Over the past few weeks, one of India’s biggest infrastructure conglomerates ILFS, with assets worth over Rs.1.158 lakh crore, has slowly but surely started sinking, potentially blowing massive holes in a number of banks, causing mayhem in stock markets and sending tremors down dozens of infrastructure projects ranging from highways and metro lines to bridges and tunnels.

On March 31, 2018, the consolidated balance sheet of ILFS group showed a total debt of Rs.91,091.3 crore. From the looks of it, ILFS is largely unable to repay this in the coming months. Already, in September it has defaulted on three payments including a Rs.1000 crore default to SIDBI, Rs.105 crore on Commercial Papers and Rs.80 crore on inter-corporate deposits. By October, ILFS is due to repay Rs.3600 crore. To avoid its creditors, ILFS and 40 of its subsidiaries have filed for bankruptcy. Meanwhile RBI has called a meeting of all stakeholders (ILFS and creditors) on 28th of this month, just before the company holds its annual general meeting on 29th.

On the face of it, the death pangs of this behemoth, with an estimated 169 subsidiaries/associates, a presence in 22 states and close ties with govts. at the centre and state levels, seems unbelievable. How did it go so badly wrong for a company that was known as the ‘pioneer of public-private-partnership (PPP)’ in India?

This question has become all the more crucial because Life Insurance Corporation (LIC) which owns the largest chunk of shares – 25.34% - in ILFS is now being pushed by the central govt. to bail out ILFS. LIC Chairman V K Sharma was reported as saying that "We will ensure IL&FS does not collapse. We will not allow contagion to spread from IL&FS...All options are open (including raising stake in the company)." This means that the money paid by common Indians as premia to LIC will be handed over to the wizards of ILFS for squandering away bank loans.

Ponzi Scheme of Loans

On its website, ILFS grandly states that after identifying suitable projects, “we then use innovative structural and financial techniques to enhance project viability and impact”. For 25 years since its incorporation in 1987, it indeed pursued this strategy. Now it turns out that the ‘innovative techniques’ were really a Ponzi scheme of loans. Here’s how it worked.

ILFS projected itself as the go-to company at a time when, with the onset of liberalisation and deregulation, the govt. was looking for private entities as partners to take up diverse projects, including infrastructure building. It is widely believed that ILFS had a galaxy of retired bureaucrats who liased with govt. departments in getting contracts. These contracts were then used to get loans from banks, NBFCs and other entities.

But this would be just business as usual under capitalism. What was ‘innovative’ was that subsidiaries were lending among themselves too, and then – taking more loans from outside on the basis of showing cash reserves. It is a kind of inverse Ponzi scheme of loans.

The result was that debt kept piling up but ILFS was in cruise mode because it was rolling over its debt even as it got more loans. It rode through the better part of a quarter of a century with this neat little scheme – till now.

Unpayable Debt

In the past few years, however, things started turning sour. ILFS, in a letter to its employees has tried to explain it all off by claiming that the holding up of Rs.16,000 crore by the govt. caused a liquidity crunch leading to the crisis. But the reality is that a slowing economy, consequent dip in demand, risk aversion by banks because of mounting NPAs, floundering infra projects and an inept, if not complicit government, has caused the crisis to burst out. It was only a matter of time – the die was cast when ILFS committed itself to the PPP model and its ‘innovative’ financing strategy.

At present it is unclear how exactly the monies borrowed by ILFS and its phalanx of subsidiaries/ associates were spent. Other NPA stories – and India abounds with them these days – show that usually credit is siphoned off for personal gain, either through investment or through consumption. Nirav Modi or Mehul Choksi, or the king of good times, Vijay Mallya, are poster boys for this kind of fraud.

In this case, because ILFS was the king of PPP’s, there is reasonable ground to believe that the spoils would have been shared not just among the company’s top honchos but also with those handing out govt. contracts. There is no proof yet, but as the whole thing unravels, this too may come out.

LIC – The Good Samaritan or Scapegoat

The immediate worry however is the move made by the central govt, largely drawing support from its apologist media. As in the case of the sinking bank IDBI only a few weeks ago, calling upon the Golden Goose, LIC to save ILFS is seen by the govt. as the most expedient way out. Why? Because it bails out ILFS using public money and yet keeps the whole transaction out of the govt.’s own books.

Even as the LIC was offering to bail out ILFS, Economic Affairs Secretary Subhash Chandra Garg was quoted as blithely saying that ILFS "has assets, it has liabilities to take care. There might be some temporary mismatch, so it is IL&FS, which will deal with the problem. The government is not involved directly."

LIC is a public sector company with an enormous cash reserve due to its pre-eminent position as India’s leading insurance provider. Although statutes prohibit it from investing beyond a limit in companies, the govt. can force it to do so as was seen in the case of LIC’s takeover of IDBI. This way, the money spent on the bail out is considered LIC money which is not in the books of the Govt. of India. It will not add to the fiscal deficit, a prime concern for both the Modi govt. and its neoliberal mentors in the West.

What this gambit does do is put the common man’s money at risk. If LIC keeps saving companies that are sinking because of malfeasance on the part of their managements, in effect it means that such fraud is being subsidised by the people. The govt. washes its hands off the whole matter, the ILFS mandarins gleefully start living in Barbados or some other palm-fringed island, and the common people go about their daily grind, rueing the invisible hand of the market.

In the coming days, more details of ILFS shenanigans are going to emerge as the pot is coming to a boil very soon. Then, more skeletons will come tumbling out. So watch this space for more.