Abraham Lincoln liked to play a game with his soldiers! His question was, “How many legs does a cat have, if the tail is also counted as a leg”. The answer was obvious; just because you call the tail a leg, it does not become a leg. The cat still has four legs only. That is exactly the situation that is currently on with IL&FS. Just because the Indian government does not want to declare IL&FS insolvent, it does not become a solvent company.
How IL&FS imploded
The problems at IL&FS did not come about overnight. The deterioration in its books started long back. For years, IL&FS had been borrowing short and lending to infrastructure projects. The situation was absolutely fine as long as the debt downgrade did not happen. The moment the debt got downgraded, mutual funds stopped investing in IL&FS paper and the entire situation suddenly imploded. It became apparent that IL&FS was sitting on infrastructure receivables that would take years to monetize. On the resources side, the short term money flows just dried up after mutual funds and banks stopped lending to the infrastructure lender. Transparency was another issue as most infrastructure projects were funded through a maze of group companies. The result was an atrocious maturity mismatch with little hope of any recourse in the short to medium term. Where does IL&FS go from here on?
IL&FS must go to the NCLT
The National Company Law Appellate Tribunal (NCLAT) recently struck down a proposal by lenders of IL&FS to refer the company to NCLT. While there has definitely been opaque funding at IL&FS, not all the money is lost. In fact, if early estimates are to be believed then up to 60% of the monies can be recovered. All that has to be done is to take IL&FS to the NCLT and ensure that the lenders get an equitable share. Since IL&FS owns a lot of quality assets, albeit with long term cash flows, there should not be a problem getting a secondary market buyer. Of course, the bargaining will boil down to how much of a discount to the present value of cash flows that the buyer is willing to pay, but at least that will help to monetize the assets. There are limited avenues for these long term projects.
Pin down the blame; fast
Even as the former ICICI CEO has been hounded and harassed over one lending deal, the IL&FS former management has gotten away despite destroying IL&FS and creating potential NPAs worth Rs.1 trillion. They must not be allowed to get away scot free if the government wants to arrest corruption in high places. There are billions of dollars in public money involved in the form of shares, deposits and through mutual funds. It is time to send IL&FS to NCLT and chase the elusive ex-bosses! ©