Untold Story of Infrastructure Leasing and Financial Services
By Dr. Lalit Kumar Setia |
@drlalitsetia | drlalitsetia@gmail.com |
Created October 09, 2018
Updated 30th May, 2019
Everybody tries to
earn more and then utilize the earnings for maximum satisfaction. In order to
stay happy, an amount is always kept in liquid form so that it can be utilized
at the time of need, in emergencies or for common day to day functions. The
keeping and maintaining such amount is most important and in case, it is not
managed the common day to day functions may be affected and the emergency needs
may become more stressful. The liquidity is also important for every company to
deal the corporate affairs smoothly. Recent case of Infrastructure Leasing
& Financial Services (IL&FS), is full of learning on liquidity
management.
What does IL&FS do and why to safeguard it from failure?
Like all companies
the IL&FS also required to manage working capital to maintain liquidity but
it failed to maintain in second quarter of financial year 2018-19. In order to
safeguard the company from failure, the Central Government of India come up
with a rescue plan for bailing it out from the debt and replacing its
management in September 2018. The point to consider here is, “Why Government tried
to safeguard IL&FS?”
Basically, the IL&FS is a group company of 12 companies
which is formed with equity capital invested by three companies i.e. Central
Bank of India, Unit Trust of India and Housing Development Finance Company. The
IL&FS funds the infrastructural projects of India and for getting financial
resources, it raises debt. The debt also includes short term loan from Small
Industries Development Bank of India (SIDBI). The debt becomes uncontrollable
with the amount over Rs. 91 crores in September 2018. The Government worried
because the failure of IL&FS can affect the infrastructural development of
India and the debt if not paid by IL&FS then the banking sector may face
crisis which further be a big problem for whole India.
In case, the government had not taken over the IL&FS,
the 28 billion investments of IL&FS into mutual funds may be affected
adversely. But the question is whether the government will be able to control
the failure of management by using a new board of directors. The Indian economy
is already under the threat of rising global crude prices and appreciation in
the value of Dollar in terms of rupee.
How IL&FS
Crisis is detected?
Since the IL&FS is a group company formed with its
subsidiaries and the subsidiaries are not listed companies; the subsidiaries
are not required to follow the audit norms. Due to non-compliance of strict audit
norms; the weak financial position of the subsidiaries was not detected because
no statutory audit is applicable in case of non-listed companies. But in September
2018, the IL&FS defaulted on its commercial paper obligations; and the
IL&FS audit pointed out its uncertainty in recovering advances provided to
its subsidiaries. Due to failure in recovery, the financial statements were
showing an accumulated loss of Rs. 4.61 billion including net working capital
deficit of Rs. 13.48 billion.
What caused
IL&FS suffered with Crisis?
The analysis of business environment of IL&FS detected
that the cause of concern behind the crisis was its legal environment;
including the introduction of new land acquisition act by which it became very
difficult to procure land in infrastructure projects. Due to delay in procuring
land, the funds become mismanaged and company became in huge liquidity crunch.
Since the failure of IL&FS can influence a lot of entities very negatively
due to its huge investments in banks, mutual funds and infrastructure players;
the central government took the decision to change its management.
Why Indian
Economy Shocked with IL&FS Crisis?
With detection of liquidity crisis in IL&FS, every
expert became surprised on failue of a large company in India. The Government
think-tank NITI Ayog and Indian Institute of Corporate Affairs (IICA) start
detecting the causes of liquidity crunch in IL&FS. The Serious Fraud
Investigation Office (SFIO) also investigated the company and found that the
IL&FS was suffering with a debt of Rs. 91 crores and hold assets of Rs. 115
crores which may be liquidated to tackle the crisis. But sudden sale of its
assets may lead to losses, and decision is taken to change the management and
tackle the problems.
How Crisis is
tackled with intelligence?
The default in making payments to short term loans, dented
the creditability of the company and the lenders & stakeholders worried for
their investments in the company. Nobody was ready to invest more in the
company and to change the image, the management is replaced with appointment of
experienced people including Sh. Uday Kotak, Sh. G.C. Chaturvedi, Sh. G.N.
Bajpai having experience in finance and administration. It increased the
confidence of lenders and investors in IL&FS.
The over-leverage of IL&FS is controlled to reduce the
liquidity crisis in the company. The projects of the company were funded by
long-term debt. The faith in the company returned and it started working well
as earlier under strict control of new governance of the new management.
Does Finance require continuous attention of Management?
The case of IL&FS liquidity crisis, taught a lesson
that the management should keep continuous attention on its finances. The only
formula to get success in an organization is managing finances as per its
strategy. It is fact that without proper management, an organization cannot
sustain in this competitive world.
The mismanagement in the organizational activities of
Infrastructure Leasing & Financial Services (IL&FS) made everyone
realize the value of effective management. The credit rating of the companies
seems very good with four star and five stars but even after such ratings, the
companies start falling in meeting their financial needs if the finances are
not controlled.
The Effective
Financial Management is the key
Recent crises of IL&FS, DHFL and Zee Group etc. proved
the importance of financial management in a company. Merely gaining higher
credit rating by an agency cannot sort out the problems and cannot be trusted
as a mark of credibility; but the decisions and management of the company can
change the entire picture as happened in case of IL&FS liquidity crisis.
Now-a-days, the investors became annoyed when a higher
ranked credit rating company failed to deliver the expected performance. It is
must to understand the importance of financial decisions instead of trusting
over the credit rating. The agencies which rate the companies should also
consider the internal strengths apart from the financial position, while rating
them.
What can further
be done to improve performance of IL&FS?
This is in the hands of new board of directors, now to take
effective financial decisions. One decision can be debt restructuring which has
already been used in the year 2014 in IL&FS but that cannot be the
permanent solution to the company. Another solution is selling assets which may
be sold at loss, but that loss will ensure the safe future of the company in
terms of liquidity. In case, the losses are not booked and avoided, it can
further affect the performance of the company. The new strategic approach is
required to have some new innovative ideas for performing better in the
projects of infrastructure and earn more profits to settle long-term loans of
the company.
*Copyright © 2018 Dr.
Lalit Kumar. All rights reserved.
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