For almost any financial transaction today, you require to fulfill KYC (know your customer) formalities. We need to look at
IL&FS from a similar perspective.
While the financial services institution is in a spot of bother on the liquidity front, lenders and mutual funds with exposures to the company are taking heart in the company’s constitution. While
IL&FS was promoted by Central Bank of India, HDFC and Unit Trust of India, it diversified its shareholding significantly over the years.
As a result of this, as on March 31, 2018, the largest shareholder of IL&FS was Life Insurance Corporation of India (LIC) with a 25.34 percent stake, followed by Japan’s ORIX at 23.54 percent. Other key stakeholders include State Bank of India and Abu Dhabi Investment Authority, besides its promoters who are now minority stakeholders (UTI only retains 0.82 percent).
Informed sources with exposure to the debt indicate that the issue with IL&FS is not so much about bad assets but more an asset-liability mismatch, which has caused a near term liquidity issue and led to it defaulting on certain obligations.
This is clearly worrisome and the listed scrips of the company’s subsidiaries have taken a beating in the recent past—IL&FS Transportation (-24 percent in a month), IL&FS Engineering & Construction (-22 percent) and IL&FS Investment Manager (-19 percent). And this concern is clearly translating into action: the company has put its office on the block; it plans to raise funds through a rights issue and for immediate liquidity; it has stated much of this will flow to its arms (all of which have seen recent ratings downgrades).
Despite all the above concerns, what gives credence to the argument that the issue will blow over is the following:
a) The pedigree of key stakeholders makes it difficult for them to allow the company to fail, as it sends the financial markets a very wrong signal
b) LIC is a government-owned entity, even State Bank of India is a key stakeholder. This raises a moral question of these
stakeholders being involved (they both have board seats) with a defaulter company even as they pursue other defaulters under IBC.
c) Given the upcoming elections, the government can ill afford to have a financial institution with tens of thousands of crores of exposure to the financial system fail.
In light of the above, it would be reasonable to expect moves by LIC and other key stakeholders to restore faith in the company. After all, in financial markets, half the battle is perception, and if that can be managed, it can offer enough time to help put the house in order. Any mishandling of the situation could be disastrous, but I would bet on the crisis being “managed”.
Have you signed up for Primo, our daily newsletter? It has all the stories and data on the market, business, economy and tech that you need to know.