about where IL&FS will get the money from to meet its next short-term obligation. The nearest funding milestones to watch for are its ability to find investors for its NCDs and then for the rights issue subscription by October-end.

Till then, the chaos caused by IL&FS’s defaults may continue to affect markets and investors in its listed subsidiaries.

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