Infrastructure Leasing & Financial Services (IL&FS) was a leading group of expertise providing value-added financial services for the development of world-class innovative infrastructure. They provided a complete wide range of services for infrastructure projects ranging from visioning, documenting, developmental and financial aspects, technology to management and execution. The service sectors of IL&FS include roads and transportation, e-Governance, power, ports, area development programs, health initiatives, cluster development, water and waste water management, urban infrastructure and in addition also contribute to social, environmental and economic infrastructure. IL&FS also started financial services to complement infrastructure building enterprise, to finance the projects and to address the payback period of infrastructure projects.
IL&FS: Incorporation History and Group Companies
It was incorporated in 1987 and was promoted by three financial institutions – CBI (Central Bank of India), HDFC (Housing Development Finance Cooperation) and UTI (Unit Trust of India) to provide finance and loans for major infrastructure projects. They operate through a channel of 256 subsidiaries (23 direct subsidiaries and 141 indirect subsidiaries), including all subsidiaries, 6 joint venture companies and 4 associate companies.
IL&FS has also marked its international presence through its owned subsidiaries – IL&FS Global Financial Services Pvt Ltd. (Singapore), IL&FS Global Financial Services (UK) Ltd at London and IL&FS Global Financial Services (ME) Limited (Dubai) and IL&FS Global Financial Services HK Ltd – (Hong Kong).
The major shareholders of IL&FS include Life Insurance Corporation of India holding, 25.3 per cent stake, Japan’s Orix Corp, holding 23 per cent, and ADIA (Abu Dhabi Investment Authority) with 12.56 per cent. Other shareholders include HDFC (Housing Development Finance Corporation) with 9.02 per cent, CBI (Central Bank of India) with 7.67 per cent and SBI (State Bank of India) with 6.42 percent.
- IL&FS Infrastructure Development Corporation Limited (advisory and project development).
- IL&FS Transportation Networks Limited (manages the development and implementation of surface transport projects like highways, flyovers, bridges and roads.
- IL&FS Environmental Infrastructure & Services Limited.
- IL&FS Education and Technology Services Limited.
- New Tirupur Area Development Corporation Limited.
- Noida Toll Bridge Company Limited.
- IL&FS Financial Services Limited (Investment Banking Arm of IL&FS).
- IL&FS Investment Managers Limited (domestic private equity fund management).
- ORIX Auto Infrastructure Services Limited (deals with transport finance and transport infrastructure)
- IL&FS Trust Company Limited – ITCL (Debenture and Bond Trusteeship).
IL&FS Technologies Ltd. (IT Arm of IL&FS group) (services offered consultation, software development, data digitization and management services, systems integration and IT infrastructure management services to global customers.
IL&FS: Major Infrastructure Projects
The few of the major projects which were undertaken and promoted by IL&FS are:
- Delhi-Noida Toll Bridge across Yamuna river.
- Ranchi-Patratu Dam Road spread across 35 kms, having 5 major bridges.
- Patnitop tunnel connecting Chennai and Nashri – this is India’s longest road tunnel and Asia’s longest bi-directional tunnel.
- Baleshwar Kharagpur Expressway.
- Tripura power project or Palatana power plant.
- Gujarat International Finance Tec-City (Gift city).
- Building state-of-the-art oil terminal- third largest petroleum storage and trading center in the world.
IL&FS: Masala Loan
IL&FS raised $50 million through masala loan, an Indian rupee denominated loan, in order to refinance debt and general corporate purposes. It raised funds from AfrAsia Bank Ltd (Mauritius-based) and SBM (Mauritius) Bank Ltd. It secured loans from EDC (Export Development Canada) under rupee ECB Facility and entered into Memorandum of Understanding with EDC in September 2015. Key features of this loan were:
- IL&FS is the first Indian non-banking financial company to raise money from masala loan – a rupee-dominated loan, from overseas investors.
- As it is rupee-denominated loan, the foreign exchange and hedging costs are born by the lender.
