THE IL&FS

DEFAULT
  Incorporated in 1987 as a Core Investment
Company registered with the RBI
 Initial business was to finance infrastructure
projects

Founding shareholders of IL&FS

Central Bank
HDFC UTI
History of IL&FS of India

IL&FS
  IL&FS finances and executes infrastructure
projects via the “Public Private Partnership”
model.

Present shareholding structure

Life Abu Dhabi
Mitsubishi
What does IL&FS Insurance
Corporation
(Orix)
Investment
Authority
do?

IL&FS

340+ subsidiaries
  IL&FS’s corporate structure is highly
complex

 It operates through more than 340 direct

and indirect subsidiaries

Corporate  This makes it practically impossible to

resolve the debt crisis via the IBC route
structure of IL&FS
 Its major listed subsidiaries include ILF&S
Transportation Networks and IL&FS
Investment Managers
Some
technical
terms
Shadow Bank

• A Shadow Bank is an organization that

does a Bank’s work without being subject to
regulatory oversight of regular banks.

• They are not classified as banks because

they do not accept deposits from the public.

Example: NBFCs, P2P lenders

• Pros: Shadow banks go where Banks don’t

go, i.e. provide easy credit to
businesses/entities who are not able to get
credit from regular banks

• Cons: Since they are not subject to

regulatory oversight, the risks are much higher
and if the shadow banking system collapses,
it can lead to a huge contagion effect for
the economy. (Read: 2008 Global Financial
Crisis)
Commercial Papers (CPs)
• A Commercial paper is a money market
security. It is a short-term mode of financing
generally with a maturity of less than 270 days.
• It is issued at a discount, reflecting the short-
term market interest rate

Pros:
• It is easily accessible if a firm needs emergency
funds
• It does not need to be registered as a charge
on the Company’s assets

Cons:
• It is an unsecured debt instrument and hence
has a higher risk
• It is short-term and hence if a Company uses
this to invest in long-term assets, this can lead to
a liquidity crisis (Read IL&FS)
NCLT
• NCLT (National Company Law
Tribunal) is a quasi-judicial body in India
that adjudicates issues related to Indian
Companies. All proceedings under the
Companies Law and the Insolvency
and Bankruptcy Code, 2016 are
handled by NCLT.

Sections 241 and 242 of the

Companies Act, 2013
• The above-mentioned sections of
the Companies law give the Central
Government the power to apply to the
NCLT to take-over the board of any
Company if it believes that the affairs
of the Company are being conducted
in a manner that is against public
interest.

• IL&FS’s board was replaced under

these sections.
The Crisis.
What happened?
 IL&FS group’s transport subsidiary (ITNL)
delayed repayment of Rs 450 crore of inter-
June’18: IL&FS’s corporate deposits from Small Industries
subsidiary delays Development Bank of India (SIDBI)
ICRA and CARE downgrades ITNL’s debt
repayment
ratings

July’18: Group’s Founder and Chairman Ravi

Parthasarathy steps down, citing health
Company’s reasons. Hemant Bhargava, LIC MD and
Founder steps nominee, takes charge as Non-Executive
down Chairman of IL&FS group
 The group defaults on a Rs 1,000 crore term
September’18: loan and its subsidiary defaults on dues worth
IL&FS group’s first Rs 500 crore owed to SIDBI.
Several short-term loan defaults take place,
default totaling Rs 440.46 crore

ICRA, CARE and Brickwork agencies

September’18: downgrade conglomerate’s rating to
Rating 'default' or 'junk' grades.
downgrade Alongside, the Reserve Bank of India (RBI)
initiates a special audit
 IL&FS defaults again and loses access to fund
September’18: raising through commercial paper market for
IL&FS seeks relief up to six months. IL&FS board seeks relief from
NCLT to work out an arrangement with
from NCLT stakeholders

NCLT judgment allows government to assume

September’18: control and institute a new board under the
NCLT removes chairmanship of Uday Kotak and five other
board new board members.
 Government filed application with NCLAT
October’18: seeking moratorium on creditor proceedings
NCLAT and against IFLS. Board appointed Arpwood
Capital and J M Financial as transaction
Resolution Plan advisors and roped in Alvarez & Marsal to
develop resolution plan

The Serious Fraud Investigation Office (SFIO)

has made its first big arrest in the IL&FS by
April’19: taking its former vice-chairman Mr. Hari
SFIO arrests Sankaran into custody today.
Deloitte faces SFIO probe in IL&FS case
former IL&FS VC SFIO arrests chief Ramesh Bawa for
irregularities in sanctions and disbursement of
loans
 53,000 crore of bank loan to IL&Fs are added
to bad loan books of Banks, with NCLAT
May’19: Loans to allowing to classify default loans as NPAs,
IL&FS classified as though banks cannot initiate recovery
process for these loans
NPA

