Final Draft- Banking Law

A Study of the IL&FS Fiasco: Reasons, Consequences, Response and Legal Implication

SUBMITTED BY- KARTIKEY SINGH

ROLL NUMBER- 46BALLB16
SUBMITTED TO- Prof. Anil Kumar Rai

NATIONAL LAW UNIVERSITY

DELHI, INDIA
2019
Introduction
Established in 1987, Infrastructure Leasing & Financial Services Limited is one of India’s
leading infrastructure development and financial companies. It was initially promoted by the
Central Bank of India (CBI), Housing Development Finance Corporation Limited (HDFC)
and Unit Trust of India (UTI). Subsequently it has increased its shareholding by inducting
institutional shareholders like State Bank of India, Life Insurance Corporation of India, ORIX
Corporation Japan and Abu Dhabi Investment Authority (ADIA). 1 It is now a core investment
company and serves as the holding company of IL&FS group, with “most business operations
domiciled in separate companies which form an ecosystem of expertise across infrastructure,
finance and social and environmental services.”2
The non- banking financial company came in news when through a series of announcements,
the company revealed that it is going through a severe financial distress. The group company
on 15 September 2018 announced that it had defaulted in payment obligations on a Letter of
Credit (LC) payment to IDBI Bank, interest payments on Non- Convertible Debentures
(NCDs) and other payments obligations with respect to bank loans, short- term deposits and
term deposits.3 These announcements took the market by surprise, and led to a significant
disruption in the subsequent months. This was followed by some of the credit rating agencies
like ICRA and CARE ratings downgrading the company and its subsidiaries form high
investment grade (AA plus and A1 plus) to junk status, indicating actual or imminent
default.4 This made IL& FS difficult to raise money in future.
After this, various events followed in quick succession. The media made scathing comments
about the role of management and the board of IL&FS and hinted at serious irregularities as
more defaults followed. In October, the government moved a petition before the National
Company Law Tribunal (NCLT) seeking to supersede the board of IL&FS and appoint a new
one chaired by well- known banker, Uday Kotak. The situation is that IL&FS has about $500
million of repayment obligations and its debts total about $12.6 billion.

1
IL&FS, ‘Who We Are’ < https://www.ilfsindia.com/about-us/group-profile/> accessed 8 November 2019.
2
‘IL&FS: The crisis that has India in panic mode’ 3 October, 2018 <
https://economictimes.indiatimes.com/industry/banking/finance/banking/everything-about-the-ilfs-crisis-that-
has-india-in-panic-mode/articleshow/66026024.cms> 8 November 2019.
3
Beena Parmar, ‘Debts ad defaults: What happened to IL&FS’ <
https://www.moneycontrol.com/news/business/companies/debt-and-defaults-what-happened-to-ilfs-
2952381.html > accessed 8 November 2019.
4
George Mathew and Sandeep Singh, ‘IL&FS defaults, NBFC whiplash: understanding the debt market crisis’
The Indian Express < https://indianexpress.com/article/explained/ilfs-defaults-nbfc-whiplash-understanding-the-
debt-market-crisis-5374379/> accessed 8 November 2019.
Asset- Liability Mismatch: Reason Behind the Fiasco
The primary reason behind the IL&FS crisis can be attributed to mismatch in the asset-
liability management on behalf of the banking company. Banks and financing institutions
work by borrowing the money from investors and then lending it on interest to other
borrowers and thus income is generated. 5 In order to maintain the profit earning, these
institutions must make sure that the average lending rate is higher than the average borrowing
rate. Management of this interest rate spread is crucial for the asset liability operations in any
bank or financial institution. The assets and liabilities are decided based on various factors
like:
1) Type of interest rates- fixed or floating
2) Type of depositors and borrowers- retail or whole sale
3) Type of maturity – money market (short- term) or capital market (long- term)
4) Type of denomination- domestic currency or foreign currency6