- It was the first kind of a deal between IL&FS Group and EDC.
IL&FS Crisis: The Unfolding
The three-decade-old infrastructure lending giant, IL&FS, sent shock waves through Indian financial market when it began defaulting on debt repayments.
On 21st September 2018, the stock market shed more than 1110 points in a single day. Although the stock market recovered after that, the shares of NBFCs, housing finance companies, mutual funds have been hit even today. The reason behind decline in the value of these particular companies is cited to be IL&FS issue.
Before unfolding the saga of IL&FS crisis, we need to understand certain concepts related to IL&FS and what actually happened to such a big conglomerate.
IL&FS As a Non-Banking Financial Corporation:
While finance is the major requirement of individuals as well as corporates, banks alone cannot meet the requirement of public as well as private sectors. This is the reason why NBFCs came into existence, both in public and private sectors, to complement banks and aid in funding finances. They need to be registered under Companies Act 1956. NBFCs are usually private owned, but when government owned entities are added, they are termed as non-banking financial intermediaries. Key difference between banks and NBFCs is the method of functioning and the extent of financial regulation by the RBI on both. Banks do accept demand deposits (which offer high liquidity), but the NBFCs do not accept demand deposits. NBFCs can accept public deposits for only a short tenure, minimum period of 12 months to maximum period of 60 months. The banks are under stringent regulations by RBI, whereas extent of control over NBFCs is less compared to banks. Akin to banks, NBFCs are also engaged in lending and financial activities such as providing loans, credit facility, trading in the money market, savings and investment products, managing portfolios in stocks, transfer of money, etc. NBFCs can operate other businesses other than banking services like hire purchasing, leasing, venture capital finance, infrastructure finance, housing finance, etc. IL&FS is one of the India’s leading non-banking financial corporation.
IL&FS as a Shadow Bank:
It is also referred to as nonbanking financial intermediaries or market-based finance.
Shadow banking carries out lending process same as traditional bank lending, but it is not regulated in the same way as traditional bank lending. Examples of shadow banking include bonds, money market funds, mutual funds, finance companies, insurance companies, hedge funds, private equity funds and other special purpose entities. Shadow banks are the financial institutions which act like banks and carry out bank-like activities outside the traditional banking sector.
They raise short-term funds in the money markets and utilize those funds to buy assets/finance their projects with longer-term maturity. They are not subject to traditional bank regulations and so they cannot borrow in an emergency nor the funds are covered by insurance.
They invest in high risk assets and projects and so whenever these investments backfire, there is a contagion effect created in the market. When these high-risk instruments work favorably, they give high returns and add on to the growth of the economy, but when they fail, the contagion effects are unpleasable and unimaginable. Example of this is global financial crisis in 2008. IL&FS is also one among the shadow banks.
IL&FS as an Infrastructure Giant:
As we are well aware, IL&FS, huge conglomerate, is involved in developing high-quality infrastructure projects across the world’s fastest-growing major economy. These infrastructure projects carry high gestation period and high risk. It takes longer period to lay a road, build a port terminal, begin a mining operation, roll out a telecom network or set up a power plan. These projects require huge funding, say they are capital-intensive, and revenue generated is zero up until the project is running. They also carry risks and hurdles like political regulatory clearances and land acquisition issues. The delays in any of these leads to enhanced cost issues, a mismatch between expected project cost and executed project cost, thus further raising the funding issues. Incomplete infrastructure projects such as a half-built bridge or half stalled power plant is worthless and fruitless asset as lender can recover nothing by seizing it apart from facing legal issues. IL&FS being one of the core companies dealing in both financing and owning infrastructure projects faced all the risks, complications and obligations involved in these projects, which is cited as one of the reasons in its defaulting. IL&FS faced high risks and faced high asset-liability mismatch by financing such infrastructure projects, where it had to borrow money from short-term debt instruments and had to invest in longer-gestation projects. IL&FS basic strategy of investing in high-risky assets is considered as one of the major reasons of its downfall. The issues which surrounded this include:
- IL&FS with high debt to equity ratio: Leverage ratio is the issuing of debt instruments with equity. Debt instruments could be short term or long term wherein the short term debt instrument (eg commercial papers) come with repayment liability of less than 1 year. So higher the debt leverage ratio, higher the repayment liabilities which will pressurize the finances of the company. Now a company may borrow up loans (say in the form of commercial papers), but invest in infrastructure projects which are more long term and would generate profits in long tenure ( say 8-10 years), but the company needs to repay the loan in short tenure (say 6-12 months), this leads to asset-liability mismatch. This is what happened with IL&FS where it kept on borrowing short-term loans to finance long-term projects, but the long-term projects could not generate revenues fast enough or say in a timely manner to pay off short-term debts. The debt leverage ratio of IL&FS was around 10.6x in September 2017 and it jumped up to 16.8x as of March 2018. In September the debt to equity ratio has been deciphered to be 18 times. IL&FS went on to have most leveraged balance sheet in the large non-banking finance company space having huge increase in the debt leverage ratio, which led to huge amount of repayment liabilities, which led to defaulting in repayment to SIDBI.
