IL&FS and the debt crisis: What went wrong?

The news sent shock waves across mutual fund houses and brokerages, which cumulatively held IL&FS bonds worth over Rs 11 lakh crore, because IL&FS enjoyed a credit rating of top notch AA+.

Rating agencies jumped to correct their assessments and downgraded IL&FS to a level below considered investment grade.

Credit rating agencies also pointed out that apart from the liquidity pressure, which IL&FS was facing, it was also laboring under a debt burden that had doubled in the last four years between 2014 and 2018 and stood in excess of Rs 91,000 crore. Out of the total debt amount, a massive Rs 57,000 crore was owed to public sector banks.

IL&FS and its subsidiaries continued to rack up defaults on both debt repayments and interest payments and the IL&FS Group went into emergency damage control mode.

In an interaction with CNBC-TV18, Hari Sankaran, former vice-chairman and managing director of IL&FS said, "At the asset level (for IL&FS Group), you are actually seeing valuable assets operational. The intrinsic value of these assets has to now be discovered through a very calibrated and orderly asset monetisation plan."

Sankaran added that, "we feel confident based on the kind of assets we have created, that we should be able to service much of the creditors that we have taken money from to build these assets. The plan is to create an asset monetisation plan that results in unleashing value and cash flow to repay creditors".

The government, however, was in no mood to wait for the plan to fructify. Armed with an order to supersede the IL&FS board, it nominated a new 6-member board led by Uday Kotak, who was later elected as the chairman. Other members included Vineet Nayyar of Tech Mahindra, who was named Vice Chairman & Managing Director; GN Bajpai, former SEBI chairman, G C Chaturvedi, former ICICI Bank chairman and former IAS officers, Malini Shankar and Nanda Kishore.

The newly appointed board promised quick action on reassessing the group's assets and liabilities, that would then form the basis of a revival plan.

After taking over the control at IL&FS, Uday Kotak assured all stakeholders that the new board will be meeting very frequently and will take all necessary steps to preserve the value of IL&FS Group and it's 348 subsidiaries.

On the asset monetisation plan for IL&FS Group, the Ministry of Corporate Affairs (MCA) made it very clear that it will undertake a multi-pronged approach. In an interview with CNBC-TV18, Injeti Srinivas, Secretary at the MCA, said that some units of IL&FS may be sold as going concern, some may be put out for slump sale whereas some maybe wound up.

The MCA, meanwhile, ordered the Serious Fraud Investigation Office (SFIO) to probe if any fraud was committed at the IL&FS Group. On December 3, the SFIO's interim report to NCLT alleged that IL&FS executives, including former chairman Ravi Parthasarathy, window-dressed financials. It also alleged "fraudulent and irresponsible conduct of key managerial and executive personnel of IL&FS in using Employee Welfare Trust as a vehicle for their personal enrichment".

The problem did not end with the IL&FS' books. Defaults by IL&FS and its group companies sparked a massive sell-off in shares of non-banking financial companies and opened doors to a crisis in the Indian shadow banking space that has created ripple effects through the economy.

As the calendar turns to 2019, the new board will begin finalising and executing its resolution plan, but the going will get tough as it is struggling to build a fair sense of the IL&FS Group's assets and liabilities, and has to unravel a web of transactions and group holding patterns. The former management, of course, may have a long court battle to look forward to, if the SFIO and other investigative agencies can make a case against them.