RBI dismissed IL&FS suggestion for more funds for infra holding companies

Facing liquidity issues, ITNL decided to merge companies to show a bigger balance sheet

The Reserve Bank of India (RBI) rejected Infrastructure Leasing and Financial Services’ (IL&FS’s) suggestion that commercial banks should extend financing to holding companies in the infrastructure sector, shows a draft report by Grant Thornton (GT).
 
The report contains the screenshot of an email of March 2016, in which former chairman of IL&FS, Ravi Parthasarathy, informs key management persons including former vice-chairman Hari Shankaran that he had met RBI Deputy Governor R Gandhi and told him about the genesis of such holding companies and advantages of the platform. However, Gandhi told him that the view in the central bank was that banks should not extend debt financing to holding companies as the resources were then used for financing debt and/or equity of other companies.
 
“The RBI’s concern centred around the lack of financial discipline amongst holdco borrowers, and their ensuing inability to service the loan that they have accessed. Mr Gandhi also stressed that he could not formulate special legislation for IL&FS group, but needed to cater to a much broader audience,” the mail said. Business Standard has reviewed the GT report. 
 
Parthasarathy’s meeting with the RBI happened at a time when subsidiary, IL&FS Transportation Networks (ITNL), was finding it difficult to raise funds. In the same email, Parthasarathy suggested that ITNL should be merged with other companies to make it easier to raise funds and to make it ‘look and feel like an Operating Company’ to access bank financing. “As you know, we have raised funds under adverse circumstances over the past six months. Going forward, we need to face the reality that the current business architecture may not remain viable. It would appear to me that there is no option, but to merge some of the operating entities into ITNL so that it looks and feels like an Operating Company that can access bank financing… In the process, we would have a broad view of what the resultant financials look like, and what are the specific approvals that need to be taken,” the email says.
 
The email goes on to say that the merger of IL&FS Engineering and Construction (IECCL) and ITNL would not be a good idea because both companies were perceived to be weak. Rather the significant dilution that IL&FS would suffer would render the market to question the continued support for ITNL. “ITNL was not able to raise funds from the market post-March 2016, and the only option is to merge the operating entities in ITNL so that it appears to the stakeholders as an operating company and can raise additional funds,” notes the GT report.
 
The GT report that has accessed mails from the company’s server has found how the other group companies negotiated with credit rating agencies, which included gifts, threatening to change rates and delay on a regular basis. In addition, the credit rating rationale supposed to be drafted by the rating agencies were materially modified by or significant suggestions from the former key employees of IL&FS were incorporated, to provide and support good ratings given by the CRAs.
 
Also, when key employees became aware that ratings won’t be favourable, they tried to delay the process and publication. In addition, when the company did not get the desired rating from the CRA, they would pressure them to either withdraw the credit ratings or approach other rating agencies for better ratings.
 
The irregularities in IL&FS came to light in September 2018 after the parent company defaulted on Rs 1,000 crore short-term loan from Sidbi. With the group owing over Rs 90,000 crore to banks, mutual funds, provident funds and retail investors, it is the biggest financial sector crisis. Currently, 82 companies, including IL&FS, IFIN and ITNL, have been classified in the red category — ones which cannot service their loans. These companies owe as much as Rs 61,375 crore.

IL&FS receives nod for wind asset sale 

IL&FS on Monday said it received approval from a retired judge — appointed by the National Company Law Appellate Tribunal (NCLAT) — on the proposed sale of its wind power assets, held under ORIX Corporation of Japan. Justice (retired) D K Jain has been appointed to supervise the operation of the resolution process of IL&FS group companies.