- IL&FS and PPP Model Inefficiency: Public private partnership (PPP) model was introduced by government of India to improve the infrastructure of the country (which was then immensely required) by tying up with private companies, as the resources itself with government were quite constrained. Under this model, IL&FS started financing and developing infrastructure projects where it was supposed to finance, manage, execute and complete the projects with the help of government with legal and bureaucratic issues to be taken care of by the government. But government did not cooperate as expected by the company, including passing LARR (land acquisition rehabilitation and resettlement act) leading to compensation payment, issuing of licenses defaulted, corruption peaked and PPD model didn’t work in the favor the IL&FS, who invested heavily in the infrastructure projects, led to the overshooting of the cost of the projects. The value stuck in between IL&FS and government is estimated to be around $ 90 billion. Huge amount is stuck in arbitration between IL&FS and government.
- Passage of LARR (land acquisition rehabilitation and resettlement act): When government of India passed PPP, the most benefitted company was IL&FS, as it hugely dealt with infrastructure projects, which go hand-in-hand with real estate. It started acquiring lands, took innumerable number of infrastructure projects and financing them, but then when LARR was passed in 2013, land owners claimed their compensation. As a result of passage of LARR, IL&FS has to pay more than 17 crore worth of compensation to the land owners to having acquired land, which in turn led to the over-costing of the projects undertaken by IL&FS. Hence there was a huge mismatch between the estimated cost of the project and the executed cost.
- Shift In The Strategy: IL&FS was basically started as a finance company, but over a couple of years they not only financed infrastructure projects, but they also started ownership of the same, thus needing more and more finance to complete these long-term projects, which came from borrowing from banking sectors as well as money markets.
- Unviability of The Infrastructure Projects: As of 2016, the borrowing capacity of IL&FS started declining, as the banks declined to finance, refinance or give loans to the companies of IL&FS for infrastructure projects. But as IL&FS had already invested a huge amount in these projects and needed financing to complete these, it started borrowing from money market instruments using commercial papers and convertible debentures, which led again to higher repayment liabilities as these debt instruments were short term whereas revenues generated from infrastructure projects took longer periods thus making them unviable.
IL&FS Crisis: Reasons Cited For the Default
- Improper management of company’s resources by top level management: The projects were not well executed or managed by the top level management. Execution of contracts, billing, recovery areas were not scrutinized.
- Highly paid upper level management: Top level management remunerations were quite high, even after the debt obligations.
- IL&FS being a shadow bank, there were less regulatory compliances.
- Risk management team was inefficient. According to Indian Express Report, the top risk management team did not held any meeting for over two years, though red signaling was flagging over.
- Cost escalation due to project delay: Due to various reasons, there was a huge difference between the cost escalation and cost execution of the projects which the IL&Fs had undertaken. For eg, Nagaland project cost escalation was around 1200-1300 crore, but due to subsequent delays and delays it rose to 2900 crore. There was profitability loss due to huge difference between calculated cost and executed cost.