150 subsidiaries have been identified for

resolution process

Turnaround and resolution process is ongoing

Present situation
SFIO has initiated probe against credit rating
agencies
Financial analysis
20,000.00 15.0%
Revenue and profitability
18,000.00 17,672.50
analysis
11.2%
10.6%

16,000.00
9.9% 9.6%
16,219.96 10.0%
• Revenue comprised of :
 Infrastructure services
14,061.13
14,000.00  Financial services
5.0%

3.4%
 Other services
3.2%
• Revenue grew from ~INR 11k
12,000.00 11,296.14
11,065.91
1.7%

10,000.00 0.3% 0.0%

Crores to ~INR 18k Crores
• However, profit margins
8,000.00
became negative in FY18
-3.7%
• The decline in profit margin
was mainly because of :
-5.0%
6,000.00

 Increased direct costs

4,000.00
 Increased borrowing
costs (from 40% of
-10.0%

2,000.00
-12.7%
revenue to 45% of
revenue)
- -15.0%
FY14 FY15 FY16 FY17 FY18

Revenue from EBTDA margin %

Net margin %
operations
120.0% 18.00
Analysis of Balance sheet
16.78
16.00
debt
100.0%

14.00 • The debt-equity ratio of IL&FS

22.9% 22.3%
25.3%
28.3%
increased to a very high
80.0% 12.00 number of ~17 times in FY18
10.63 • Further, short term debt as a
9.47
9.72
10.00 % of debt increased from
60.0% ~23% in FY15 to ~28% in FY18
• This is contradictory to the
8.00

business model of IL&FS

because its revenue is
40.0% 77.7% 6.00
77.1% 74.7%
71.7%
generated from long-term
infra projects whereas short-
4.00

term debt needs to be repaid

20.0%

in the short-term
2.00

0.0% -
Mar15 Mar16 Mar17 Mar18

Long-term debt as Revenue from

a % of total debt operations Debt-equity ratio
120.0% 18.00
Analysis of Balance sheet
16.78
16.00
debt
100.0%

14.00 • As on 31st March 2018, the

22.9% 22.3%
25.3%
28.3%
IL&FS group had an
80.0% 12.00 outstanding loan of INR90k
crores.
10.63

9.47
9.72
10.00 • This is ~80% of the total assets
60.0% of the Company.
• This excludes the non-fund
8.00

based bank guarantees and

letters of credit amounting to
40.0% 77.7% 6.00
77.1% 74.7%
71.7%
INR600 Crores that is not
appearing on the balance
4.00

sheet yet.
20.0%

2.00

0.0% -
Mar15 Mar16 Mar17 Mar18

Long-term debt as Revenue from

a % of total debt operations Debt-equity ratio
 Analysis of Balance sheet
debt
• The Interest coverage ratio of
IL&FS over the last 4 years was
close to 1 and became less
than 1 in FY18. This clearly
indicates that its credit
worthiness was poor for a
long time.
• The DSCR on the other hand
was way below 1 for a long
time. Any bank exercising its
due diligence would think
twice before lending to IL&FS
• These indicate that a default
was always on the horizon

EBIT Debt service Interest coverage

coverage ratio ratio
1.00

Liquidity analysis
0.92 0.91
0.90
0.90 0.87

0.80

0.70
• The current ratio, cash
ratio and liquidity ratios
0.60
measure a firm’s ability
to meet its short-term
0.50
0.48
0.50 0.47 0.46

0.40
obligations.
• IL&FS had a current
0.32 0.33 0.32
0.29
0.30

ratio of less than 1 for

0.20
all of the past 4 years.
0.10
• Further, its quick ratio
- and cash ratio were
even lower.
Mar15 Mar16 Mar17 Mar18

Cash ratio
Current ratio Quick ratio
 IL&FS had a very high debt

IL&FS had a low profitability

Its debt-equity ratio was much higher than industry

average
Conclusion
Its Interest coverage ratio was less than 1

Its current ratio was less than 1

The above analysis clearly suggests that IL&FS’

financial position was not very strong
Role of the credit
rating agencies
 While lending money to a Company or a
firm, a lender looks at its credit rating

India majorly has 6 credit rating agencies, including

Role of credit ICRA, CRISIL, India ratings, etc.

rating
agencies Major credit rating agencies had given investment
grade ratings to IL&FS group entities between 2012
and 2018

This raises a question on the integrity and

competence of these credit rating agencies
 Since the beginning of defaults by
IL&FS, all credit rating agencies
have downgraded its ratings to
“junk” status

Grant Thornton in its interim

Credit rating forensic audit report have claimed
that IL&FS’s credit ratings were
updates “swayed” by senior management

SFIO and SEBI have initiated

investigations into the high credit
ratings given to IL&FS
Way forward
 Government appointed a new six-member board led by Uday
Kotak

