A brief study of the IL&FS crisis

Abstract

Galileo Galilei once said, "All truths are easy to understand, once they are discovered; the point is to discover them." On the 6th of September, 2018, the credit markets in India were shaken by the morning news bulletin . Infrastructure Leasing and Financial Services (IL&FS), arguably the country’s largest financer for infrastructure projects had defaulted on its commercial paper. The underlying feeling of dread only magnified by the sheer fact that this parent controlled more than 200 entities, an empire sprawling multiple projects & geographies. It was easy to conclude that the future looked bleak. The only question was how bleak? IL&FS’s, incorporated in 1987, had an original mandate to finance the construction and maintenance of commercially viable long-term infrastructure projects. The company gradually outgrew its original mission, transmuting into a major infrastructure player itself. It embodied its new motto Concept to Execution, shifting focus from sponsoring projects to implementing them. Its operating model was characterized by an unsteady concoction of subsidiaries, special purpose vehicles (SPVs) and associates, many of which were specifically set up for individual projects. This model helped IL&FS developed and finance projects over 1.8 lakh crore and more than 14,000 kilometers in its road construction, and then something snapped. IL&FS commercial papers had historically always been graded investment-grade A. If a stalwart like IL&FS could default, the market stakeholders expressed their concerns on the extent of the rot in its multiple subsidiaries and, more worryingly, regarding what could still possibly be unearthed?. The central government proposed a six-member team to take the reins of the IL&FS board. The six members are - Uday Kotak of the Kotak Mahindra Bank, retired IAS officer Vineet Nayyar, former Sebi chairperson G N Bajpai, ICICI's non-executive chairperson G C Chaturvedi, IAS officer Malini Shankar and senior bureaucrat from CAG Nand Kishore . The Serious Frauds Investigation Office (SFIO) stepped in and has been meticulously trying to unravel the dubious loans granted and round-tripped by Infrastructure Leasing and Financial Services Ltd (IL&FS) by seeking information from all borrowers on their links with the 346 entities in the failed infrastructure and finance conglomerate. This exercise itself has been throwing up several interesting revelations, including the role of scores of Indian Administrative Services (IAS) officers and their relatives who seem to be embedded in the group, including directors and chief executives (CEOs) of several subsidiaries of IL&FS. As the skeletons kept tumbling out of the cupboard, three questions begged to be answered: First, could this have been avoided or was it always a dormant volcano waiting to erupt? Second, how does this influence the macroeconomic variable of domestic infrastructure financing? Third, is there a way to restructure the assessment of credit risk in this industry to prevent such a scenario in the future?