The IL&FS Rescue Act: Who’s In? Who’s Out?

Conversations around a possible rescue of strained Infrastructure Leasing & Financial Services Ltd. have narrowed down to a handful of large investors, with a number of domestic institutions deciding to stay away from an upcoming rights issue of the firm.

On Friday, the Reserve Bank of India will meet with three large investors of IL&FS, a day ahead of a crucial annual general meeting of the infrastructure conglomerate. The meeting comes against the backdrop of large scale defaults and a sharp downgrade in ratings of the firm, which, in turn, have roiled financial markets.

According to three people in the know, senior officials from the central bank will meet with representatives at IL&FS, Life Insurance Corporation of India, Orix Corporation and Abu Dhabi Investment Authority. The meeting will assess possible rescue options.

Last week, the banking regulator had alerted all shareholders about the meeting on Friday. However, later, the RBI informed smaller investors that they need not attend the meeting.

Emails sent to IL&FS, Orix Corporation and the Abu Dhabi Investment Fund were not answered.

Who’s In? Who’s Out?

The three investors who will attend the meeting with RBI have among the largest shareholding in IL&FS. They also have the financial muscle to step in with equity capital to help steady the firm. According to the company’s disclosures, LIC held 25.34 percent, Orix Corp held 23.54 percent, Abu Dhabi Investment Authority held 12.56 percent.

While Orix and Abu Dhabi Investment Authority have not commented publicly on their interest in IL&FS, LIC has not ruled out an additional investment in the firm.

On Tuesday, after a meeting with Finance Minister Arun Jaitley and RBI deputy governors, LIC Chairman VK Sharma had told the press that they would take necessary steps to ensure that IL&FS does not fail. He had also not ruled out the insurer’s participation in the rights issue.

Other large investors like State Bank of India (SBI), Central Bank of India and Housing Development Finance Corporation, which hold less than 10 percent stake each, are unlikely to participate in the IL&FS rights issue, the people quoted above said. This may be the reason that they were asked not to attend the meeting, they suggested.

HDFC Ltd has expressed no interest in putting in more equity into IL&FS. Central Bank of India is under the RBI’s prompt corrective action and, hence, not in a position to spare capital for a non-core investment.

In the case of SBI, the lender is currently awaiting a formal decision in the matter from its investment committee, said the people quoted above.

The country’s largest lender has sought a detailed plan from IL&FS on usage of funds and asset monetisation plan, said these people. The details would include the time required to sell road assets shortlisted for sale, the repayment obligations and details on loans which need to be rescheduled by lenders. The company is yet to submit this plan. Once the resolution plan has been submitted, SBI’s board committees will assess it and take a final decision on further funding to the company, said these people.

In the absence of a clear revival plan, SBI is also unlikely to extend support to the Rs 3,500 crore loan proposal from IL&FS. It will, however, vote in favour of the proposal to increase the authorised capital of IL&FS in order to help it raise funds, one of the people quoted above said. The proposal comes up for vote at Saturday’s AGM.

SBI Chairman, Rajnish Kumar, on Wednesday, had said that the bank was awaiting a concrete proposal from IL&FS. However, Kumar clarified that the bank will do everything needed to ensure stability in the financial markets.

Emails sent to SBI and HDFC were not answered.

Why The Rights Issue Is Crucial

The success of the rights issue is crucial as it would help IL&FS raise up to Rs 4,500 crore from its shareholders. It needs this money to tide over short and long term funding requirements. The lack of even short term liquidity has meant that the company and its subsidiaries have defaulted on multiple repayment obligation over the last month.

On Thursday, IL&FS Financial Services, the non-banking finance arm of IL&FS, informed stock exchanges that it had not been able to meet repayment obligations on loans and deposits. The company defaulted on a Rs 52.4 crore repayment of short term deposits and Rs 104 crore term deposit. It also did not repay loans due to five lenders.

The defaults started when parent IL&FS did not repay Rs 500 crore in inter-corporate deposits to Small Industries Development Bank of India (SIDBI) last month. Since then, the liquidity crunch has worsened and defaults have continued to pile up.

The defaults, and the resultant rating downgrades from AAA to D, have sparked off a vicious cycle in financial markets. The trust deficit created as a result, along with tight liquidity conditions, have led to redemptions at debt mutual funds and higher funding costs for NBFCs.