As a partially new board of Infrastructure Leasing & Financial Services Ltd (IL&FS) takes charge, there’s one thing most experts seem to agree on.
“Life Insurance Corporation of India should not be overburdened even if it means IL&FS has to be allowed to collapse.”
That’s according to Anil Singhvi, chairman of Ican Investment Advisors and founder of governance advisory firm IiAS, who said IL&FS does not qualify for a government bailout. Nor should LIC, the largest shareholder of the company with a 25.34 percent stake, be forced to infuse further funds.
Sucheta Dalal, veteran journalist and managing editor of Moneylife, agreed. “There can’t be a rescue for IL&FS from public money. We have sent a notice to the LIC chairman against using public money to rescue a private company,” she told BloombergQuint in an interview.
Infrastructure company IL&FS has defaulted on a number of its debt service payments over the last month, leading to an overhaul of its board by the Government of India, which stepped in on Monday to control some of the damage.
To be clear, the government has not offered any financial support to IL&FS. It said it hoped that financial institutions would be supportive for providing urgent liquidity, according to the finance ministry statement issued on 1 October.
Superseding the board is not a concrete plan, said both Singhvi and Dalal, as six members of the old board still remain in power.
“The government has no plan and it has put in a new board because they had to do something,” Dalal said.
Raising doubts on the credibility of the existing management, Singhvi said the new board should replace key management executives.
Dalal agreed, elaborating on several instances of mismanagement at the company over years and highlighting the generous remuneration policies in contrast to the financial reality of the company.
The government too has alleged mismanagement at IL&FS and misrepresentation of facts.
Next Steps
“The new board needs to first assess the current problem and identify key people to bring in. The way forward is to make the structure simpler,” said former chairman of the Securities and Exchange Board of India, M Damodaran.
IL&FS should go through an insolvency process like any other private company and should identify assets it can sell, Singhvi said. He made the case that it is not too big to fail.
“They (IL&FS) have value in assets in their road subsidiaries. These are cash-flow generating, at least from a distant view and will be able to fetch value,” said Rajiv Lall, managing director and chief executive officer of IDFC Bank Ltd. “There are potential buyers with the resources to buy assets that have value.”
The company would take at least six months to see any funds through the sale of assets, Lall said. “My concern is time. This is serious amount of money that needs to be paid for the assets and that needs due diligence.”
In the past too the company has attempted to sell several assets but failed. A government-ordered probe by the Serious Fraud Investigation Office could complicate and delay matters.
Since asset monetisation will take time, the immediate funding requirements to repay debt will have to be met by existing shareholders or by raising further debt. The latter seems tough as IL&FS is now rated junk.
A debt moratorium may be one solution the new board may seek, said Singhvi. IL&FS had earlier filed an application at the National Company Law Tribunal for a scheme of arrangement (financial restructuring) and were seeking a moratorium under that. Chances are that in absence of any new lenders, the existing shareholders will have to step in.
The IL&FS experience does not bode well for LIC’s rescue of IDBI Bank, agreed both Dalal and Singhvi.
(This story was originally published on BloombergQuint.)
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