In a major breather to the crippled infra lender and engineering group IL&FS, its largest shareholders LIC and Orix Corp and the State Bank of India on Saturday announced they would subscribe to the proposed Rs 4,500 crore rights issue of the company.
The announcement came at the annual general meeting (AGM) of the company, which has been defaulting on debt obligations.
IL&FS plans rights issue and sale of assets to clear dues Here's what Hari Sankaran, the vice chairman and the managing director of IL&FS, said in an exclusive interview with CNBC-TV18: Q: Have all shareholders agreed to subscribe to the rights issue?
A: We had an AGM this morning and in the AGM the authorised capital of the company was increased to Rs 4500 crore. The board has approved an issuance of rights of Rs 4500 crore and that is the first step towards realising that amount of money.
The shareholders now have to process the investment proposal within their system and come back hopefully by the end of October in order to complete the rights issue.
Q: Did they give any indication that all of them are onboard? Will Rs 4500 crore come?
A: It is very clear that the recapitalisation of the company is an essential part of the measures that we need to take to bring back normalcy and to be able to go forward. So, as part of the plan, this Rs 4500 crore constitutes a critical part of making sure it happens.
Q: I am asking you because HDFC was on record saying that they are passive investors ... some papers reported that Orix is not interested, so that is why I am asking you if everyone is onboard ... will LIC pick up what is not picked up by the other shareholders?
A: It is my belief that all these shareholders are very responsible institutional shareholders. Therefore I do believe that they will consider the proposal very seriously and take a decision based on the merits of the case.
We believe that IL&FS group as a whole remains an important institutional player in the infrastructure sector and has got and built a lot of assets which have value.
Q: At the moment people are in their own problems. For instance, Central Bank of India is prompt and corrective action bank for the Reserve Bank of India. It is possible that they will not be able to invest. That is why I am asking you how many shareholders have committed?
A: I do not know. That is not something that I should even speculate on. Having said that, I should tell you that the resolution passed by the board is to first offer every shareholder an opportunity to participate in the rights issue, failing which other shareholders can participate, failing that even a third party could participate in the investment opportunity.
Q: Do you think it will go to the extent of needing a third party? Or will the current shareholders themselves take up what someone else is not?
A: It is very inappropriate for me to speculate now.
Q: Orix has 23 percent, if they do not pick up their share, that is a substantial portion that only LIC can because State Bank of India has its responsibilities I would assume?
A: At the end of the day this group of shareholders has been very supportive of this institution and they have been able to see it to this point. Therefore I do believe there is merit in waiting for them to come forward after they go through their processes and express their commitment.
Q: It is going to be Rs 4500 crore rights issue, which has been known for some time now. Was there any positive response from Abu Dhabi Investment and Orix?
A: Yes. They came here, they spent some time, they went through the report, they understood the valuation metrics, they understood the situation which the company is in and they understood how this Rs 4500 crore is essential for the purposes of making sure that the rehabilitation plan works.
Q: By when will you know whether all of them are onboard? What is the deadline by when they have to come back to you?
A: Today was the very important meeting of the board of IL&FS where we discussed these issues. Essentially what has now come out very clearly is we have a very comprehensive plan to restructure the group in terms of being able to give creditors and shareholders a plan by which we can restore normalcy by sale of assets, by recapitalisation and all the other stuff that we have to do.
I think we need about 30 to 45 days to be able to complete that exercise and give that confidence to our creditors and especially shareholders.
Q: Let me just ask about HDFC because they spoke on the channel and they said they are not interested. Is there a change of mind since they last spoke to us, that was about 48 hours ago?
A: My recollection of that interview was that, if I had to make a decision, I may not make the decision. I do not believe the institution itself took that decision.
Q: The vice chairman said it.
A: I can make commitments which I cannot honour either.
Q: The vice chairman said that they were not interested in subscribing. Has he changed his mind?
A: I have no idea, you will have to ask him that question.
Q: Then let me come to the loans part. Loans - has LIC or State Bank of India committed?
A: Not as yet.
Q: What is the short term plan? We were told that just commercial paper maturing is about Rs 17000 crore for the group.
A: No. That is not true.
Q: Only commercial paper how much would the liability be?
A: I would not know readily because ... we have defaulted. So I am not quite sure what the current tally is.
Having said that, let me also bring attention to our plan that the board of this company actually had thought of some time ago and which we are in the process of detailing and implementing. The bottomline is that the only way in which we can actually honourably in transparent fashion repay our creditors is to be able to sell our assets in a calibrated orderly fashion and that is our focus.