The mismatch between assets and liabilities may lead to various types of risks which need to
be managed by these financial institutions.7 These risks include:
1) Credit Risk- This type of risk emerges from the situation when a customer, to whom
the bank has lend the money, is unable to return the credit due to certain financial
difficulties.
2) Liquidity Risk- The banks need to meet the cash needs of its customers otherwise it
will be declared as insolvent. In order to do this, the banks should have sufficient
liquid assets to meet those demand and an insufficiency may lead to a liquidity risk.
3) Market Risk or Systemic Risk- it is related to bank’s assets where their values are
changed by the systematic factors.
4) Interest Rate Risk- It comes about because you have lent money at one particular rate
which is long term but you might be required to borrow at a higher rate.
5) Earning Risk- Earning risk is related to a bank’s net income, which is the last item on
the income statement. Due to changes in the competition level of the banking sector
as well as the law and regulations, this could cause a reduction in the bank's net
income.
5
‘Indian Financial System’ < http://www.pondiuni.edu.in/storage/dde/downloads/finiii_ifs.pdf > accessed 8
November 2019.
6
Arnab Bhattacharya, ‘Liquidity Crisis at IL&FS- A Closer Look at the Big Picture’ <
http://indiafa.org/liquidity-crisis-at-ilfs-a-closer-look-at-the-big-picture/ > accessed 8 November 2019.
7
Turgut Tursoy, ‘Risk Management Process in Banking Industry’ (2018) New East University <
https://mpra.ub.uni-muenchen.de/86427/1/MPRA_paper_86427.pdf> accessed 8 November 2019.
 6) Solvency or Default Risk- The long- term sustainability of the banking sector is
dependent on the solvency of the banks. Two critical situations may cause solvency
problems, including when bank management has a significant amount of bad loans in
their credit account, or when its portfolio investments substantially decline in value
and generate a severe capital loss.8
The case of IL&FS is largely attributed to the inability of the firm to meet its current or short-
term cash flow obligations which can be categorized as a liquidity crisis.

I. Funding Long Term Assets with Short- Term Liabilities- Risks and Reward
One of the reasons behind the asset- liability mismatch can be attributed to the short- term
borrowings which were taken in order to finance the long- term assets. This resulted into an
imbalance as the redemption dates of the short- term borrowings and their liabilities far
exceeded the amount of repayments to be received on assets which were lend for long
terms.9If there is adequate liquidity in the market, it can be beneficial to finance the long-
term liabilities with short- term borrowings as NBFCs can borrow cheaper and invest in
higher long- term assets. However, in cases where illiquidity is introduced in the market, such
short- term borrowings can prove disadvantageous due to their exposure to the interest rate
fluctuation resulting into roll- over risks.10
Therefore, with the announcements of default by the subsidiaries of IL&FS, the mutual fund
managers started selling the commercial papers in secondary market at reduced prices. This
resulted int market participants taking risk aversion steps for speculated financial crisis by
reducing their exposure to both debts as well as equity securities issued by IL&FS. This
meant that the investors will now be paying reduced amounts for IL&FS securities as
compared to the market price, thus escalating the costs of funds and profit making of the
IL&FS.11

