Infrastructure Leasing & Financial Services (IL&FS) Ltd, which is currently in the doghouse for defaulting on various loans, is facing trouble from lenders who want to see how the company plans to repay the additional money it is seeking before they agree to lend again.
Under the broad plan approved so far, Rs 4,500 crore is to be raised as equity from existing shareholders through a rights issue, and another Rs 15,000 crore is to be raised from the bond market. As things stand, neither are all existing shareholders keen to invest, nor are lenders willing to throw more good money after bad.
According to an Economic Times report, LIC, which holds a quarter of the equity in IL&FS, will invest in the rights issue, and so will Japan’s Orix, which holds 23 per cent. But the rest, from State Bank of India to HDFC, Abu Dhabi Investment Authority and Central Bank of India, among others, have not shown any great enthusiasm to bail out the infrastructure firm. IL&FS has over Rs 90,000 crore in outstanding loans, and needs a minimum of Rs 300-500 crore every month to service them.
The truth is that allowing IL&FS to collapse is not a viable option, since it could impact the financial system as a whole – as we saw last week when the stock markets hammered all non-bank financial companies’ stocks and also banks. It has to be a managed dismemberment, with the government standing guarantee to prevent a financial system crisis.
It makes no sense to arm-twist the LIC and SBI to invest in IL&FS, since that would be akin to penalising policyholders in one case, and shareholders in the other. Unlike the IDBI Bank bailout by LIC, where there were at least synergies to tap for the latter, in the case of IL&FS, there is no such obvious benefit for LIC from dishing out more capital.
LIC and SBI had invested in the company’s original capital as the government had blessed the idea, but today there is no case for saddling them with this additional burden, when they themselves have big challenges on their hands – LIC to turn around IDBI Bank, and SBI to turn itself around after merging six other banks with itself. In fact, SBI chairman Rajnish Kumar last month gave the government enough hints that he was not willing to carry more cans on behalf of the government.
This actually leaves us with few sensible choices. The least repulsive ones include:
One, government guarantees on IL&FS debts for a limited period while the company works out a resolution plan.
Two, offer of outright sale of the company to any foreign partner, with some recast of its borrowings. In this event, lenders may well be willing to offer to refinance existing loans since the new promoter may be stronger financially.
Three, sell the constituent parts of IL&FS to whichever private sector partner is willing to buy them. With nearly 100 subsidiaries involved in road, port, power and engineering projects, many of them should find buyers at the right prices along with the relevant debts. It is only the balance IL&FS that needs to be taken to the bankruptcy courts.
India does not need too-big-to-fail infrastructure financing companies which have had a doubtful track record. They should be broken up and sold to avoid future disasters.
But there is no point in burdening other viable financial behemoths like LIC and SBI and making them struggle as well.
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