- Land acquisition problems: IL&FS faced problem in land acquisition, especially due to passage of LARR and noncooperation of government under PPD model. There was delay in land acquisition and thus cost of land as well as project estimated increased tremendously.
IL&FS: Commercial Papers and Inter-Corporate Deposits
There was news flashing worldwide that IL&FS defaulted on interest payments on commercial papers and inter-corporate deposits. Let’s first understand what these actually mean and how are they related to IL&FS crisis.
Commercial Papers: Financial market consists of capital market and money market. Money market transactions (lending or borrowing) is for short tenure (less than 1 year) whereas capital market lending and borrowing tenure is more than 1 year. Money market instruments include commercial papers, inter-corporate deposits, etc. Commercial paper is the money-market security issued by financial corporations to raise funds to meet short-term obligations, financing of the accounts payable or to finance their undertaken projects. It is a short-term unsecured promissory note where there are no collaterals supporting these instruments. The maturity period for these papers is 90 to 364 days. They do have secondary markets available for these. For example, company XYZ issues CP to Mr A for a period of three months, but if Mr A wants to liquidate those papers, he could go and sell those to say Mr B in the secondary market who can in turn hold these papers for the next two months and then return back to company XYZ.
Inter-Corporate Deposits: It is an unsecured lending of funds by corporate entity (registered under the Companies Act 1956) to another corporate or financial institution. Here the surplus funds of a company can be utilized by lending it to other companies – might it be trading company or financial institutions – who are in need of finances. These deposits are nontradable, do not have any secondary market available. They usually carry a high rate of interest and are issued for very short tenures (usually 3 to 6 months). They are non-regulatory, unsecured sources of raising funds and carry high risks and high returns. They are usually raised to solve temporary capital crisis.
IL&FS Crisis: Institutions to be blamed for:
- Rating Agencies: The rating agencies rated IL&FS as an AAA company and this urged the investors to invest their money as it held the highest credit ratings. IL&FS’s exposure towards infrastructure sector was highly risky. The rating companies might have cited their high concentration in loan book, illiquidity of the asset owned, subdued profitability, still they assigned top ratings to the company’s CP drawing investor’s attention. Even after the first default payments on its commercial payments on August 28, 2018, the ratings did not change as the delay in CP redemption was safely attributed to technical issues and facilities were repaid with surplus available and funding support. But on September 17, the credit rating agencies, after the default, suddenly changed the ratings from AAA to D indicating that they were also in a state of shock by the high risk of default. CRA could have monitored the development of IL&FS more closely and in a timely manner, it would have allowed it for a more gradual change of rating, which in turn would have eased out the shock to the larger economy.
- Board of Directors: None of the board of directors took the regulatory action or speculated the scenario and they just walked out resigning. It could be attributed to the negligence of the higher authorities to the upcoming tragedy.
- Major Shareholders: The major shareholders of IL&FS – Life Insurance Corporation of India, Orix Corp, Abu Dhabi Investment Authority also failed to monitor the company that they had major stake in. According to Indian Express Report, the top risk management team did not held any meeting for over two years, though red signaling was flagging over. The chairman of the risk committee of IL&FS was Hemant Bhargava since August 2017 who was also the managing director of LIC. Still he overlooked the mess ups. R C Bhargava, an eminent member from board of IL&FS, was also a part of risk committee, but he also overlooked the situation.
- Reserve Bank of India: RBI might have registered early warning signals, but it kept quiet until the crisis started. It failed in its supervision and regulatory action before the crisis happened and considered itself a regulator only after the mishap. RBI’s came into action after the defaults, after a considerable period of time, not before the crisis. RBI would certainly be held responsible for its inefficiency in detecting early warning bells.
- Government of India: Government of India never assigned a regulator for major NBFCs if they were cited to be in trouble. No laws or rules were mended for such firms to keep them regulated. Bankruptcy code applied to the non-financial firms, but no systemic plans to regulate major financial firms.