II. Over- dependency on Commercial Papers and Systemic Risk

8
Dhirendra Tripathi, ‘The Ripple Effect of the NBFC Crisis on the Economy’ LiveMint <
https://www.livemint.com/industry/banking/the-ripple-effect-of-the-nbfc-crisis-on-the-economy-
1557242882381.html > accessed 8 November 2019.
9
‘The Benefits and Risks of Short Term Borrowing’ Global Development Finance 77 <
http://siteresources.worldbank.org/INTGDF2000/Resources/CH4--76-95.pdf> accessed 8 November 2019.
10
Ibid.
11
Kayezad E Adajania, ‘One Year Later: How Debt Funds Turned Out After the IL&FS Crisis’<
https://www.moneycontrol.com/news/business/personal-finance/one-year-later-how-debt-funds-turned-out-
after-the-ilfs-crisis-4509491.html>
IL&FS was dependent on the issuance of commercial papers or short- term unsecured debt
and then later defaulted on the payments. Commercial paper can be understood as a
promissory note which is unsecured and pays interest at a fixed rate. It is typically issued to
cover short- term financial obligations, such as a funding for a new project.12 The genesis of
the reliance on commercial papers can be traced to the problems faced by IL&FS in the
infrastructure sector after which the banks decided to reduce their exposure to it. This led to
them not issuing long- term loans to it. As a result, IL&FS had to resort to short- term
borrowings in the form of commercial papers in order to ensure the continuance of the
ongoing projects.13 Since the yields on commercial papers were lower than the benchmark
lending rate, it was beneficial for the NBFCs to borrow from the bond markets rather than the
banks. On the other hand, many banks and mutual fund managers also preferred to invest
their surplus funds in the money markets rather than government securities as the yields on
the Commercial Papers were higher than the reverse repo rates.
When IL& FS fiasco happened, those who got were debenture holders of the company-
pension fund, mutual fund and the lenders from the NBFCs who had lent to IL&FS. Around
forty percent of the incremental consumer financing last year was done by the NBFCs, not
banks. In this, around 25-30% of the NBFC money was coming through funding or Mutual
Funds spots. Mutual funds used to but their (NBFCs) papers for 90-120 days and give them
money and they used to roll over. Second, they used to place bonds or mutual funds spots in
the market. 45-50% of the NBFC financing was coming from Mutual funds at that time. But,
because mutual funds like DSP, HDFC and others were hit by the IL&FS scam, they stopped
their funding to the NBFC. When they stopped funding, the NBFCs had to release the money
to pay back whatever is maturing.
However, such short-term borrowings should not relied upon as a permanent source of
income as they are susceptible to market changes resulting from any adverse financial
outcome. It is because of this reason ICRA downgraded the credit rating of IL&FS from
investment grade to default when one of its subsidiaries failed on its repayment obligations.
This stimulated a panic response in the money market because more than sixteen thousand
crore rupees of IL&FS’ debts were in the form of short term borrowing which make up
almost two percent of outstanding commercial paper in the money market and also around 2
percent of non- convertible debenture which make a total of around point seven percent of the
12
Mark P Cussen, ‘An Introduction to Commercial Paper’ <
https://www.investopedia.com/articles/investing/070313/introduction-commercial-paper.asp > accessed 8
November 2019.
13
TT Ram Mohan, ‘IL&FS Was an Avoidable Crisis’ (2018) 53(45) Economic & Political Weekly 12.
entire banking system loans. These numbers suggest that any tribulation to IL&FS would
present an eminent systemic risk to the overall financial and banking system in India.
Indian banks already have the burden of non- performing assets in their balance sheets and
thus they avoid any increase in exposure to the NBFC sector. Further, because of the IL&FS
announcements, retailer investors became more risk averse towards it and also other NBFCs
thus forming a redemption pressure over the mutual fund market. All of this in combination
lead to the general loss of investor confidence in the creditworthiness of the NBFCs.
Money market mutual funds also came under heavy redemption pressure, as retail investors
became more risk averse, given the significant exposure of mutual funds to IL&FS Group in
particular, and NBFCs as a whole. Thus, the rapid deterioration in the credit rating of IL&FS
Group led to a general loss of investor confidence in the creditworthiness as well as asset
quality of the NBFCs, and a heightened risk aversion towards portfolio exposure to NBFC
securities. Apart from this the intercession on behalf of the RBI to maintain the foreign
exchange rate owing to the depreciating value of rupee put further liquidity pressure on the
market, making the things worse for IL&FS.

III. Unviable Projects

Close to sixty thousand crores of IL&FS’ debt is because of its investments in unviable
projects which include roads, ports and water power projects. The factors responsible for
slowing down infrastructure projects include complications in land acquisition, delay in
environmental clearances and consequent delay in completion of projects, cost escalation
leading to incomplete projects and lack of timely actions. 14 Adding on to this, government is
due to give payment clearances of up to ninety billion rupees to IL&FS because of dispute
over contracts.15

IV. Structural Defaults

The business structure of IL&FS has a fundamental flaw which exposes it to both the
financial and project risks in the infrastructure sector. Ravi Parthasarthy who was the
founding CEO of IL&FS remained in office along with his close acquaintances for nearly
thirty years treating the company as his private property. The financing company created a
complicated conglomeration of 350 subsidiaries which made this group unmanageable.
14
‘What is the IL&FS Crisis and Why the Infrastructure Funding Company has to be Rescued’ 24 September
2018, Indian Express < https://indianexpress.com/article/business/what-is-the-ilfs-crisis-and-why-the-
infrastructure-funding-company-has-to-be-rescused-5371664/ > accessed 8 November 2019.
15
‘IL&FS Crisis’ < https://blog.forumias.com/article/ilfs-crisis> accessed 8 November 2019.
Indian Administrative officers were given key positions in the company and its subsidiaries
so as to fend off any kind of questions which were put to its working from outside. The
company also represented itself as a public company so as to raise fund which would not be
possible for any private entity.16

