WHAT HAS GONE WRONG

THE LARGER PICTURE

IS A RECOVERY IN SIGHT?

NEW DELHI: Infrastructure Leasing & Financial Services Limited (IL&FS), the infrastructure lending conglomerate which was instrumental in inception of public private partnerships in India, has sent tremors down the country's financial markets -- and the rot might well spread.To put things succinctly, the IL&FS group is faced with a debt of Rs 91,000 crore in its books and is saddled with a severe liquidity crunch. Of the Rs 91,000 crore, IL&FS alone has a debt of nearly Rs 35,000 crore while IL&FS Financial Services owes Rs 17,000 crore. Together these two sit as standard asset for most of the lenders, according to a Nomura India report.The lack of liquidity means that the financier which has to its name marquee projects like the country's longest tunnel -- Chenani-Nashri tunnel-- has repeatedly missed debt repayments in the past few months.On Monday, for the third time this month, it defaulted on interest payments on commercial papers. Earlier this month, it came to light that IL&FS group defaulted on a short-term loan of Rs 1,000 crore from Small Industries Development Bank of India (Sidbi), while a subsidiary has also defaulted Rs 500 crore dues to the development finance institution. IL&FS has not been able to pay Rs 490 crore so far this year and is due to pay an additional Rs 220 crore by October end. In the next six months, it needs to pay as much as Rs 3,600 crore.To make things worse, news agency Bloomberg on Monday reported quoting sources Sidbi has filed an insolvency application against IL&FS at the National Company Law Tribunal (NCLT).IL&FS, a financier categorised by Reserve Bank of India ( RBI ) as 'systematically important', having a debt of Rs 91,000 crore spells trouble in itself.The complexity of the rot however lies in the fact that IL&FS is majorly exposed to state-owned entities and thus puts public money at risk. The shareholding pattern of the conglomerate shows that Life Insurance Corporation of India ( LIC ) is the biggest shareholder, with State Bank of India ( SBI ) and Central Bank of India also having stakes.More signs of danger lie in the quality of borrowings of IL&FS. According to company filings, almost 60 per cent of IL&FS's borrowings (as of May 2018), lie in non-convertible debentures. For the uninitiated, debenture is a type of debt instrument that is not secured by physical assets or collateral. The absence of collateral in debentures is based on the belief that the bond issuer is unlikely to default on the repayment -- exactly where IL&FS has betrayed the markets.As far as loss to individual investors are concerned, the risk does not end here. A major chunk of the debentures mentioned above are subscribed by insurance companies, pension funds and provident funds -- savings that the huge middle class of the country banks upon.The beleaguered shadow bank has caused jitters in the equity markets too. Coupled with other global and domestic cues, the IL&FS fiasco has resulted in a rout in the banking and financial stocks in the last one month, precisely since IL&FS missed the first repayment in August-end. The Nifty Financial Services sub-index has lost 10.97 per cent, while the Nifty Bank sub-index has slipped 12.18 per cent during the period.“There are liquidity concerns ... financial stocks led the rally and now they are dragging the markets and it has a domino effect on sectors such as real estate and autos,” told AK Prabhakar, head of research at IDBI Capital to news agency Reuters on Monday.In the wake of the crisis, the strongest support till now has come from the LIC. On Tuesday, Reuters quoted the state-owned insurer's chairman V K Sharma as saying that LIC will not let IL&FS collapse adding they have kept all options, including increasing LIC's stake in IL&FS open.RBI and Sebi on Sunday promised 'appropriate action' to prevent market disruption while SBI has assured continued support to non-banking finance companies (NBFCs).This week could prove to be a crucial one for IL&FS with the RBI slated to meet the stakeholders on September 28 ahead of the annual general meeting (AGM) of the financier, which is expected to take up a capital infusion plan. Earlier this month, news agency PTI reported LIC is believed to have agreed to subscribe to the forthcoming rights issue and extend some immediate working capital loan.On Monday, Bloomberg quoted an internal memo of the company to report IL&FS is seeking to sell 25 assets worth Rs 30,000 crore, adding that 14 of the 25 assets have garnered investor interests.However, with a number of long and short-term borrowings downgraded to 'default' or 'junk' by rating agencies, it might be difficult for IL&FS to roll over the debt.(With agency inputs)