IL&FS: Debts and Defaults:
As of March 2018, IL&FS consolidated total debt stands at whopping Rs 91,091.3 crore. Of course, it is not the debt of any one company, but all the subsidiaries and joint companies associated with IL&FS.
IL&FS reportedly revealed a series of delays and defaults on payments on its debt obligations and inter-corporate deposits on due date. It ran out of cash and faced liquidity crunch. This in turn raised concerns about the possibility of a contagion and caused large-scale damage to the Indian financial system.
The first warning signal flagged off in June 2018 when IL&FS defaulted on inter-corporate deposits and commercial papers of about Rs 450 crore. But at the RBIs orders, the major shareholders rescued it. In July 2018, another subsidiary of IL&FS was facing trouble making payments due on its bonds. In the same month, Ravi Parthasarthy, the chairman and founder of IL&FS, stepped down from his post after having served the firm for over 30 years.
The trouble for IL&FS began on September 4, when it came to light that IL&FS yet again defaulted on a short-term loan of Rs 1,000 crore taken from SIDBI (Small Industries Development Bank of India), due date being August 28, 2018. At the same time, a subsidiary of IL&FS also defaulted on Rs. 500 crore loan taken from the Development Finance Company. On 27 September 2018, IL & FS Financial services had defaulted on Rs 52.4 crore of repayment of short-term deposits and Rs 104 crore on term deposit. It was also not in a position to repay its CP obligations. Its debt equity ratio was around 18 times.
On October 1 2018, which will not be soon forgotten in the Indian financial markets, Government of India took major steps to seize the contagion effect to the financial market. On the same day, the Ministry of Corporate Affairs moved to the NCLT (National Company Law Tribunal), filing a scheme of arrangement under Section 230 of the Companies Act as IL&FS did not want any bankruptcy proceedings.
The existing board committee was superseded by a new 6-member board as the earlier board was deemed to have failed to discharge its duties. The new board was headed by Uday Kotak, Kotak Mahindra Bank managing director, Vineet Nayyar (former IAS officer & Tech Mahindra boss), G N Bajpai (former Sebi chief), G C Chaturvedi (former ICICI Bank chairman), Malini Shankar and Nand Kishore (former IAS officers).
Serious fraud investigations were also carried out to probe in if any frauds were committed. Several audits were also carried out with IL&FS’ books. The government also ensured credit to NBFCs, which brought a sort of relief, and RBI aided NBFCs by relaxing liquidity norms and encouraged bank to lend more in order to stabilize the market to an extent.
IL&FS Crisis: Its Overall Impact
- Exactly after a decade after the global financial crisis in 2008, India has been massively hit by IL&FS crisis, which has in turn hit the stock market, debt market, equity market, liquidity crunch and so forth. Because of the potential impact on India’s domestic debt markets, banks, non-banking financial corporations and housing finance companies have been vulnerable to IL&FS crisis
- The market indices, Sensex and Nifty, fell drastically due to IL&FS crisis.
- Defaults in payments by subsidiaries of IL&FS triggered fear of liquidity crisis in the financial markets.
- Series of defaults by IL&FS and its group companies and downgraded credit ratings led to massive sell-off in shares of NBFCs and Indian shadow banking was at the crossroads creating ripple effects through the economy.
- Housing finance companies like DHFL and Indiabulls tanked over 60% and 30% respectively in trade. This was because the IL&FS crisis triggered a panic which led to massive sell-offs in these stocks fearing like IL&FS other NBFCs could also face loan obligations going ahead. Other companies like Bajaj Finance, Edelweiss Financial, Shriram Transport Finance, M&M financial services were also down in the range of 14% to 16%.
- Having defaulted on the commercial papers, investors are trapped in further losses. Further what concerns the investors is IL&FS defaulted on short-term borrowings as inter-corporate deposits too.
