BUSINESS LAW REPORT

IL&FS Crisis
IL&FS stands for Infrastructure Leasing and Financial Services Ltd.,
which is a holding company of the larger group known as IL&FS Group.
It was founded in the year 1987 with significant equity from Central
Bank of India, Unit Trust of India, and Housing Development Finance
Corporation to fund infrastructure projects since most contemporary
banks of that time focused on corporate funds rather than infrastructure-
based funds. IL&FS major stakeholders include Life Insurance Corp Of
India holding 25% stake, State Bank of India with 6.4%, Japan’s Orix
Corp holding 23%, and Abu Dhabi Investment Authority with 12%.

Failure Of the IL&FS

The following factors are responsible for the substantial financial crisis
of IL&FS-

• Too much debt in the company

This was the most critical factor of the fall of IL&FS. With a
consolidated debt of 90000 crores, the company was unable pay
its debt and found itself in an asset-liability mismatch.

• Losses in the infrastructure sector

Infrastructure sector projects have a long gestation period and

have higher chances of risk. The company has invested in power,
road, and water projects that have a gestation period of 8-15
years. The company would get project refinanced, but with NPA
increasing with banks, IL&FS have to look for other sources like
NBFCs, etc. as a short-term loan and naturally unable to pay

Impact on Indian economy

 • On Individual Investors
Since IL&FS begun raising funds from the market by commercial
papers, the worst affected are investors that include mutual funds,
individuals, banks which offered a loan by way of intercorporate
deposits.

• On Infrastructure Projects
The IL&FS crisis is to have a significant effect on current
infrastructure projects. Major banks do not give loans to finance
big infrastructure projects.

• On NPA Crisis and the spillover to the economy

Being an NBFC, RBI did not exercise as much control over
operations as in the case of traditional banking. The default of
60000 crores will add to the current financial distress.

Lessons from IL&FS Crisis

• The traditional governance seeks to align the interests of

shareholders on the one hand and the management of the
company on the other hand. Governance mechanisms that are
shareholders focused point us in the wrong direction when it
comes to financial institutions. They encourage management to
engage in excessive risk-taking simply because creditors bear
most of the risk (for a fixed return). In contrast, shareholders’ risk
is limited to their investment (with boundless potential for
upside). In these circumstances, the interests of the shareholders
and creditors militate against each other.
• One of the most important messages is the absence of a
bankable model for infrastructure in India. If we do not have long-
term funds to finance long gestation projects like roads, ports, and
airports, and as long as infrastructure companies borrow and
continuously roll over cheaper short-term borrowings to build
large projects, it will remain a touch-and-go for them

Submitted By-
Shishir Gupta
2019PGP058