BUSINESS LAW REPORT

IL&FS CRISIS

- Rahul Baid
- 2019PGP041

ABOUT IL&FS:

Infrastructure Leasing & Financial Services Limited is one of India’s leading infrastructure
development and financing companies pioneering in innovative world class infrastructure in the
country. It was incorporated in 1987 and was initially promoted by Central bank of India, Housing
Development Finance Corporation limited and Unit Trust of India. Since the past 25 years, IL&FS
has focused on commercializing infrastructure projects and introducing value-added financial
services to become a major component in India’s growth story.

IL&FS is one of the leading Public Private Partnership in India mastering in variety of projects
including roads, water, power, ports, area development and social and environmental
infrastructure. Every IL&FS project is a story of pioneering vision, excellence and sustainability.

IL&FS CRISIS:

The recent debt defaulting by Infrastructure Leasing and Financial Services (IL&FS) in September
2018 was a good disclosure about the faults in connection with Indian NBFC sector. This debt
crisis has created an issue of illiquidity in the market and has impacted different financial sectors
such as real estate and infrastructure. The crisis has declined the real estate stock index and the
benchmark index during the said period. IL&FS defaulted on certain payments and failed to service
the commercial papers on the due date in September 2018, which indicates that IL&FS ran out of
cash or is in short, facing a liquidity crunch.
The first shock came when the company postponed USD 350.00 million bonds issuance in March
2018 due to demand for a higher yield from investors. Another reason for the crisis is the recent
slump in infrastructure projects and disputes over contracts locking approximately INR 9000 crore
of payments due from the government.
In early October, the government approached the National Company Law Tribunal (NCLT)
seeking to supersede the board of IL&FS. NCLT appointed a new one chair Uday Kotak and a
full-time vice chairman and managing director had been appointed immediately. The NCLT has
recently mentioned that it is not possible to find a single solution for the IL&FS crisis and its INR
91,000.00 crore debt. The Uday Kotak led NCLT Board reported that infusing a good amount of
capital from credible and financially strong investors is not viable.

In a 34-page affidavit filed with the NCLT, Hari Shankaran, ex-managing director of the IL&FS,
has refuted all accusations of wrongdoing. In 2015, when IL&FS faced problems of refinancing
loans, it had proposed a merger with the Piramal group, which has a strong presence in the financial
sector. The merger was expected to result in funds of ₹ 8,500 crore in the merged entity. Life
Insurance Corporation (LIC), one of the principal shareholders of the IL&FS, did not agree with
the valuation proposed and sat on the proposal for a long time. As a result, the deal extended and
eventually was declined.

Last September, the IL&FS made a desperate bid to meet its liquidity requirements by floating a
rights issue of ₹ 4,500 crore, which was to be supplemented with liquidity support of around ₹
3,500 crore from State Bank of India (SBI) and LIC. The board of IL&FS, which included
representatives of SBI and LIC, approved the rights issue. There was a general expectation that
the rights issue would go through but unfortunately the proposal failed leading to an increase in
the crisis.

Meanwhile, IL&FS has moved the NCLT in Mumbai on Tuesday seeking respite in relation to
filing of a scheme of arrangement under Section 230 of the Companies Act by settling disputes
between the creditors and the company.

Unless the IL&FS can find a buyer willing to plough in the required amount, assets will have to
be sold in order to pay back lenders. By common reckoning, lenders will have to take a haircut of
at least 25%–30% on their exposure. The failure to address the IL&FS’s liquidity needs through
merger or infusion of equity by shareholders, is now leading on to insolvency.

LEARNING:
- From the above example of IL&FS, it is clearly evident that there lacks a proper mechanism
of addressing the issues posted by creditors in India. Because of the lack of efficiency of
LIC board, the merger between IL&FS and Piramal could not take place further pushing
the former company into insolvency. Otherwise, there were chances that the severe losses
could have been avoided and the creditors would have been at a relief.

- There exists no model for infrastructure financing in India leading to long gestation periods
to build roads, ports and airports. If this remains, there will always be a risk of cheap short-
term borrowings to finance large projects and in turn chances of defaults.

- The procedure adopted by NCLT in order to appoint an interim representative who handles
the company henceforth after defaults is a good process as the stakeholders have some
confidence left on the company.