- Money market schemes, which were used by companies to meet their short-term funds, were eventually withdrawn by the investors and saw the biggest monthly outflow in September as the mutual funds faced redemption pressure. This monthly massive outflow, at least in a decade, took industry by surprise where a whopping Rs 3.14 lakh crore was wiped off the asset base of mutual funds in September month.
- As the panic and fear factor glooming around the market, the Indian financial market faced the worst liquidity crunch in a decade. Non-availability of cash in the market made the borrowings even costlier and hard of the NBFCs and other companies to raise funds.
- Impact on infrastructure projects: Government of India has promoted huge number of infrastructure projects like road projects, port projects, civil aviation projects, etc in collaboration with IL&FS. Infrastructure projects would get stuck because of land acquisition issues as PPD model is not working efficiently and finances from government are constrained. The major investor in infrastructure projects – the IL&FS has no funds or resources to finance these anymore. So this would obviously have a detrimental effect on the infrastructure sector.
IL&FS Crisis: Way forward
- Immediate actions and interferences from authorities were required to stabilize the economy as well as to reduce panic or the fear factor flashing across the money market. Few of the rescue plans proposed were:
- Bring in new investors on board by issuing equity/shares and generate liquidity.
- By selling some of the assets, generate liquidity, but the entire process was expected to take at least 18 months.
- Proposal to conduct Right’s issue was done where own promoters would bring in investment and ensure liquidity.
- Bail out from shareholders: Financial assistance from its existing shareholders by selling their commercial papers.
Right’s Issue: Issuing of shares/equity at a discounted price to already existing shareholders in proportion to their holding of old shares. So here the existing shareholders can purchase additional stock shares in proportion to their existing share holdings. The stake holding of the existing shareholder will not change under the right’s issue. For example considering a hypothetical situation where Company X has issued 100 shares amongst A, B, C and D and A has purchased 10 shares, B has purchased 10 shares, C has purchased 30 and D has purchased 50 shares. Now it wants to issue 50 more shares under right’s issue, so A and B are going to get 5 shares each, C 15 shares and D is going to get 25 shares. So the ownership issue does not change.
When a pioneered infrastructure company in India like IL&FS, assumed to be “too big to fall”, can end up in a mess, this would certainly raise questions with regard to corporate guidelines, various provisions with respect to corporate governance, role of CEO and role of independent directors. Government of India needs to promote transparency, regulation and accountability so as to avoid any such mishaps in the future. Long-term measures also need to ensued for the same.
- The Reserve Bank of India (RBI) came down harsh at the non-banking financial companies cancelling registration certifications of 66 (NBFCs). Out of these 66 non-banking companies, 18 were based in Delhi and 22 in West Bengal. With this, these companies would not be able to transact the business of a Non-Banking Financial Institution (NBFI), as defined in clause (a) of Section 45-I of the RBI Act, 1934.
- The central bank has also cancelled registration certificates of more than 750 non-banking financial companies in October.
- Non-banking financial companies (NBFCs) have been under strict monitoring ever since a series of defaults at IL&FS or Infrastructure Financing and Leasing Services, which created tremendous chaos in the domestic capital markets and triggered concerns about risk in the shadow banking sector.
- The series of defaults prompted the government to step in and take control and regulatory actions over the company. In October, new board was constituted by the government, which submitted a plan to rescue the debt-laden firm to a company law tribunal, thus paving the way to potentially secure the group’s future.
- Credit rating agencies were subjected to tightened disclosure and review norms by market regulator SEBI. SEBI also instructed the CRAs to monitor all the transactions and maintain transparency and disclose parameters such as cash balances, adequacy of cash flows, unutilised credit lines, etc.
- Reserve Bank of India assigned few banks to act as partial guarantors to take care of some of the non-banking financial companies’ existing debt as a refinancing source. This should certainly ease off massive credit crunch affecting the sector.