V. Issues with Management

Serious Fraud Investigation Office (SFIO) investigated into IL&FS and found that IFIN
which is a 100% subsidiary of IL&FS Limited extended loan facilities to outsiders, a number
of whom were not serving their debts commitments regularly. The top management of the
IFIN were cognizant of the fact that accounts were getting stressed via the reports generated
from the Management Information System. In light of this, the management adopted
fraudulent practices to not let these loans to be classified as non- performing assets by
lending to other companies belonging to the borrowers for repaying the principal and/ or
interest of the aforesaid defaulting borrowers.17

VI. Role of Auditors

The SFIO report mentioned that the auditors failed to report the funding of the defaulting
borrowers which was prejudicial to the company’s interest. The auditors colluded with the
IL&FS group of companies and acted fraudulently by financial statement in the book of
accounts. The auditors further did not report the negative net owned funds and capital to risk
asset ratio which was the reason behind the loss to the creditors who had invested in the non-
convertible debentures of the company.18

16
n(13).
17
Rashmmi Rajput, ‘IL&FS Case: SFIO Files Chargesheet’ The Economic Times <
https://economictimes.indiatimes.com/industry/banking/finance/ilfs-case-sfio-files-first-
chargesheet/articleshow/69590260.cms?from=mdr> accessed 8 November 2019.
18
Ibid.
Consequences of the IL&FS Crisis

On Individual Investors: Since IL&FS had begun raising huge amounts of money from the
market by way of a commercial paper, which is an unsecured debt meant for immediate
financing needs. The worst affected are investors that include mutual funds, individuals,
banks and other companies, which offered loan by way of inter- corporate deposits. Finance
Gurus have noted that Public Provident Fund, that refuge of lakhs of small investors looking
for a secure return of around 8%, has ‘serious exposure’ to IL&FS.

On Mutual Funds: In the wake of IL&FS crisis, NBFCs are increasingly finding it hard to
access funding. This is probably because of the fact that unlike banks, NBFCs credit growth
has been fueled largely by borrowings from the banks and from capital and money markets.
In particular, NBFCs were accessing half of their funding from mutual funds (MFs) by
issuing commercial papers and certificates of deposits. Between FY14 and FY18, the share of
CPs within the borrowing mix doubled for NBFCs while it tripled for HFCs. Due to relatively
lower costs, the sharp rise in share of CP borrowings had a positive effect on the cost of funds
and margins for NBFCs. However, it increased vulnerability to asset- liability mismatches.
Futher, since mutual funds are finding it more difficult ot rely on the ratings disbursed by
credit rating agencies and they no longer trust the stated balance sheets of the NBFCs, the
MFs no longer want to buy commercial papers and debentures. The NBFCs are thus deprived
of incremental funding, which in turn is jamming economic activity among small and
medium sized enterprises, auto manufacturers and real estate developers.19

On Infrastructure Projects: The IL&FS crisis is likely to have a major effect on current
infrastructure projects. For example, in Maharashtra, the government officials believe that the
refusal of banks to offer loans on continuing work on the highway for the Mumbai- Nagpur
Communication Expressway is a direct result of the IL&FS crisis, which has made banks
extremely wary of releasing funds for the road project. IL&FS’ existing projects have also
faced a critical blow, some of these were in the form of a PPP model (Public Private
Partnership) for developing national highways and connecting roads. The crisis also raises
19
Saurabh Mukherjea, ‘The RBI can reverse the NBFC crisis’ 2 August 2019, Fortune India <
https://www.fortuneindia.com/opinion/the-rbi-can-reverse-the-nbfc-crisis/103490 > accessed 12 Novemeber
2019.
questions about some of Prime Minister’s infrastructure projects including 20,000 kilometers
of national highways and ring roads in 28 major cities this fiscal year.20

On Credit Rating Agencies: The lack of transparency, accountability and subversion of

credit rating agencies which are supposed to exercise principles of prudence, caution and
utmost integrity, have been highlighted by the crisis. It is likely that the government would
tighten its grip over credit rating agencies and prescribe greater punishments for frauds.

