A systemically important financial institution (SIFI) is a bank, insurance company, or other financial institution whose failure might trigger a financial crisis. They are colloquially referred to as “too big to fail”. Source: Wikipedia
As per the new board of IL & FS, It is not 169, there are 348 entities within the group and the debt could be much higher than Rs.91,000 crores.
What is a Systemically Important Core Investment Company (CIC-ND-SI)?
A CIC-ND-SI is a Non-Banking Financial Company
(I) With asset size of Rest 100 crore and above
(ii) Carrying on the business of acquisition of shares and securities and which satisfies the following conditions as on the date of the last audited balance sheet
(iii) It holds not less than 90% of its net assets in the form of investment in equity shares, preference shares, bonds, debentures, debt or loans in group companies;
(iv) Its investments in the equity shares (including instruments compulsorily convertible into equity shares within a period not exceeding 10 years from the date of issue) in group companies constitutes not less than 60% of its net assets as mentioned in clause (iii) above;
(v) It does not trade in its investments in shares, bonds, debentures, debt or loans in group companies except through block sale for the purpose of dilution or disinvestment;
(vi) It does not carry on any other financial activity referred to in Section 45I (c) and 45I (f) of the RBI act, 1934 except investment in bank deposits, money market instruments, government securities, loans to and investments in debt issuances of group companies or guarantees issued on behalf of group companies.
(vii) It accepts public funds
Source: RBI
The Board of IL & FS include LIC of India (25.34%), ORIX Corporation, and Japan (23.54%) Abu Dhabi Investment Authority (12.56%), HDFC (9.02%), Central Bank of India (7.67%) and State Bank of India (6.42%) are the key shareholders and none of them have a majority stake.
Experts say that not having a majority shareholder led to accountability lapse. Around a decade back, IL&FS Engineering and Construction Company Ltd., a subsidiary of IL&FS stepped in to rescue Maytas Infra & Maytas Properties, both were part of the Satyam Group. Ironically IL&FS finds itself in a similar situation now, needs the rescue boat.
The Milestone Projects by IL&FS
They have constructed the longest Tunnel in the South East Asian Region comprising of four lanes from Chennai to Nashik. Another one was the Four lane highway from Baleshwar to Kharagpur. The third one was the Tirupur water project.
TWIC’s Tirupur CETP ZLD project recognized by the prestigious Global Water Awards 2014 by Global Water Intelligence (GWI) as “Highly Commended” under the Industrial Water Project of the year category and has also called it as a phoenix rising from the ashes of an environmental catastrophe.
Tamilnadu Water Investment Company Limited was a Joint Venture between the Government of Tamilnadu and Infrastructure Leasing & Financial Limited (IL&FS)
Who will watch the Watchdogs?
The new Board need to have a Forensic audit to get a true and fair view of transactions, inter – company transactions, end use of funds, inter-company investments and quantum of leverage etc. Why the ex- statutory auditors are not accountable?
Thankfully, there is some relief in this area, recently Government of India has set up NFRA (National Financial Reporting Authority) – the newly set up independent regulator of the audit profession. It is expected to become all powerful body to discipline and oversee the quality of service rendered by Chartered Accountants at Large Entities. Like Sarbanes Oxley Act in United States, India needs some strict regulations and implementations.
Do we have to wait Disruptive payment model for Infrastructure?
When the likely Asset Liability mismatch is an inherent feature of the infra business, Where is the Business foresight and Risk Management of the Board? Much of the stress in the sector was due to exposure to the projects that was financed by government or its agencies.
Most of the Infrastructure developers are burning their fingers due to long gestation period, land disputes and challenging systems in government payments for infra projects. Delays cost leads to shortage in the business working capital and hence liquidity problems arise. The government should address the issues of the sector on the whole by a disruptive idea. IL& FS has claimed that around 10,000 crores of the group’s liquidity is stuck with claims and termination payments. Risk was magnified by asset liability mismatches of years.
Can we expect some noise from independent Directors in India?
An Independent Director has to play the role of an independent observer to protect the interest of all stakeholders. They help in bringing an independent judgement on the Board’s deliberations. They should try to bring an objective view in the evaluation of the performance of the board and management in meeting agreed goals and objectives.
But this has become a mockery in India. When the things start going out of control, they all will exit and the collapse is imminent. Recently, on November 23rd, 2018, second independent director of cash strapped Jet Airways resigned. Hope this not a precursor to the collapse. Let the Independent Directors make some noise during the tenure and at the exit, which is one of their primary roles.
Do the Rating Agencies need the regulatory scrutiny?
The steep fall from high grade investment status to Junk status after the default started was a major lapse in the regulatory system. Credit rating agencies have downgraded ratings of IL & FS during September, 2018 when it defaulted on loan repayments. ICRA and CARE have always awarded IL&FS with decent ratings, which helped them to raise money in the debt market.
These Credit rating agencies should work and look at the market intelligence data and surveillance rather on just past performance. It also reminds of the “issuer model” ratings in 2008 crisis whereby the issuer would pay to the credit rating agencies to rate the underlying securities. S&P Global, Moody’s and Fitch were being criticized for the above model. Mandatory rotation of the rating agency as it is in the case of the Auditors is being suggested by Experts for as one of the solution.
Will it Turnaround?
The Mutual Fund (MF) industry had invested about Rs.2, 800 crores through 18 schemes. The snowfall effect was evident in the Mutual Fund industry by the fall in the Net Asset Value (NAV) between 1% and 5%, eroding investor’s wealth. Also, Lending to Non- Banking, Finance sector is perceived to be highly risky and it increased the cost of funds and will impact the profitability soon.
Some the experts say that as bailing out institutions do not have any money of their own, the insurance premium and small deposits of public should not be wasted on such bailout packages.
A retail investor‘s trust in the Audited Financial Reports & Credit Rating is getting lost by corporate stories like IL& FS. His/her voice is not being heard in the corporate chaos.
Many institutions were turned around by various methods in India. Let us wait and watch with the hope that how IL&FS is getting turned around to regain the confidence of investors in Corporate investment.
Let us make the noise and spread those noise!