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What made IL&FS fail?

Sometimes we all wonder how these huge corporations fail! One of them that has been in the public eye this year is IL&FS, i.e. Infrastructure Leasing and Financial Services. Its shareholding includes SBI, LIC, ORIX Corporation of Japan and ADIA (Abu Dhabi Investment Authority. It has been debt ridden by a huge amount of 91000 crore, which has been causing a lot of problems as most of this debt is financed by Public sector corporations and IL&FS has been continuously defaulting on its payments for the last few months.

Timeline

So, lets discuss how it all started.

IL&FS, its subsidiary IL&FS financial services and IL&FS transport networks ltd. Borrowed funds from the market and banks which were based on window dressed financials to get higher loans at a cheaper rate and lent these funds at higher rates to group companies and project subsidiaries. The subsidiaries then used these funds to pay interest on previous loans and helped in fraudulently maintaining healthy looking financials which couldn’t sustain for long.

The funds flowed from IL&FS’s high credit rated subsidiaries to its loss-making low credit rated subsidiaries as alleged by SFIO (Serious Fraud Investigation Office). It borrowed Rs 2007.29 crore in commercial papers and Rs 1100 crore in inter corporate deposits during 2017-18, which was around three times than its previous year. Similar was the case with IL&FS financial services which loaned huge amounts of around Rs 3900 crore (debentures), Rs 980 crore (inter-corporate deposits), Rs 8500 crore (bank loans) and Rs 2730 crore (commercial papers).

What caused such huge losses?
Infrastructure projects have been facing huge losses due to negative cash flows but that’s not the sole reason behind piling up of such huge losses. IL&FS charged high fee from its direct subsidiaries for consulting, project management, advisory services, loan-syndication as per SFIO. These fees were charged upfront from the loans which reduced the loan amounts for the subsidiaries and increased the financial problems for their projects. SFIO has accused former chairman Ravi Parthasarathy, former vice-chairman and MD Hari Sankaran, and joint MD and CEO Arun K. Saha for improper management and making the crisis happen.

The current Scenario
NCLT in February ’19 passed an order permitting 22 companies of IL&FS that were able to meet all payment obligations to service debt as per schedule. NCLAT, lifted moratorium on 133 IL&FS group companies which were incorporated outside India’s jurisdiction. Lenders have the right to take these companies to court in case they default payment.

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