IL&FS Crisis: Role of Indian Rating Agencies
Credit Rating: Credit rating is the quantified assessment of the creditworthiness of the borrower with respect to particular debt or financial obligation. It is an evaluation of the credit risk of the borrower predicting their ability to pay back debts. Any entity – an individual, corporation, state authority or sovereign government – can be assigned credit rating. Lender will look at the creditworthiness of the borrower, a civil score is looked by the banks in case of retail borrowing. When bonds and debentures are issued, investors (lenders) will look at the creditworthiness.
Efficacy of the Indian Rating Agencies: IL&Fs crisis raised doubts and concerns about the efficacy of the credit rating agencies. The loan defaults by company such as IL&FS with credit rating of AAA took the market to surprise, thus raising questions about their credit ratings. The credit rating agencies, after the default, suddenly changed the ratings from AAA to D indicating that they were also in a state of shock by the high risk of default. CRA could have monitored the development of IL&FS more closely and in a timely manner, it would have allowed it for a more gradual change of rating, which in turn would have eased out the shock to the larger economy. However, CRA clarified this was due to lack of access to information, particularly from unlisted companies, thereby restricting their ability to effectively rate the company’s securities.
IL&FS Crisis – Unfolding Regulatory Mishaps:
Post-independence, IL&FS defaulting has been a biggest distress in the Indian financial market. As the news of default of IL&FS flashed, the Nifty and Sensex showed a downward fall. Sensex fell by 1,800 points in just five days and share market investors lost almost Rs 7 lakh crore. Still, the Reserve Bank of India, the Finance Ministry and Exchange Board of India did not interfere up until September 23, 2018, when SEBI and RBI jointly stepped in and ensured that everything is well in the market. Despite that, Nifty went down by 150 points on Monday, September 24, as the market collapsed. Many of the mutual fund companies were insistent on selling off the commercial papers assuming the bond market also would likely face lack of liquidity. It kind of created a chaos in the bond market and created liquidity crunch. It further fuelled the mutual funds and NBFCs sectors despite attempts taken by the government post crisis.
Now the most important point to be noted here is red signals had been flashing up since 2008, but none of the authorities – the Reserve Bank of India, the Finance Ministry and Exchange Board of India – bothered to peep into the matter. In June 2018, Ravi Parthsarthy, CEO and chairman of IL&FS, resigned, signaling warning signs. But the problem was actually no one knew who is to be blamed for the crisis and who the actual regulator was.
The vigilance nature of the RBI and Finance Ministry helped India during Lehman Brothers Crisis, but during IL&FS crisis, RBI’s came into action after the defaults, after a considerable period of time, not before the crisis. There now would be number of attempts and plans to salvage the problem, efforts would be put in to stabilize the striving market, liquidity would be ensured and managed, mutual funds and NBFCs would resume their position again, but is this how a financial crisis managed. New reforms in the financial sector and new reforms in the Bankruptcy law were drafted by the government and FRDI Bill was to be introduced, but it was put in cold storage. As a result, Bankruptcy code applied to the non-financial firms, but no system to regulate major financial firms. RBI would certainly be held responsible for its inefficiency in detecting early warning signals.
IL&FS Crisis: Referred As India’s Lehman Brothers Crisis
The financial crisis in the year 2008 was considered as the most serious financial crisis since the Great Depression of the 1930s, which occurred on September 15, 2008 as a result of collapse of the investment bank Lehman Brothers. It is referred to as “global financial crisis” as it hit the world economy through linkages in the global financial system. Major economies experienced deepest recessions and many banks around the world incurred huge losses. Experts have cited the root causes of the crisis of both Lehman brothers and IL&FS to be the same:
- Negligence of authorities to the upcoming tragedy.
- Increased borrowings by banks and investors.
- Investment in highly risky assets.
- Inefficient regulatory steps.
- Both of them faced liquidity crunch leading to defaults.
Lehman Brothers was the fourth largest investment banks in United States and IL&FS was leading Infrastructure Company and was considered “too big to fall”. But both of them collapsed due to almost similar causes. So IL&FS crisis is referred to as “Indian Lehman Brothers Crisis”.