The fall of IL&FS
is a story of enlisting the private sector to facilitate ease of living without
ensuring ease of paying the bill
The
mimicking of the Satyam Computer Services model to take over IL&FS is
intended to assure the market that the crisis will be contained swiftly. The
tech services exporter was sold within four months after the Union government
bundled out the discredited board. A finance ministry official has put the
bailout timeline for the cash-strapped financier and developer of
infrastructure at six to nine months. The improbable feat seems to have
succeeded for now. Save for one mutual fund, there was no mass-scale dumping of
debt, belying fears of a contagion. Though similarities are sought to be drawn,
the two cases are different. The promoter-driven software solutions provider’s
problem was not with liquidity but its deployment. The fallout of the collapse
was restricted to its stakeholders as was in the case of a non-performing
airline and some steel makers. Accountability could be fixed. In contrast, no
single institution controlled the resources-hungry showcase of public-private
partnership that absolved the government from raising funds for execution and
maintenance of bare-bones projects. Lenders include financial institutions,
banks, NBFCs and mutual funds. Operations span across geography and involve
numerous participants. Despite maintaining an arm’s length, the government is
an indirect shareholder. Satyam dressed up earnings to retain a slot among the
top three players in the sector. IL&FS’s illiquidity stemmed from pending
receivables, resulting in defaults. While the desperation to scale up
contributed to Satyam’s demise, the obstacles for IL&FS were not bagging orders
but implementation and payment delays. Handpicked
directors being ignored by a founder cooking the books is understandable. What
is not is the passive role of two foreign big-ticket investors, a poster-boy for
transparency and state-owned entities even as professional managers without skin
in the game recklessly piled up short-term debt. The ejected nominees represented government-controlled
entities as well as the private sector. The plumbers replacing them are drawn
from bureaucracy and deal makers.
.
If the chief of a mortgage pioneer was penciled
to find another home for Satyam, a new-age banker has been entrusted to staunch
the bleeding of the IL&FS group, excise the infections and wrap it up in an
attractive package. Despite a record of wealth-creation, it will not be out of
place to wonder how much time an owner, who is in the midst of reducing his
stake by the December 2018 deadline to comply with regulations, can devote to
his flagship from an honorific job. Not only that, the issue is of enlisting
someone who has been pulled up by the monetary watchdog, for trying to bypass
the dilution of his holding by issuing preference shares, to rescue a sinking
ship whose corporate governance practices are responsible for the mess it is in.
Instead of one enterprise, he will have to reckon with over 300 listed and unlisted
subsidiaries, associates and joint ventures with a web of cross-holdings. A
company doing generic back-office work is bought for its client roster to
expand market share. In contrast, the challenge for the new buyers of assets,
floated mostly by special purpose vehicles, is to make them revenue-accretive. Rather
than trying to plug the leakage, what is required is disentangling and slicing and
dicing of the IL&FS group so that it can be disposed of piecemeal.
More than
survival, the preoccupation of the fire-fighters will be to open lines of
credit to extinguish the likely redemption pressure. The issue in Satyam was
not of de-leverage but of restoring confidence. The Rs 91000-crore liability of
IL&FS is a collateral damage of a hybrid monster, created by the government
to snag private capital for local body projects, gone out of control. In turn,
the policy makers could conveniently shrug off the responsibility to boost tax
revenues to support the demand for world-class facilities and, at the same time,
not muster courage to make users pay for them. Retail finance companies get
assured monthly returns on their assets. Apart from collection of toll over a
fixed tenure, other essential but capital-intensive projects such as water
treatment do not generate annuity. The one-time payout hinges on release of funds
from the sponsor, often municipalities and Central and state undertakings
hobbled by the need to provide subsidies and free services. Now that the
experiment has backfired, the government has two options. It can take the exposure
on its book by subscribing to the NBFC’s bonds. The alternative it to disallow
the beneficiaries of the services a free run. Not all the woes of IL&FS are
of its making. Its misfortune is being present in a sector that promises ease
of living but does not assure ease of paying the bill.
-Mohan Sule
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