So, if you look across the group, you have one of the largest wind assets that has been built by IL&FS Energy of about 1000 megawatts operational. You have got 19 assets in the road sector out of which 14 are operational. We have got assets in other verticals which are also performing. So, therefore at the asset level, you are actually seeing valuable assets operational. The intrinsic value of these assets has to now be discovered through a very calibrated and orderly asset monetisation plan.
We feel confident based on the kind of assets we have created, that we should be able to service much of the creditors that we have taken money from to build these assets. So, that is the real plan. The plan is to create an asset monetisation plan that results in unleashing value and cash flow to repay creditors.
Q: Your total debt is Rs 91000 crore, according to the ICRA report. Will the assets amount to that much?
A: There are two parts to this number. Most of that money has been taken to build assets. Those which are operational in my view very easily will be able to repay those debts and that is a substantial part of Rs 91000 crore.
Q: Give me an idea of how much is substantial?
A: Rs 60,000 crore to Rs 65,000 crore. I would go one step further to say that if we are able to realise the value that we ought to get for the equity that we have invested in these assets, then the rest of it also becomes highly manageable. Don’t forget these are growing businesses. In other words they will have EBITDA margins which will service debt. So, if you consider three parts to the equation, number one divestment of assets, number two equity value realised from sale of assets, number three running EBITDA margins of the group as it goes forward. I believe that we have a credible story to work on a restructuring plan.
Q: This is coming at a time when there are already a lot of stressed assets in the economy which are going for distressed valuations. So, how quickly will you be able to sell and will you be able to garner this Rs 65000 crore sometime soon – 18 months, 24 months?
A: We identified 25 assets from July 21 to this month ... so, I am personally very confident that if I am given the opportunity to calibrate, we should get real value for our investments. This is good for creditors, it is good for our shareholders going forward and it is good for the country because we have very consciously taken a decision that we will complete projects even if it means that we have to bear the extra cost because an operational asset is far more important than an under construction asset.
Q: What do you mean by saying if I am given time and if I am given the space, how much time do you want and how much money do you want till then?
A: In my view, if we have the ability to build a plan in 30-45 days and then we get about six months to complete the approval process of getting every class of creditors to look at it and approve it, we believe that within a period of 18-24 months, we should make substantial progress on this work.
Q: But until then, how much money will you need?
A: It is an operating asset. All the loans at the level of the project SPVs are being serviced. It is only the loans at the level of the holding company (holdco) that are stressed and do not have ready cashflows. So once the plan is approved then it is very quick for us to be able to implement and those asset sales can start repaying and bringing credit risk back to normal.
Q: I agree at the SPV level, they are servicing their own loans but at the holdco level, how much will mature? I am trying to figure out that other than this Rs 4,500 crore of rights money, how much more will you need before the 18 months are up?
A: The plan is in fact exactly on that ground saying that because we can get you your money back through sale of assets, give us the time to do so and we will have a very detailed plans that tells you which assets we can sell, when, how much of the money can come to you in order to give you the credibility that you need for the purpose of going to your board and satisfying them that this money will come back to them.
Q: Who will loan you till then? Is it LIC and State Bank of India (SBI) you are expecting will loan you?
A: Our shareholders have to support that is for clear but there can also be other lenders who are willing to take that risk and do that against specific asset sales.
Q: Have you indicated that?
A: We haven't gone to them as yet. We need a plan first.
Q: But this is a plan, isn’t it?
A: No, it has to be detailed. A television interview will not generate the money I want.
Q: You have got 25 assets on sales, July 31st you have announced it and from July 31st to September 30th surely you have reasonable amount of details available.
A: We have lots of details available but we don't have a legal framework.
Q: It is not enough for LIC to tell you that I will put some more money on the table.
A: No, we need a legal framework in which you can do this.
Q: Coming to the legal framework, you have gone to the National Company Law Tribunal (NCLT) to stop insolvency proceedings in all your group companies, has that permission been granted?
A: No. Our lawyers are working through that process but the bottomline is very simple. We need a framework in which we can divest assets in an orderly manner. Once we have that opportunity, we are confident that we will be able to show the cashflows that are needed to keep all creditors current and then to move forward on that basis.
Q: Because in the Madras High Court one of the companies has been taken to NCLT, so which will supersede which, you are going to NCLT, somebody else has already taken one of your group companies to NCLT?
