Saving the Titanic: Govt took control of IL&FS to avert 'catastrophic' damage to financial markets, economy

Saving IL&FS was critical as nearly two-thirds of the firm’s accumulated debt of 910 billion rupees ($12.36 billion) was from public sector banks.

Reuters October 06, 2018 10:01:23 IST
Saving the Titanic: Govt took control of IL&FS to avert 'catastrophic' damage to financial markets, economy

New Delhi: The government said it was forced to take control of ailing shadow banking firm Infrastructure Leasing & Financial Services (IL&FS) as it feared its collapse would cause 'catastrophic' damage to the financial markets and the economy, a court filing shows.

In the largest intervention of its kind, the government this week replaced the board at IL&FS, a construction and infrastructure firm that had defaulted on a series of repayments to creditors as it struggled under a debt pile of more than $12 billion.

The company’s downfall has undermined confidence in the country's shadow b++anking sector, triggered declines in the nation’s stock and bond markets, and stoked fears of outflows from the mutual fund industry which has a large exposure to such financing companies.

 

Saving the Titanic Govt took control of ILFS to avert catastrophic damage to financial markets economy

Uday Kotak, newly appointed Non-Executive Chairman of IL&FS. Reuters

In a 36-page petition filed by the Corporate Affairs Ministry at the company law tribunal, the government does not pull its punches, referring to IL&FS as a “titanic ship” and accusing its board of mismanagement.

The petition, which sought permission for the board takeover and the right to replace executives and was approved by the tribunal, has not been made public, though some media outlets have quoted from parts of it in recent days. Reuters was able to review the entire petition.

Saving IL&FS was critical as nearly two-thirds of the firm’s accumulated debt of 91,000 crore ($12.36 billion) was from public sector banks. Moreover, IL&FS accounts for 16 percent of the total exposure of banks to the country's non-banking financial companies (NBFCs), the government said in the petition.

“The future impact of more defaults in the group may be catastrophic for the (country’s) financial stability,” it said.

“Any impairment in its ability to finance and support the infrastructure projects would be quite damaging to the overall infrastructure sector, financial markets and the economy,” the government added.

Critical time for Narendra Modi

IL&FS, whose top shareholders are state-run Life Insurance Corporation, the State Bank of India, Japan’s Orix Corp and the Abu Dhabi Investment Authority, is one of the largest of thousands of NBFCs which have mushroomed in the country in recent years.

The NBFCs, that currently manage an aggregate loan book of nearly $300 billion, have played a key role in lending growth in India as the main banking sector struggled to tackle a bad-debt burden of $150 billion.

It is rare for the government to take control of a private company. In 2009, it took over Satyam Computer Services following an accounting scandal at the firm.

But the rescue was critical for Prime Minister Narendra Modi who can ill afford a financial crisis months before he faces voters at the next election, due by May 2019. His administration is already facing public ire over high fuel prices, a falling rupee currency and farmer protests due to low crop prices.

In a 'critical lapse', IL&FS’ risk management committee, which was tasked to keep tabs on liquidity, credit and market risks, met just once between 2015 and 2018, the government said.

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