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IL&FS eyes Lehman-style bailout from Centre

In case the government bailout also falls through, the newly constituted IL&FS board will have to work on alternative plans to raise capital

In case the government bailout also falls through, the newly constituted IL&FS board will have to work on alternative plans to raise capital
In case the government bailout also falls through, the newly constituted IL&FS board will have to work on alternative plans to raise capital

New Delhi: Following failed attempts by the cash-strapped Infrastructure Leasing and Financial Services (IL&FS) to raise Rs 4,500 crore, the possibility of the government bailing out the company looks very real, according to three people familiar with the latest discussion between the group’s board and the government. If the government pays attention to the appeal from IL&FS, this would be its second intervention in the company after having recently superseded the board.

According to the people quoted above, the IL&FS board, chaired by Uday Kotak, managing director of Kotak Mahindra Bank Ltd, is likely to pitch the Centre for a bailout. While the final contours of the programme are still being prepared, it is expected to be a variant of the US government’s rescue act under the Emergency Stabilisation Act, following the 2008 financial crisis. In case the government bailout also falls through, the newly constituted IL&FS board will have to work on alternative plans to raise capital.

How the US dealt with the financial crisis in 2018

In 2008, post the collapse of Lehman Brothers, the US government started an emergency bailout programme called the Troubled Asset Relief Program (TARP). It was aimed at enhancing the liquidity of secondary mortgage markets by purchasing illiquid mortgage-backed securities, thereby reducing potential losses of institutions that owned them. Under TARP rules, beneficiary companies lost certain tax benefits and, in some cases, faced limits on executive compensation and were barred from awarding bonuses to their top 25 highest-paid executives. In a TARP programme, typically, banks pay a certain dividend to the government and buy back the illiquid securities from the government after a certain period.

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How TARP can work in India during the recent crisis?

According to the available data, mutual fund houses have investments worth Rs 3,504 crore in IL&FS group companies. Net asset values (NAV) of at least 25 mutual fund schemes have eroded after credit rating agencies downgraded the ratings of IL&FS debt securities. As a result, most funds have closed new subscriptions in schemes exposed to the IL&FS group and expect serious redemption pressures if the situation continues unabated. Under a TARP-like bailout programme, the government can buy out IL&FS securities both from mutual funds and those lying with IL&FS.

However, such a move will depend on the design of the government bailout programme and the approval the government receives. This means existing equity shareholders such as Life Insurance Corporation of India (LIC), State Bank of India (SBI), Central Bank of India, Orix and Abu Dhabi Investment Authority can subscribe to fresh preference shares if issued by the group. If new preference shares are issued, these shareholders can buy them to keep their holding at current levels or increase them. This will bring new money to IL&FS books, which can be used to meet some of the immediate repayment obligations.

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