IL&FS mess: A three-point surgical strike

A few days ago the Modi government celebrated the second anniversary of its surgical strike against Pakistan. One wishes there were surgical strikes on other equally important areas as well. Unfortunately, from September 2, when Moneylife broke the story of Infrastructure Leasing & Financial Services (IL&FS) having defaulted on a payment of Rs 10 billion in short-term obligations to Small Industries Development Bank of India (SIDBI), till today, there has been precious little done by the government to fix the problem. 

Sure, the Reserve Bank has developed a spine suddenly and is talking tough, but not yet on IL&FS. In the absence of big, quick and effective steps, the stock and bond markets remain in turmoil while banks and finance companies are worried about the short- and medium-term impact. Instead of holding press conferences, the ministry of finance (MoF) needs to make a surgical strike on the IL&FS mess — a short, time-bound and credible agenda to permanently fix this hydra-headed monster, which has a finger in almost every infrastructure project in the country. This could involve taking the following steps.

Step 1: Immediately get a new leadership

It is astounding that there has been no action against those responsible for this monumental mess. The same sleeping board and senior management continue to fiddle with revival strategies. The board includes people like Chairman S B Mathur, Hari Sankaran (25 years in the job), Arun K Saha (30 years in the job); independent directors RC Bhargava, Michael Pinto, Jaithirth Rao and Rina Kamath; and bunch of nominee directors from LIC, Orix, the Abu Dhabi Investment Authority, Central Bank of India and State Bank of India. Each one of them needs to go. In their place the MoF should persuade someone like P J Nayak or Jamini Bhagwati to take charge with a free hand and a time-bound mandate to do the following.

Step2: Start selling assets through competitive bids

It is laughable to see that a tottering, terminally sick giant, weighed down by Rs 1.2 trillion of debt is being sought to be revived with just a Rs 45-billion rights issue. This is why we never get a permanent resolution of our financial mess. It will only kick the problem forward by a few months or years down the line. The rot is too deep. The only way to contain the contagion from spreading is to systematically sell key projects by getting national and international operators to bid. The message must go out that a man with impeccable credentials is now in charge with an agenda to raise cash without shady deal-making.

Step3: Dismantle IL&FS

Many will argue that the insights and skills that IL&FS has developed over time must be preserved. This is mostly rubbish. I wish policymakers investigated how a small cabal around Ravi Parthasarathy has run IL&FS like a fief for three decades. Its modus operandi was ingenious: Gold-plating projects, taking on huge debt from public sector banks (PSBs), and taking billions as project management fees and charges. After this, if the projects survived, users would pay through their nose for the inflated project costs. From the Tirupur water supply project to the Noida Toll Bridge to Gurgaon Metro Project to the GIFT City, a project close to Narendra Modi’s heart, it is the same story every time.

How did IL&FS manage to continue at this game for so many years? It needed active support from the state. And so, as part of the same deceitful scheme, IL&FS has always projected that it is a government organisation, for which it devised a devious multipronged strategy. First, snag shareholding from public sector banks and life insurers so that they provide the needed cover. Second, recruit dozens of officers from the Indian Administrative Service at fat salaries to help it bag projects and maintain relations with state governments. Third, enlist the “support” of various chairmen and executive directors of PSBs for its gold-plated loans. Where is the “expertise” here if, after all this, it has now become a threat to the financial system itself? The same senior managers who ran this ship aground enjoyed perks and privileges of a highly profitable private sector company for decades and are now personally hugely wealthy. There is no expertise here, only scheming and trickery. It has to end once and for all.

This government prides itself on responding to feedback. Unfortunately, in the area we monitor, namely the financial sector, it does not seem to have a clue. In 2014, when the new government started its innings, I had said one of Mr Modi’s first jobs should be to fix the financial sector, especially PSBs. Unfortunately, this has not happened. It is indeed true that the mess that government and quasi-government financial institutions find themselves in is the handiwork of the previous government. But this regime has been a few steps behind every major event, instead of being on top of them. It could easily have taken tough decisions, saying that it is merely cleaning up the mess left by the previous government. Instead, it seemed strangely reluctant to take that simple political cover and initiate decisive action. This won’t do in the case of IL&FS. A swift surgical strike is needed to kill a hydra-headed monster and prevent it from taking down the system. 

The writer is the editor of www.moneylife.in

Twitter: @Moneylifers