(I wrote this for a magazine named “Industrial Economist” . The government unfortunately is set on a path that will throw a lot of good money away)

IL&FS- A Regulatory failure and cover up?

The IL&FS affair is not the first of the scams we have seen. There have been many in the private sector and if I may say, the universe of the PSU Banks has been a haven for scams. As is the case, it is corruption and greed. In case of IL&FS, it had pedigree promoters to start with and a maverick CEO who then changed shareholders and ensured that there was a thick veil between him and the outside world. The shareholders and their directors are guilty of negligence in letting an unfettered rein to the CEO.

As the sordid saga unfolds, it is very disturbing to see a ‘rescue’ plan being put in place by the government that seems to have panicked. The RBI had labelled IL&FS as a ‘systemically’ important NBFC but then its supervision has been a total failure. A team with a bunch of people with zero experience or expertise in infrastructure were allowed to survive unquestioned for three decades and borrow a lakh of crore of rupees! And we have a fiduciary agency like LIC buying equity in an unlisted entity and then stepping in to rescue, throwing good money after bad. Everywhere it has been a failure of responsibilities.

And the blame is being pinned on the rating agencies! It is like blaming the film critic for a review that does not match the film. While they are guilty, we are being foolish to hang the crime on them. The money managers have no business to base an investment decision SOLELY on the basis of some alphabets expressed by a rating agency. If anyone is to be punished, it should be the investment managers who bought debt in this company without doing their homework. Of course, I would also like to impose a huge monetary penalty on the rating agencies for their negligence. The only excuse for such a sharp drop in ratings would have been a structured fraud. Here, it is clearly a case of poor credit judgment and negligence in surveillance of a rating that has been assigned. Anyone with some basic sense should have put this kind of funding of long-term projects with short term debt in to a far lower rated category.

I am categorically against the ‘rescue’ of such an organization. It is not a PSU Bank where public deposits are at risk. This is not a socially relevant enterprise. Let it fail and go in to bankruptcy. Appoint an administrator who will have the twin tasks of closing down the shop and also investigate the frauds. Maybe the SFIO will do its job. The focus should be to sell it like any other Bhushan Steel. If IL&FS is worth of a rescue, so is every infrastructure company in the private structure that has gone under and so much of bank loans have been written off. A Kingfisher Airlines was more useful to the public.

The ‘rescue’ act by the government seems to be a cover-up to protect some people.

As per reports, the assets could realise 70K crores. The loans could be around 100K crores. A 30K hit will be distributed between banks and mutual funds etc. Why is there such a tearing hurry to ‘rescue’? Each of its running projects can be sold at a price. The projects yet to take off can be simply awarded or sold to another bidder. Surely, the hole in the balance sheets cannot be filled by any facetious ‘rescue’. Look at the rescue act. A board with no experience or expertise in infrastructure has been put in place in a hurry. Now probably they will choose a CEO who is an ‘establishment’ man. And then LIC will step in and maybe some shareholders will contribute some more capital and loans rescheduled. However, this will be done by someone or people for whom the outcome may not be so important or relevant. And banks will be forced to restructure debt and we will pretend as if nothing has happened.

The company has a poor culture that should not be allowed to continue. Creating a maze of companies and putting low level employees on the board, building a network of connects and write less than profitable business, graft in many areas etc are not things that need ‘rescue’. The government has panicked. There is no comparison to Satyam. Satyam had no debt. It had a good business. Here, there is a mountain of debt and not sure whether the business it has is viable. Every past business, whether it be the NOIDA toll bridge or the Tirupur project of IL&FS, it has been shrouded in mystery and cost escalations that were several times the estimates. Let IL&FS die a corporate death. Do not let the wound fester.

R Balakrishnan

October 5, 2018

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