“Alvarez & Marsal” were appointed as turnaround consultants

to come up with a resolution plan for the Infra giant

150 subsidiaries of the Companies were classified in one of the

3 following categories
Way forward
Green: 55 Companies that can service their debt

Amber: 13 Companies that can pay their operational expenses

and secured creditors

Red: Companies that do not have cash

 ILFS Balance sheet
Currency : INR Crores Mar15 Mar16 Mar17 Mar18
Share Capital 733 983 983 983
Reserves and Surplus 5,934 6,259 6,542 4,445
Shareholder funds 6,668 7,243 7,525 5,428
Minority interest 3,403 4,217 4,388 3,903
Long-Term Borrowings 48,649 54,665 59,764 65,294
Deferred Tax Liabilities (Net) 180 145 146 135
Other Long-Term Liabilities 1,380 1,326 1,341 1,837
Long-Term Provisions 1,415 1,563 1,665 2,129
Non-current liabilities 51,624 57,699 62,916 69,394
Current Maturities of Long-Term Borrowings 7,719 6,444 9,745 12,239
Short-Term Borrowings 6,747 9,265 10,509 13,559
Trade Payables 1,525 2,087 2,396 3,032
Other Current Liabilities 3,465 4,933 5,941 7,018
Short-Term Provisions 650 827 1,050 1,241
Current liabilities 20,105 23,556 29,640 37,089
Total equity and liabilities 81,800 92,714 104,470 115,815
Tangible Assets (Net) 8,424 13,432 19,139 19,579
Intangible Assets (Net) 9,808 14,884 18,054 20,004
Capital Work-in-Progress 9,722 6,881 3,577 2,833
Intangibles under Development 9,345 8,170 8,037 8,881
Fixed assets 37,299 43,366 48,806 51,297

Receivable against Service Concession Arrangements 8,276 9,006 8,743 8,506

Goodwill on Consolidation (Net) 1,787 1,818 1,757 1,769
Non-current Investments 5,153 4,998 5,143 5,641
Deferred Tax Assets (net) 175 343 529 487
Long-Term Loans and Advances 8,813 10,289 12,094 12,688
Other Non-Current Assets 1,850 1,438 1,596 2,167
Non-current assets 63,353 71,258 78,668 82,556
Current Portion of Non-Current Investments 41 503 172 28
Current Investments 915 974 614 992
Inventories 613 914 1,257 1,480
Trade Receivables 2,057 3,085 4,189 5,540
Cash and Cash Equivalents 6,419 7,704 9,480 10,647
Short-Term Loans and Advances 4,185 3,400 3,255 4,388

Current Portion of Long-Term Loans and Advances 2,105 1,273 1,508 3,225
Other Current Assets 2,111 3,602 5,326 6,958
Current assets 18,447 21,456 25,802 33,258
Total assets 81,800 92,714 104,470 115,815
 ILFS Profit and loss account
Currency : INR Crores FY14 FY15 FY16 FY17 FY18
Revenue from operations 11,296.14 11,065.91 14,061.13 16,219.96 17,672.50
Other income 264.54 574.63 1,036.68 936.57 1,126.29
Total income 11,560.67 11,640.54 15,097.81 17,156.52 18,798.78
Cost of Raw Materials 535.95 552.75 685.45 1,464.19 2,216.72
Purchase of Stock-in-Trade 100.56 65.79 203.44 151.08 240.72
Changes in Inventories (275.20) 113.27 39.61 132.96 28.48
Sub-contracted Construction Cost 3,049.31 2,444.84 3,612.13 2,931.92 3,716.90
Employee Benefit Expenses 836.82 924.98 1,106.35 1,148.42 1,238.18
Borrowing Costs 3,970.68 4,517.54 5,497.92 6,515.69 7,922.84
Other Operating and Administrative Expenses 2,225.81 1,852.96 2,596.37 2,988.54 4,090.49
Depreciation and Amortisation Expense 372.11 464.03 835.69 1,206.01 1,453.69
Total expenses 10,816.05 10,936.16 14,576.96 16,538.81 20,908.01
Profit before tax 744.62 704.38 520.85 617.72 (2,109.23)
Tax expense 346.37 336.95 471.93 325.14 285.55
Profit after tax 398.25 367.43 48.91 292.58 (2,394.78)
Minority interest (103.14) (123.09) (11.70) (144.33) 509.08
Share of profit of associates (51.51) 5.11 7.65 (6.42) (1.16)
Net profit 243.61 249.45 44.86 141.83 (1,886.85)
Add back:
Tax 346.37 336.95 471.93 325.14 285.55
Depreciation and Amortisation Expense 372.11 464.03 835.69 1,206.01 1,453.69
EBTDA 1,116.74 1,168.41 1,356.54 1,823.73 (655.54)