Story behind collapse of @ILFSGroup & @DHFL_India. Excerpts from #Pandemonium: The Great Indian Banking Tragedy @RoliBooks Launch on 10 Nov 5 PM Book Excerpt | Writer Tamal Bandyopadhyay offers an insider story on the rot in India’s banking system
The following is an excerpt from noted journalist Tamal Bandyopadhyay’s latest book Pandemonium: The Great Indian Banking Tragedy. The book is a definitive insider story on the rot in India’s banking system – how many promoters easily swapped equity with debt as bank managements looked the other way to protect their balance sheets, until the RBI began waging a war against ballooning bad loans. It will be released on November 9.
If the rise of Infrastructure Leasing & Financial Services (IL&FS) defied all logic and the creation of this ‘business model’ broke all sorts of laws and regulations, there was a lot of mystery shrouding its fall as well.
On 24 July 2018, Ravi Parthasarathy, chairman and managing director of IL&FS, who had run the group with the authority and flamboyance of a promoter, stepped down like a professional manager, citing ill health.
A last-ditch attempt was made to raise funds that could have alleviated the liquidity crisis. This was through a rights issue. It is an even bigger mystery how and why this rights issue was aborted. The rights issue was approved at the company’s annual general meeting on 29 September 2018.
A resolution was passed to raise capital through a rights issue, to approach the National Company Law Tribunal (NCLT) for permission to sell assets, and generate liquidity to repay debtors. Hari Sankaran, the vice-chairman and managing director of IL&FS, unveiled this three-pronged strategy at its annual general meeting.
The Rs 4,500 crore rights issue was launched; a small amount from one shareholder did flow into an escrow account, kept with one of the lenders, which had given a short term-loan to IL&FS to tide over a temporary liquidity crisis. And yet, the rights issue was aborted. The lender was IndusInd Bank Ltd.
It had exposure to a few operating companies of the group, the largest account being a Rs750 crore loan to Chenani Nashri Tunnelway Ltd – this was classified as a standard asset. Who pulled the plug on the issue? And, why? Had it gone through, IL&FS could have continued to function as a ‘going concern’, giving it time to sell off assets at reasonable prices.
Apart from the rights issue, IL&FS also had plans to tap some lenders and equity holders for liquidity support of about Rs3,500 crore. Pending the rights issue and liquidity support, IL&FS approached IndusInd Bank for a short-term loan of Rs2,000 crore as it needed to meet running expenses and service debt. Several meetings were held at different levels.
The assets of the holding company were offered as security and the proceeds of the rights issue were earmarked as one of the repayment sources. IL&FS also offered to open the rights issue’s escrow account with IndusInd Bank.
Before disbursing the money, IndusInd Bank brass met the senior management of LIC, the largest shareholder of IL&FS, to revalidate its claim about the rights issue and collected no-objection certificates from the security trustee for taking the assets as security.
There was a catch, though. Even though the security document was signed, it was not registered due to the sudden turn of events and the board was superseded. In the absence of registration, it may not be easy for IndusInd Bank to recover the money it gave. But that’s a different story.
Valuation Collapse IL&FS was set up in 1987 by Central Bank of India, HDFC and Unit Trust of India. As of 31 March 2019, LIC was the largest shareholder in IL&FS with a stake of 25.34 per cent, followed by Orix Corporation of Japan (23.54 per cent), Abu Dhabi Investment Authority (12.56 per cent) and IL&FS Employees Welfare Trust (12 per cent).
Among others, HDFC held 9.02 per cent, Central Bank of India 7.67 per cent and State Bank of India 6.42 per cent. Three years before the default, the Piramal Group, a diversified group with a big presence in healthcare, life sciences, drug discovery, financial services and real estate, was looking to buy a big stake in IL&FS. But LIC put its foot down.
Piramal wanted to acquire a 35 per cent stake in IL&FS in a deal that could have offered a lifeline to the cash-strapped infrastructure lender. But LIC was not happy about the valuation. Piramal’s offer was at Rs740–750 per share but LIC was not willing to accept anything below Rs1,200.
Three years down the line, LIC chose not to subscribe to a rights issue priced at just Rs150 a share! A 34-page affidavit, filed with NCLT by Sankaran, said LIC’s decision in 2015 not to back the proposed merger with Piramal group worsened the crisis at IL&FS. The group was already facing a cash crunch due to delayed projects and problems with refinancing. Piramal’s entry would have generated Rs8,500 crore of investible funds in the entity.