On NPA Crisis and the Spillover on the Economy: Being a non- banking finance
company, the RBI did not exercise as much control over operations as in the case of
traditional banks. The group needs about 4000 crores fast to pay loans. The money is likely to
come from LIC and SBI, state- owned firms which together hold over 30% equity in IL&FS
which might not seem much for cash- rich giants like LIC and SBI. However, the concern is
how often they will be called to save too- big- to fail firms? Recently, LIC began takeover of
IDBI for an estimated 13000 crores to save the government bank from collapsing. The default
in payment of loans of Rs. 60,000 crores will only add to the current financial distress that the
banking sector is facing due to rising non- performing assets. As a result, the spillover on
other segments of the economy is undeniable.21

Responses to the NBFC Crisis

20
‘What is the IL&FS Crisis and Why the Infrastructure Funding Company has to be Rescued’ 24 September
2018, Indian Express < https://indianexpress.com/article/business/what-is-the-ilfs-crisis-and-why-the-
infrastructure-funding-company-has-to-be-rescused-5371664/ > accessed 8 November 2019.
21
TV Mohandas Pai, ‘NBFC Crisis and Its Domino effect on Indian Economy’ 9 September 2019, Business
Today< https://www.businesstoday.in/opinion/columns/nbfc-crisis-domino-effect-on-indian-economy-ilfs-
scam-gdp-growth/story/378109.html > accessed 12 November 2019.
SEBI’s Response: After the crisis and the involvement of the credit rating agencies in it,
SEBI has now tightened the norms for credit rating agencies in an attempt to restore investor
faith in the system. RBI’s new circular said that credit rating agencies will now have to make
more disclosures about the quality of debt instruments they rate. The new guidelines require
disclosures on cumulative default rates, probability of default benchmarks and liquidity
indicators. SEBI has also tweaked the methodology to arrive at default rates. They now need
to disclose all factors that ratings are sensitive to. SEBI has also proposed appointing
independent director on the board of each credit rating company for a period not exceeding
three years. The new benchmark, ‘probability of default’ will be used for both short- and
long-term instruments. SEBI says rating agencies need to disclose on their websites by
December 31 one- year, two- year and three- year cumulative default rates for each rating
category.
If there is an explicit credit enhancement, the credit rating agencies will assign a ‘CE’ suffix
to a rating. The rating agencies will also have to evaluate whether a credit enhancement
structure is sufficient, under various scenarios, including stress, and disclose it in ratings
press releases.
The new regulation also states that in consultation with SEBI, the rating agencies will need to
frame uniform standard operating procedures (SOP) to track debt defaults and their timely
recognition.22

Corporate Borrower’s Response: The tide seems to have turned in favour of commercial
banks as the liquidity crunch following the IL&FS has pushed corporate borrowers away
from the bond markets, back to banks. Data released by RBI on 24 October 2018, shows non-
food credit growth at over a four- year high of 14.5% year- on- year for the fortnight ended
12 October. In absolute terms, non- food credit grew from Rs. 78.15 trillion in the fortnight
ended 13 October 2017 to Rs. 89.47 trillion in the 12 October 2018 fortnight. Banks have
been seeing double- digit growth in this segment since December 2017 and it has been
steadily recovering since April 2017 when it touched an all- time low of 2%. The gap
between bank lending rates and the borrowing rates from the bond market has considerably
narrowed now. Moreover, in some cases, bank loans are turning out to be cheaper than bonds.

22
DK Agarwal, ‘How Sebi Wants to Discipline Rating Agencies and Restore Faith in Them’ <
https://economictimes.indiatimes.com/markets/stocks/news/how-sebi-wants-to-discipline-rating-agencies-and-
restore-faith-in-them/articleshow/69799109.cms?from=mdr> accessed 12 November 2019.
The rate transmission I the bond market in quicker than in bank lending rates, the former has
gone up following interest rate hikes, while the latter has seen a smaller change.23

RBI’s Response: The Reserve Bank of India in light of the IL&FS crisis released draft
guidelines on liquidity management framework for non- banking financial companies and
core investment companies. The guidelines come on the back of rating downgrades and debt
defaults in the NBFC sector and the need for stronger asset liability management (ALM)
framework. The need has also arisen because many NBFCs have run up serious mismatches
in their books by borrowing short- term to find long- term assets. In its draft guidelines, RBI
has proposed to introduce a Liquidity Coverage Ratio (LCR), which is the proportion of high
liquid assets set aside to meet short term obligations for all NBFCs with an asset size of more
than 5000 crore. Starting April 2020, NBFCs will have to maintain a minimum 60% of LCR
as high liquid assets which will be increased in a calibrated manner to 100% by April 2024,
RBI said.
The regulator has also proposed to revise the ALM of NBFCs to ensure that the difference
between inflows and outflows during the first 7 days is not more than 10% of the total
outflows. Similarly over the next 8-14 days and 15-30 days, the cash flow mismatch should
be only 10-20% of the cumulative outflows. This is to ensure that NBFCs’ reliance on
external debt to repay its maturing debt is reduced, given the current market conditions where
funding from banks and mutual funds has become scarce.
RBI has also asked NBFCs to adopt liquidity risk monitoring tools to capture any possible
liquidity stress. This will include concentration of funding by counterparty/ instrument/
currency, availability of unencumbered assets that can be used as collateral for raising funds,
certain early warning market-based indicators, such as, price-to-book ratio, coupon on debts
raised, breaches and regulatory penalties for breaches in regulatory liquidity requirements,
RBI said.24

