Infrastructure Leasing and Financial Services (IL&FS) is in the news, for all wrong reasons. One of the biggest names in the infrastructure finance and development space is down on its knees. More importantly, it looks like it is going to badly affect many other players in the financial sector. It is not every day that a behemoth goes under. The last time it happened was when Satyam Computer Services went under and had to be bailed out. This time around, the stakes are much larger and the systemic risk is way higher. Let us use this rare opportunity to develop some insights about markets.
IL&FS is backed by several blue chip and household names in financial services — LIC, State Bank of India, Orix Corporation of Japan, HDFC and Abu Dhabi Investment Authority. The company’s website says that it is a systemically important core investment company registered with the RBI. It lends to and invests in IL&FS group companies. IL&FS is huge. It has 24 direct subsidiaries and 135 indirect subsidiaries. With all this pedigree, IL&FS was also behind some of the biggest and important infrastructure projects in the country.
Terrible blow
So the financial markets were in a state of shock when IL&FS defaulted on its financial obligations (repayment of interest/principal). As of today, IL&FS has defaulted on 10 different payment obligations in September alone. The IL&FS group has a total debt of close to ₹ 90,000 crore with over ₹ 50,000 crore bank loans, mostly from public sector banks. This is a terrible blow for the banking system that is reeling from one problem to another without any respite. The mutual fund industry has over ₹ 2,500 crore worth of exposure to IL&FS debt instruments — short term to long term.
The rating agencies that were supposed to provide an accurate picture of the company’s financial situation through their ratings, downgraded the IL&FS group debt instruments to default category only after the first default rocked the markets. This is more like them acting like Bollywood policemen — who, instead of working hard to nab the crooks, let the hero beat up the villain and come at the final reel to handcuff the villain.
Learnings
Just like the Satyam fiasco, if there is any lesson to be learned from the IL&FS saga, it is that we have to do our own due diligence and research. The auditors did not sound an alarm bell. The rating agencies were busy doing their Bollywood policeman act, the independent directors were doing and the mutual fund managers were going by the ratings provided by the rating agencies.
When you look at all this, it is extraordinary how a good reputation can keep you in the game for years past your sell by date. Interestingly, once the faith is shaken, the payback is brutally fast and oftentimes, the immediate reaction is to paint every company in the industry with the same brush. But for those of us who do our homework and keep our wits about us, these are once in a decade opportunities to enter certain beaten down stocks at a very attractive price.
The writer is an alumnus of IIM Bangalore and co-founder, Money Wizards. chari.venkatesh@gmail.com
