ILFS Mess and RBI Fight-back

Raman Swamy

It was an impossible task. And they knew it from Day One.  Their assignment was to suggest a way to prevent Infrastructure Leasing and Financial Services Ltd (IL&FS) from total collapse. It is too big to be allowed to fail, the Finance Minister told them. Think out of the box, find some way out, otherwise it will contaminate the whole banking and financial system.  

In the first week of October, the seven financial brains were appointed as Directors on the IL&FS Board and told to submit a Revival Blueprint by October 31.

Uday Kotak and his fire fighting team - GC Chaturvedi, Nand Kishore, CS Raj, Malani Shankar, GN Najpai and Vineet Nayyar – are reckoned to be competent, experienced and innovative.  But they are not magicians. 

Their preliminary report is ready – and their verdict is simple: Just sell off the whole thing, get rid of it.

From the word go itself, three weeks ago, Kotak and his fellow-Directors were acutely conscious that the task that had been thrust upon them was too big to handle. 

IL&FS was just too big and too deeply in debt. The time given to work out a rescue plan was too short – although they soon discovered that even if they had been given another month or six months the diagnosis, prognosis and prescription would have been the same - the government should extricate itself from the mess any way which.

No formal or official announcement has yet been made.  But the markets are buzzing with informed speculation.   One foreign news agency has already flashed out the big news with a carefully worded headline – “IL&FS Sell-off Being Considered”. 

The text of the news report is more direct. The government-appointed directors, it says, are likely to propose sale or divestment of the whole company including most if its 300-plus subsidiaries.

The Company Law Tribunal is the regulating authority to which Kotak and his colleagues are supposed to submit their recommendations.  But the gist of the report is more or less predictable.

However, a sell-off is easier said than done.   Nobody can be sure who will come forward as potential buyers.  Or whether sufficient money will be generated to pay off the debts and stave off further defaults in interest payments.   The amounts involved are colossal - gross debts are estimated at over 12 billion dollars or 910 billion rupees.   The latest interest default is nearly 180 million rupees. 

These mind-boggling numbers are just indicative of what is involved.  A gigantic financial failure of this magnitude would adversely affect the health of major institutional investors like Life Insurance Corporation (LIC) and State bank of India (SBI) who together own 40 per cent stake in the conglomerate. 

There are international players too who are heavily invested and greatly anxious – like Japan’s Orix Corp (23 per cent stakeholders) and the Abu Dhabi Investment Authority with 12 per cent stake. 

Any sell-off plan will itself be a king-sized job to formulate.  The parent company and 350 subsidiary firms under the IL&FS umbrella would have to be offloaded in bits and pieces in installments spread over a staggered time frame, possibly stretching beyond 12 months or more.  

The government and state-owned entities may choose to retain a few of the hundreds of units for a variety of reasons – the most important one being to ensure that ongoing infrastructure projects do not come to a standstill.   The National Highway Authority of India (NHAI) for instance might have to be directed to take charge of some of the major pending road construction works and find private builders who can complete the task where necessary and feasible. 

It was to discuss some of these mammoth problems that the Finance Minister held a meeting on Tuesday of the Financial Stability and Development Council – a top flight panel of market regulators.   The meeting itself had a broader agenda but the focus of attention was on Arun Jaitley meeting Urjit Patel face-to-face in the midst of an unseemly row between the Finance Ministry and the Reserve Bank of India which has complicated the entire scenario of banking crisis and liquidity crunch that the country is in the grip of.

The official briefing at the end of the meeting tried to paper over the rift by describing the atmosphere as “cordial”. But the RBI Governor pointedly strode past media reporters without making any comment and many interpreted this as a reflection of the tense relationship. 

The crux of the problem is that, apparently, the Modi government is trying to encroach on the autonomy of the Reserve Bank. As some observers have put it – “After cracking down on the CBI, they government is trying to browbeat the RBI. First it was the premier Investigating Agency and now it is the country’s Central Bank”.  

That there is an element of truth in this stark assertion has been seen over the last few days with both the Ministry and the Bank using public lectures to take potshots.   Governor Urjit Patel has evidently been silently struggling to preserve and protect the independence and autonomy of the RBI as the banking regulator.  

Deputy Governor Viral Acharya has been more vocal - he warned in a speech that any attempt to undermine or dilute the independence of the Central Bank could be “potentially catastrophic”. He went to the extent of referring to the Argentina experience where the government’s meddling in central bank affairs had led to disastrous financial repercussions. 

On his part Arun Jaitley has also been using business conference platforms to criticize the RBI. Confidential matters according to him should not be aired in public.   However, the RBI bank employee’s union has joined in the fray by extending support to the Governor and his Deputy for fighting back against efforts to dilute its control over state-run banks and its decision-making powers regarding fixing interest rates. 

This rift between the Modi government and the banking regulator could be particularly harmful not only in the context of the IL&FS rescue mission but also the precarious monetary situation in the overall economy. In times of crisis, the country’s major institutions should be strengthened instead of their independence and integrity being encroached upon. 

Oct 31, 2018

Raman Swamy [email protected]

Your Comment if any