India’s own Belt-and-Road fiasco

Private development company IL&FS has accumulated a mountain of debt in a country which is desperate for basic infrastructure.

Background

Infrastructure Leasing & Financial Services Limited (IL&FS) is an Indian infrastructure development and finance company. IL&FS was originally promoted by the Central Bank of India, Housing Development Finance Corporation (HDFC) and Unit Trust of India (UTI). Currently, its institutional shareholders include State Bank of India (SBI), Life Insurance Corporation of India (LIC), ORIX, Abu Dhabi Investment Authority and Greenspring Associates.

As of 2018, IL&FS has over 300 group companies, including subsidiaries, joint ventures, and associate entities. IL&FS has several projects in different sectors including Transportation, Area Development, e-Governance, Health Initiatives, Cluster Development, Finance, Power, Ports, Water and Waste Water, Urban Infrastructure, Environment, Education, and Tourism.

As of March 2018, the largest shareholders of IL & FS Investment services were as follows: LIC (25%)  ORIX Corporation, Japan (23%) IL & FS Employees welfare trust (12%) Abu Dhabi investment authority (12%) HDFC Ltd (9%) Central bank of India (7%) State Bank of India (6%)

Analysis

A continued shortfall of budgetary resources has forced taxpayers to outsource infrastructure to local public-private partnerships led by IL&FS. However, in many instances, only the profits from the project became private. The debt burden, however, remained with the public.

Those debt burdens have now multiplied significantly. IL&FS and its associates have $12.5 billion in debt, and not enough liquidity. For instance, IL&FS Financial Services Ltd. has only $27 million as cash-in-hand, and about $500 million of repayment obligations over the next six months. This is likely to spark a debt-repayment crisis that threatens to engulf Indian banks and mutual funds. Chairman Ravi Parthasarathy, paid $3.65 million last fiscal year, left abruptly in July after being with the company since its inception.

IL&FS has enjoyed an open field when it comes to massive development programs. Gift City, Indian Prime Minister Narendra Modi’s pet project in his home state of Gujarat, saw the state government lease land at minimal prices to an IL&FS-controlled company.

A former head of Gift City board’s audit committee had to leave after he complained about the one-sided contract, as well as the engineering and architectural services vendor appointed by IL&FS not fulfilling its obligations or returning money paid.

Foreign investors, as well as locals such as Life Insurance Corp. of India, and Mahindra & Mahindra Ltd., joined IL&FS as equity partners. Their cooperation was in a socially worthwhile and economically necessary water treatment plant in Tirupur, a textile town in Tamil Nadu. However, now the investors say they’ve been diluted against their knowledge because IL&FS wants to maximize value for itself. A challenge by one investor alleging oppression by IL&FS and the Tamil Nadu government has reached India’s Supreme Court.

The unlisted IL&FS parent is beyond stock market scrutiny. While it doesn't fall within the regulatory regime for deposit-taking institutions, it’s categorized as systemically important. However, there has never been any real oversight; as an infrastructure-financier that’s also an operator with 169 subsidiaries, associates and joint ventures, it is too complex for any watchdog or credit-rating firm to monitor effectively.

Counterpoint

There has been no significant action taken by the Ministry of Finance, or the RBI in regulating a public debtor like IL&FS. The company is taking advantage of its systemic importance and is avoiding both public scrutiny and accountability.

If IL&FS was a Chinese company in a developing country, there would be an uproar by now about exploitative contracts, and the trail of waste left in their wake. However, it is an Indian company in India, which is exploiting the nation’s desperation for decent infrastructure.

Assessment

Our assessment is that the Indian government will aim to resolve the IL&FS debt situation before it balloons into a public debt crisis. The government is already struggling to establish the rule of law in the financial sector and IL&FS is one of the biggest defaulters thus far. We believe that the Ministry of Finance or the RBI will issue a public notice to IL&FS in the coming days. However, we also feel that the government may take more stringent action against the board of the company.