Is IL&FS revival going to be built on savings of middle class Indians?

We have seen it happen before. A company borrows heavily, defaults on repayments, goes belly up and then the government steps in because the company is too big to fail. The Infrastructure Leasing & Financial Services Limited (IL&FS) crisis is just one more chapter in this playbook. The IL&FS looks more and more like the UTI bailout than the Satyam buyout.

The Modi Government’s move to supersede the broad and bring in a new management may have been the only option available to buy some time, but even as Uday Kotak steps in to resolve the crisis, the crisis runs much deeper, both for the company and for the way companies are rated in the Indian financial market. The bigger question, however, is are IL&FS revival plans going to be built on the savings of middle-class Indians and what happens if the revival bid fails?

First, it would be important to understand whether the ILFS crisis is like the Tech Mahindra takeover of Satyam in 2009, or if it more like the UTI crisis that rocked the nation in 2001, where almost ₹15,000 crore of public money was spent to rescue the company from causing further damage to the economy and the markets. In 2018, keeping the markets afloat seems to be the prime reason why the government has stepped in. IL&FS is already too big to fail.

While Satyam was a case of the promotor cooking his books, the UPA government stepped in swiftly helped the company get back on its feet under a new management. In January 2009, Ramalinga Raju confessed to the cooking his books and in three months, Tech Mahindra had taken over the company through a public auction. What was important here was that the company not only had a change of guard, it also led to a change in ownership, creating a template for how to resolve such issues when corporate governance fails.

The UTI scam and the role of Ketan Parikh’s K-10 led to the formation of a Joint Parliamentary Committee which had submitted its report to the Parliament in December 2002. “Even though the exact details of the bailout plan are to be announced, the bailout package is expected to cost a huge ₹14,561 crores. Out of this, the liability on US-64 is estimated at ₹6,000 crores and on the assured returns schemes at ₹8,561 crores,” The Hindu had reported.

While UTI had made a series of bad investments which led to the collapse of US-64, the villains of IL&FS have not been exposed, yet. The government has instructed immigration authorities to keep a look out on the directors and ensure they don’t escape but so far, they have not been able to establish what they did wrong. Did they siphon-off money from the company, or did they did they make some UTI-like investments which led to the crisis?

A detailed investigation would be needed to understand what really happened and to what extent were project costs inflated due to gold-plating, to provide money to those within the IL&FS system. There is some indication of this in the Gujarat GIFT city, a favourite project of the then Gujarat Chief Minister and now Prime Minister, where an independent director has levelled serious allegations.

It is also important to understand why the government has stepped-in to the crisis. IL&FS is not the first company to default on its payment obligations but defaults by the company have a far greater potential to spook the markets, which are anyways struggling. Banks carry a ₹40,000 crore debt exposure while mutual funds, pension funds and insurance funds carry a ₹30,000 crore exposure. With the economy under-performing, petrol prices at life-time highs and job-creation slow, a stock market crash is the last thing the government wanted.

The government may have succeeded in managing the headlines and sentiments in the IL&FS story. but the crisis is far from over. In the short-term, the new management would have to get funds to meet its repayment obligations and would have to go to their prime stakeholders (read LIC) to steady the ship. LIC, as the largest stake-holder, may be forced to put good money behind the investments they have made in IL&FS.

Media reports suggest that IL&FS would be able to tide over its present crisis if it is able to get ₹4,500 crore, which is half of the ₹9,000 stuck in arbitration with government, but the government does not seem to have the fiscal space to settle these cases.

While a detailed probe is needed to understand how IL&FS collapsed from AAA to junk grade in such a short span of time, and why the rating agencies did not see it coming, the much bigger question is if the government is going to allow status-quo, by bringing in money by asking LIC to invest more, or will they have the courage to put the company through a public auction, like in the case of Satyam.

The exercise seems to be an effort to manage headlines and ensuring the markets stay steady, than ensure that IL&FS regains financial health. IL&FS is too big to fail.

*The article was updated at 9.48 am on October 3 to update the headline