PGDM I SEMESTER

Session 2021-22

PGDM107 - Legal & Business Environment

Case Study 2

Date of Assignment: 29th Nov 2021 Date of Submission: 4th Dec 2021

Submitted to: Submitted by:

Prof. Moid Ansari Harsh Gupta

ABS/PGDM/21/057
 1. What measures could have been taken to avoid the IL&FS default?

Answer. As per the case study the following measures I have identified to
avoid the IL&FS default: -

• Simplifying the complex structure of IL&FS.

• Making stringent laws to deal with lack of transparency in both
companies’ structure and finances as well as rating agencies
• Minimizing red-tapism, reducing paper work to avoid stalling of projects.
• Board of directors should be held accountable for such major defaults
and should be brought under regular audit mechanism.
• Auditing should be done by independent third-party auditors appointed
by the government in consultation with RBI and major shareholders. This
will ensure greater transparency in auditing of financial records.
• Bringing IL&FS properly under the ambit of SEBI or RBI.
• Fast tracking land acquisition and environment clearances.
• The government can look at disinvestment of deteriorating assets rather
than bailing them out from the tax payer’s money

2. How has the crisis impacted the infrastructure financing in India?

Answer. Following reason this case have impacted the infrastructure financing
in India.

• Loss of confidence of investors.

• Many mutual funds have invested in its Bonds, Certificate of Deposits.
The default and further fear of default is contagious to all financial
markets which resulted in loss of money for many investors during last
few months.
 • Government decision to pump more funds to meet with crises can result
in widen of fiscal deficit which has adverse repercussion on inflation,
exchange rate, growth etc.
• It can lead to diversion of funds which were meant for social sector
programs.
• It leads to increased litigation in National Company Law Board (NCLB) as
shareholders decided not to allow further defaults by IL&FS

3. How should the banking industry evaluate credit risk in future?

Answer. The ways banking industry evaluate credit risk in future are: -

• Avoiding concentration risk on individual scheme level

• Focus on client selection
• Do not solely rely on external credit rating
• Refrain from chasing Yield-to-Maturity
• Credit investments to be approached from a bottom-up
perspective
• Credit decisions should be based on internal due diligence and
factoring in liquidity risk