23
Shayan Ghosh, ‘IL&FS Crisis Impact: Corporates Return to Banks to Banks for Loans’ 2 November 2018,
LiveMint < https://economictimes.indiatimes.com/markets/stocks/news/how-sebi-wants-to-discipline-rating-
agencies-and-restore-faith-in-them/articleshow/69799109.cms?from=mdr> accessed 12 November 2019.
24
Gopika Gopakumar, ‘RBI Releases Draft Liquidity Framework Guidelines for Ailing NBFCs’ 24 May 2019
LiveMint < https://www.livemint.com/industry/banking/rbi-proposes-to-introduce-liquidity-coverage-ratio-for-
nbfcs-1558709520816.html > accessed 12 November 2019.
Legal Aspect: Applicability of IBC on NBFCs

The introduction of Insolvency and Bankruptcy Code (IBC) was aimed to provide a
mechanism for restructuring and rehabilitation of stressed entities. However, in the process
the IBC has left corporate debtors more vulnerable to having insolvency proceedings initiated
against them as a means of debt recovery. This is particularly concerning in situations where
the corporate debtor has numerus public stakeholders, or is systematically important to the
economy. Accordingly, the legislature has excluded from the purview of the IBC, financial
service providers, and consequently the resolution of insolvency situations for these entities
was left to the mechanisms provided by the Reserve Bank of India.
In the case of HDFC Bank v RHC Holding25, NCLT in light of an order passed by the
NCLAT in the matter of Randhiraj Thakur v Jindal Financial Services26 dismissed an
application filed for intimation of Corporate Insolvency Process against a financial service
provider. It held that RHC Holding, a non- banking finance company, is a financial service
provider and hence is not covered by the Insolvency and Bankruptcy Code of India, 2016.
The NCLAT’s judgment hinged on the registration of the Respondent as an NBFC. It noted
that Section 3(7) which defines a ‘corporate person’, excludes from its definition any
‘financial service provider’ (and consequently excludes the same from the definition of a
‘corporate debtor’). To qualify as a ‘financial service provider’, a person must be “engaged in
the business of providing financial services in terms of authorisation issued or registration
granted by a financial sector regulator”. Section 3(16) provides a non-exhaustive list of
‘financial services’. It held that it is not necessary that ‘financial service providers’ must
accept deposits. If any of the services under Section 3(16) are being provided, then the
definition of ‘financial service provider’ would be sufficiently met, as the list provided in the
definition is an inclusive list. 
The NCLAT also considered the definition of ‘financial institutions’ in Section 45-I(c) of the
Reserve Bank of India Act, 1934 (“RBI Act”), which includes in its ambit any non-banking
institution which carries on as its business or part of its business the “acquisition of shares,
stock, bonds, debentures or securities issued by a Government or local authority or other
marketable securities of a like nature”8. Relying further on this definition, the NCLAT held

25
Housing Development Finance Corporation Ltd v RHC Holding Private Ltd Company Appeal (AT)
(Insolvency) No 26 of 2019.
26
Randhiraj Thakur v Jindal Saxena Financial Services Pvt Ltd 2018 TaxPub (CL) 1021 (NCLAT-Del): 2018
210 CompCas 0713.
that the Respondent qualifies as a ‘financial institution’ under the RBI Act and would
therefore also qualify as a ‘financial service provider’ under the IBC.
The rationale behind this exclusion would reasonably be to safeguard such financial service
providers, which otherwise play a key role in the economy. The failure of a systemically
important financial institution could cause a domino effect resulting in a financial crisis that
could crumble the economy. Moreover, the stakeholders in these financial institutions, would
be members of the public whose interests must be safeguarded first and foremost. Therefore,
NBFCs, specially which are deposit taking, or systemically important, would be important to
be protected from an economic standpoint in public interest.27 However, there seems to be
little cause to extend this protection to NBFCs which becoming insolvent would otherwise
have no impact on the general public. The NCLAT judgment however, has only considered
the letter of the law, without delving into the statutory intent. It is highly unlikely that the
intent of the legislature to exclude the applicability of the restructuring mechanism under IBC
to NBFCs, was simply because they have been registered with the RBI, without due
consideration on the extent of the impact, if any, that such transaction might have with
respect to the general public. In this instance, there seems to be no rationale behind excluding
an NBFC which does not accept deposits and is not systemically important, to be proceeded
against under IBC.28

