29TH IS THE 'D' DAY

The tumbling down of someone as big as the IL&FS group has rattled many. The group was well known in the corporate circles for being rock solid and somehow the group, in many ways, represented some of the largest infrastructure development in the country.

But what do we infer now? There has been liquidity trouble brewing over at the group for some months now; the very fact that it sought approval for Rs.4500 crore rights issue is a pointer to this fact. But what is perhaps more worrisome is that rating agencies have gone for a sharp cut, right across the board. IL&FS group companies were rated as one of the highest instruments in the market. IL&FS and its group companies saw a downgrade in August before the latest one, but that was just by a notch. But on 8^th Sept, from highest investment grade, it was downgraded to below investment grade.

So how come none of the AMCs, invested heavily in IL&FS did not see this downgrade coming? Those in the know say that unlike PSU banks, IL&FS is a professionally run company where all rules in the books are followed and due diligence done too. Governance and the brand image of the group were given top priority. In fact many mistake it to be a govt-run organization and it always had a quasi-government halo. But that might have to do more with its shareholders.

Its shareholders are LIC (25.34% stake), Orix (23.54%), Abu Dhabi Investment Authority (12.56%), HDFC (9.02%) and SBI (6.42%). When funds invested in the company and bought into the commercial papers (CPs), IL&FS had an AAA/A1+ rating from all the three rating agencies –CARE, ICRA and India Ratings. It had adequate liquidity and unutilised bank limits available to meet its short-term liabilities.

Why is it in trouble now? The clouds on the horizon emerged in June when it defaulted on inter-corporate deposits and CPs worth about Rs.450 crore. Following this, rating agencies started downgrading their long-term ratings. And now with below investment rating, it will be extremely difficult for the group to raise any more money in the immediate future. IL&FS has over Rs 16,500 crore of standalone debt and Rs 91,000 crore of consolidated debt.

The thing is that the company is not going down and under; it is not yet a default case. What everyone is reacting to is the Mark-to-Market (MTM) losses and this is notional. If the company does manage to raise money and repay the dues, MTM losses could turn into profits.

And does IL&FS have plans? Actually, it has been talking about plans since July but has taken no action; all plans remained only on paper. If they had taken corrective action before the crisis brewed to this level, all this could have been avoided. Being proactive would have helped rather than being reactive now. The group is talking about monetizing its assets over the next 12-18 months and has identified firm offers for 14 of its 25 projects. It needs to collect Rs.16,000 crore from the govt.

At an emergency Board meeting held yesterday, it became apparent that all decisions to raise funds can now be taken only after getting shareholders approval at the AGM to be held on 29^th Sept. Thus all decisions on the quantum of equity raising and line of credit will now be on hold.

The point is that there is now no point in panicking. Just like JSPL, which after two downgrades bounced back, wiping off all MTM losses, this too might bounce back. We emphasize “might” as all currently depends on the ability of the group to quickly raise funds.

For all its talk about governance and due diligence, clearly things went out of hand. Unlike what many think, IL&FS in trouble does not mean that the Indian economy is on the verge of sinking; the economy is too huge to be ruled by just one group. In fact look at it the other way; because projects are stuck and money is not coming in, IL&FS is where it is today. That’s where the truth lay, much beyond the rose-tinted glory of the GDP and IIP numbers.

So for all those stuck in IL&FS, be it equity or debt, the view ahead is obviously that of great caution. 29^th will be a crucial day for the group and how quickly it raises funds is what will decide the fate.