Is LIC bailing out debt-laden IL&FS?

LIC is taking charge of an unlisted infrastructure behemoth with scores of subsidiaries, the full details of which are not easily available

In what could end up as one of the biggest bailouts in the financial sector, without portraying it as such, Life Insurance Corporation of India (LIC) is stepping in to ‘take charge of’ Infrastructure Leasing & Financial Services (IL&FS), an unlisted infrastructure behemoth with scores of complex subsidiaries, some of which are listed and a giant load of debt, the full details of which are not easily available in the public domain. It may be recalled that Ajay Piramal, a deal-hungry but astute acquirer, did a due diligence of IL&FS in 2015 but backed out. By then, even insiders felt its debt was getting out of hand. 

Hemant Bhargava, managing director of Life Insurance Corporation has taken over as IL&FS chairman at the last board meeting on Friday. A report in The Economic Times (ET) says that “LIC has tightened its grip” over IL&FS. The report says that LIC will “also be called upon to invest more to rescue the troubled company which is reeling under high debt and rating downgrades of key group firms.” 

Will LIC now bail out what is essentially a private entity (with some public sector shareholding), which has been allowed to grow into gigantic proportions without any oversight by a single sector regulator, the Comptroller and Auditor General (CAG) or Central Vigilance Commission? According to the ET report, IL&FS’s board has approved a Rs 45 billion  rights issue of this closely held company and will seek liquidity support of Rs 35 billion from the lenders. This means LIC will have to invest over Rs 10 billion in line with its equity holding. Central Bank of India, which itself is under Prompt Corrective Action by the Reserve Bank of India (RBI), will also have to invest or IL&FS will need to find another investor to take its share.

As the chart shows, IL&FS has run up massive debt which has become unmanageable now. 

Ratings agencies have downgraded the debt of IL&FS Transportation Networks Limited and two other entities in the road sector are struggling to make payments on time. There are also reports about delayed salaries in its toll company and ILFS Environmental Infrastructure and Services Ltd. Several fund raising plans have also failed. 

IL&FS, the brainchild of ex-Citibanker Ravi Parthasarathy, had ambitions plans to finance mega infrastructure projects and become a complete financial services company. Incorporated in 1987, IL&FS was initially promoted by the Central Bank of India, Housing Development Finance Corporation Limited and Unit Trust of India (UTI). Others, such as State Bank of India, Life Insurance Corporation of India, ORIX Corporation Japan, and Abu Dhabi Investment Authority invested in the 1990s, while many of the original shareholders, like UTI, diluted their holding. In 1999, UTI had once asked for a three-member supervisory board to head IL&FS’s management; but after its own debacle, it sold out most of its equity. LIC now has a 25 per cent shareholding, making it yet another company where the insurance giant has a high exposure risk. 

What makes the unravelling of IL&FS extremely complex is that each of its subsidiaries also has a large investment from public sector banks and institutions. I messaged IL&FS’ vice-chairman and managing director Hari Shankaran for comments on the details that we have put together about its outstanding debt. He responded to say, “We are in the middle of implementing our plans. We would be happy to share once consummated.” Hence, as mentioned to him, this article does not have IL&FS’ point of view.

Despite running scores of different projects and businesses, IL&FS has reported a loss or meagre profit over the past three years for which data is available.

Indeed, IL&FS’ standalone operating losses are large and persistent.

Presided over by Parthasarathy for nearly 30 years without any succession planning, IL&FS was run in the mould of National Stock Exchange (NSE), Stockholding Corporation of India and other private, so-called “professionally managed” unlisted companies. Although the bulk of the shareholding in these companies was held by public sector undertakings, they were run like private sector companies with similar perks and privileges. They have been operating in the penumbra of private or public label, as and when it suited them. IL&FS had an added advantage. Apart from being designated as a systemically-important, non-banking finance company, by the Reserve Bank of India, it did not come under the oversight of a single regulator, or central audit and vigilance agencies. 

Parthasarathy, who strategically kept a very low profile, resigned last Friday on health grounds and it is only now that details of this gargantuan but shadowy group will probably become available to the public. He ruled over the entity without a fixed tenure or re-appointment or the yoke of public sector constraints. He has pushed the company to bid for a variety of innovative projects — some of which worked and some were spectacular failures. These included the first private toll road (between Rau and Pithampur in Madhya Pradesh), the international Iridium satellite phone project underpinned by Motorola Corporation which went bust and the Tirupur water project to bring drinking water to this very rich hosiery exporting town in Tamil Nadu.

Often IL&FS would rush in to be the first bidder for an infrastructure project, but gave it up after squatting on it a long time. This included the Worli-Sea Rock link in Mumbai, which was eventually completed after long delays and massive cost escalation. It has similarly sat on the Panvel bypass until the Maharasthra State Road Development Corporation acquired it to complete the Mumbai Pune Expressway. There is not an infrastructure project it would not be interested in. As recently as April, it beat Reliance Infrastructure in its bid to run Mumbai’s monorail project that has been lying closed since November 2017. In 2011, it took over Maytas, promoted by Ramalinga Raju of Satyam and renamed it IL&FS Engineering and Construction, which too has been making losses consistently.

This piece was first published in www.moneylife.in