No easy fixes

In its first report on the IL&FS crisis submitted last week, the new government-constituted board has candidly admitted that resolving it is going to be a far more challenging exercise than initially thought. Initial investigations show that the group owes over ₹57,000 crore to public sector institutions, with projects sprawling across 14 sectors. The group, it transpires, conducted business through 347 entities held through four layers of holding companies. It used a web of intra-group loans to obscure debt, lacked firewalls, had no centralised financial oversight and ran cosy consulting contracts and lease agreements with employees — all pointing to mis-governance and fund diversion on a grand scale. It is, therefore, not surprising that the new board should present no concrete plan for resolution right now and should seek 6-9 months’ time for it. This timeline may cause some disquiet to the Centre, given the elections next year. But in the IL&FS case, unearthing the root causes of the crisis and addressing them may be far more important than keeping the entity going on life support.

The report presented three broad approaches to resolution: capital infusion into the parent company and its sale to a strong investor, sale of business verticals (roads, power, etc) with associated debt, and a break-down of the group into individual assets to monetise good ones and wind up others. The second and third options appear vastly preferable to the first. While selling off IL&FS warts and all, a la Satyam, may be a tempting prospect as it is the most expedient solution, the board must avoid taking this route for three reasons. One, given IL&FS’ extremely convoluted structure, any savvy acquirer would demand a significant conglomerate discount. This will entail severe haircuts for IL&FS’ lenders, with the acquirer possibly walking away with a windfall. Two, an acquirer buying out the entire entity would prefer business-as-usual that protects the value of his investment, rather than a post-mortem of what went wrong. Three, if a quick resolution of the IL&FS issue can shore up investor confidence, a detailed investigation into its shady past is imperative to restore public confidence.

The IL&FS saga has raised many vexatious questions about how a shaky NBFC managed to secure top-notch credit ratings, bag loans from big-name institutions, stray far outside its core business and build an empire right under the noses of regulators such as the RBI, SEBI and the Ministry of Corporate Affairs. Uncovering its exact modus operandi is essential for these regulators to do some soul-searching on their supervisory lapses, and to plug gaps. The new board has enumerated seven objectives for its resolution plan — preserving value, transparency, public interest, financial stability, stakeholder value maximisation, legality and commercial feasibility. But to set a good precedent, transparency, governance, value maximisation and public interest need to take precedence over speed or financial stability in resolving this crisis.

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