27
Desiree D’Sa, Arjun Gupta and Karan Kalra, ‘Applicability of Insolvency and Bankruptcy Code to NBFCs’ <
http://www.nishithdesai.com/information/news-storage/news-details/article/applicability-of-insolvency-and-
bankruptcy-code-to-nbfcs.html > accessed 13 November 2019.
28
Shikha Bansal, ‘NBFCs and IBC: The Lost Connection’ Bar&Bench < https://barandbench.com/nbfcs-and-
ibc-the-lost-connection/ > accessed 13 November 2019.
Resolution of the Crisis

The primary and core problem for the IL&FS Group is excessive leverage, without
commensurate asset values or cash flows, form the perspective of both timing and quantum.
Thus, the New Board believes that the Final Resolution will inevitably involve substantial
deleveraging from current levels, notwithstanding various challenges. Such deleveraging will
necessarily need to be achieved in an orderly manner, considering the scale and complexity
of the IL&FS Group, in the absence of which there could be dire impact on asset/ company
values, especially at the level of certain key verticals. A deleveraging usually involves
(whether individually or in combination): (i) significant capital infusion (either from existing
or new investors), (ii) asset monetization to retire debt and (iii) resolution/ compromise with
the creditors. The above methods will need to weighed against the gargantuan and enormous
complexity of the IL&FS Group and challenges arising from a) the multi-layered structures
especially for external borrowings; b) multiple assets classes; c) different stakeholder
categories having differing levels and types of exposure across the group, etc.29
A group level resolution would involve significant capital infusion at IL&FS level from
credible and financially strong investor(s), with a condition that such investor(s) along with
the New Board engage with the creditors such that it will lead to a Final Resolution on a
group-wide basis. A Group Level Resolution may enable continuity of many of the operating
entities, and for many employees, and may potentially reduce the complexity of engagements
with multiple stakeholders. If successfully implemented by a credible investor(s), this could
address the circumstances which prompted Government action in a timely manner.30
A vertical level resolution would involve This could involve exploring solutions involving all
assets/ companies/ SPVs comprising a specific business vertical, on a combined basis (e.g.,
roads vertical). Buyer(s)/ investor(s) interest for the Vertical Level Resolution is expected to
be more likely given that focused participants exist for different asset classes in India. For
example, a number of private equity and strategic players have significant focussed interests
in roads, renewables, real estate and thermal power. 31

29
‘Disclosure byIL&FS with regard submission of a Report on Progress and Way Forward with the NCLT’
<http://www.itnlindia.com/application/web_directory/Latest
%20Updates/Intimation_submissionofplan_ILFS_31102018.pdf> accessed 13 November 2019.
30
Ibid.
31
Ibid.
Conclusion
The discussion in the previous chapters has highlighted the reasons, consequences, responses
and legal aspects of the IL&FS crisis. The primary reason behind the crisis being the asset
liability mismatch which was a result of funding long term assets with short term liabilities,
unviable projects, structural defaults, issues with management and acquiesce on behalf of the
auditors. The crisis has adersely affected individual investors, mutual fund markets, pension
schemes, investor’s confidence on credit rating agencies and future infrastructure projects. In
light of this, SEBI has now tightened the norms for credit rating agencies in an attempt to
restore investor faith in the system. The tide seems to have turned in favour of commercial
banks as the liquidity crunch following the IL&FS has pushed corporate borrowers away
from the bond markets, back to banks. The Reserve Bank of India has released draft
guidelines on liquidity management framework for non- banking financial companies and
core investment companies in light of the NBFC crisis. As far as resolution is concerned the
Insolvency and Bankruptcy Code is no applicable on NBFCs and hence the resolution has to
take under the mechanisms provided by the RBI. Hence, IL&FS board has presented a status
report and a roadmap to the NCLT highlighting the process and impediments in the ways of
resolution.