[Burning Issue] IL&FS Crisis


IL&FS Group, a vast conglomerate that funds infrastructure projects across the world’s fastest-growing major economy, sent shock waves through credit markets when it began missing debt repayments. That’s caused concern not just for its myriad investors, including private individuals, who had regarded IL&FS debt as rock-solid.


  1. Commercial paper is an unsecured, short-term loan used by a corporation, typically for financing accounts receivable and inventories. It is usually issued at a discount, reflecting current market interest rates. Maturities on commercial paper are usually no longer than nine months, with maturities of between one and two months being the average.
  2. NBFC: A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business but does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property.
  3. SFIO:-The Serious Fraud Investigation Office (SFIO) is a corporate fraud investigating agency in India. It is under the jurisdiction of the Ministry of Corporate Affairs, Government of India. The SFIO is involved in major fraud probes and is the coordinating agency with the Income Tax Department and the Central Bureau of Investigation.

What is IL&FS?

  • The IL&FS Ltd is an infrastructure finance company registered with the Reserve Bank of India as a ‘Systemically Important Non-Deposit Accepting Core Investment Company’, with over Rs.1,15,000 crore of assets and Rs. 91,000 crore of debt.
  • The IL&FS was the brainchild of the late M.J. Pherwani and was founded in 1987 with equity from Central Bank of India, Unit Trust of India, and Housing Development Finance Co to fund infrastructure projects at a time when peers IDBI and ICICI were more focused on funding corporate projects.

What is the crisis?

  • To put it simply, IL&FS defaulted on a few payments and failed to service its commercial papers (CP) on the due date—which means the company has run out of cash or it is facing a liquidity crunch.
  • The company piled up too much debt to be paid back in the short-term while revenues from its assets are skewed towards the longer term.
  • IL&FS first shocked markets when it postponed a $350 million bonds issuance in March due to demand for a higher yield from investors.
  • The recent slowdown in infrastructure projects and disputes over contracts locking about Rs 90 billion of payments due from the government have further worsened the condition.
  • IL&FS Financial Services disclosed on September 6 that the commercial papers (CP), which were due on August 28, could not be paid on due date and were settled in full on August 31.
  • IL&FS Financial Services has about $500 million in repayments which are due in the second half of this financial year while it has only about $27 million available.
  • According to a Reuters report, by the middle of September, IL&FS and IL&FS Financial Services had a combined Rs 270 billion of debt rated as junk by CARE Ratings and a further six group companies had suffered downgrades with a negative outlook on another Rs 120 billion of borrowings.

What are the effects?

  • The company’s default spells trouble for its investors, which include banks, insurance companies, and mutual funds. Investors and traders have been worried over the cascading effects of IL&FS’s defaults.
  • IL&FS sits atop a web of 169 subsidiaries, associates, and joint-venture companies, which makes the default even more worrisome.
  • IL&FS has revealed a series of delays and defaults on its debt obligations and inter-corporate deposits.
  • IL&FS said it was unable to service its obligation towards a letter of credit to IDBI Bank Ltd.
  • This has raised concerns about the possibility of a contagion or spillover, with further defaults hitting mutual funds with exposure to IL&FS and its group companies.

Why are individual investors affected?

  • Some of the missed payments, which started in late August, were on commercial paper, or short-term unsecured debt.
  • Money managers have marked down holdings of IL&FS debt and one financial company temporarily halted inflows into some affected funds.
  • Banks, mutual and pension fund managers, insurers and individuals are bracing for further losses.
  • Among the concerns for investors is that IL&FS has made loans to its own units. The company is also in default on short-term borrowings known as inter-corporate deposits.


  • The government announced that Kotak Mahindra Bank’s managing director Uday Kotak will serve as chairman of the new IL&FS board. Additionally, the government nominated technocrats with substantial experience in their fields.
  • The Parliamentary panel on finance decided to investigate the IL&FS matter and its members will meet the new board.
  • Separately, India’s Serious Fraud Investigation Office (SFIO) has launched an inquiry into alleged financial irregularities at IL&FS, questioning its top management and searching its offices.
  • Life Insurance Corporation(LIC) has been slated to bail out Infrastructure Leasing & Financial Services Limited (IL&FS) soon.

Challenges for the new board under Uday Kotak as chairman

  • Infrastructure Leasing and Financial Services (IL&FS) is a season of corporate misgovernance, scams and lack of any CEO-level and board-level accountability.
  • It is shocking that credit rating agencies such as ICRA and CARE should have given a ‘AAA’ rating to IL&FS when information regarding the IL&FS board’s complete neglect of risk management was in the public domain.
  • It would take time to revive the company and the new board need to ensure a fair value for the assets of IL&FS.
  • The company, with Rs 91,000 crore debt, has defaulted on a series of payments due to asset-liability mismatch and its inability to raise funds from the market.
  • The immediate task for the board would be to come up with a roadmap to arrange for the funds and to also re-examine the IL&FS business model of being both a financier and a developer of infrastructure projects.
  • The new board will have to figure a way to unravel the numerous subsidiaries and associate companies, which have over the years burgeoned under the parent IL&FS’s blessings.


  • There may be a freeze on actions like payout of management salaries and payout of dividends that were declared at IL&FS’s annual general meeting.
  • The new board is reportedly considering monetisation of IL&FS’s assets to pay back investors and lenders. It also plans to sell as much as 24 projects to raise around Rs30,000 crore.
  • Besides raising funds, the board may also have to order an audit to identify what went wrong and take action against those found responsible.


The IL&FS fallout has already roiled stock markets and the government has scrambled to contain the further damage that could undermine confidence in the financial sector.  The need is to restore investors confidence who are worried about leverage at other shadow banks, prompting a surge in volatility among financial stocks.

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