A: That matter is subjudice. We believe that the scheme of restructuring which was approved by our consortium of lenders on December 7, 2017 is valid and is the basis on which this company has been currently servicing all lenders without any problems. So all we are saying is, let us honour the December 7, 2017 restructuring plan approved by all the lenders because company is current as far as servicing lenders are concerned.
Q: Let me proceed with the financial restructuring plan. Can you reassure whether lenders will have to take a haircut and if yes, just how much?
A: I shouldn't be premature or speculative. I can tell you - as a group we have done 4 CDRs, no lenders had a haircut so far.
Q: Lenders didn't have a haircut in the past under CDR also because loans were stretched on into 8-10 years and some of them at cumulative preference shares, earning 0.1 percent. So it made to look like there is no haircut?
A: No, they got back the money as per the original term as sanctioned. In all our CDRs till date without fail.
Q: So you are expecting that nobody will have to forego even interest on anything?
A: I am not going to speculate. I need a plan in place. There are very competent people preparing the plan as we speak. It will take a few days to get that done but I can assure you this much that as an institution we wish to honour our obligations.
Q: What was the board's decision - that Alvarez & Marsal (A&M) will prepare this plan?
Q: When are they expected to come back to you?
A: Next week onward we will start.
Q: Are you restructuring the group itself?
Q: So you will have different kind of subsidiaries, fewer number of subsidiaries. How will the vertical look like?
A: As we sell assets, obviously it will come down but you must keep in mind that under the legal framework of this country, every time I win a project I have to create a subsidiary for that project. So it is not as if we create subsidiaries because we want to, it is because we have to.
Q: Coming to your financial services unit. The managing director has resigned and a bunch of directors have resigned both executive director and independent director. How will that unit function?
A: We are reappointing independent directors. We have been privileged and the names will be revealed as soon as they come on board. Very good, very high standing and we wish to re-purpose the financial services arm in a manner which better suits the needs of the NBFC sector and the sectors that we address.
Q: And the CEO?
A: We already have a CEO in place. He was ex-CEO of Rabobank India and he is already in charge and he is doing a very fine job.
Q: I want to come to the way in which your creditors are spread. I counted from some of your analysis of the NCDs that had a lot of data - About Rs 15,000 crore is owed to provident fund companies and some Rs 57,000 crore to banks. Can you give us some idea whether these numbers are right. How much is owed to banks, how much is owed to mutual funds and how much to insurance or pension companies?
A: Let me make a different cut on the way you presented the facts. These are data points. Like I said to you, most of our money goes into projects which are project specific loans and those loans are serviced from the earnings of those projects. Since majority of our loans are in these projects, we are able to refinance these projects with the kind of long-term paper like pension funds etc., as we commission these projects when they become operational. We are completely safe at the project level; there is absolutely no problem, all our projects are working reasonably well and they are getting their servicing. There maybe some exceptions but it is not something that is not insurmountable, over the next 6-12 months they will quadruple.
The level of the holding company, the sector verticals; we have to sell assets to generate the liquidity required to repay our loans. So whether it's a bank or any other form of lender, all of us have to be able to see that plan of action anchored on asset divestment.
Q: Certainly but that still doesn't answer how much is owed to banks, how much is owed to mutual funds, how much is owed to insurance companies?
A: I will give you that statement if you want, I do not have it readily on my hand, but roughly speaking about Rs 55,000-57,000 is banks and I would imagine the number with the pension funds would not be as high as you mentioned it but I will reconfirm that.
Q: It says rural postal, NPS, SBI Provident Fund, SBI Pension Fund, UTI Pension Fund and some rural insurance and pension funds as well and that number was Rs 15,000 crore. It was gleaned from all your NCD document?
A: I suspect it will not be that high but I will check it out.
Q: But do you think all this will be not reneged out because those are the small guys?
A: I understand. We take our obligations seriously so we will have to make every effort.
Q: From the same documents we also gleaned that the short-term debt of the financial services companies in particular was as high as 43 percent way back from FY14. This is a infrastructure financing company.
A: No. The way it works is follows; you must understand the context in which the liability profile you see today is manifesting itself. So the infrastructure sector as a whole has been finding it difficult to find money for greenfield projects especially public-private partnerships (PPPs) and Build–operate–transfer (BOTs). Our space is PPPs and BOTs. So this is not a new problem; it's an old problem that we have to deal with. Now as the amount of refinancing available in the system for these kinds of projects came down, you still have to find the money to repay the loans that had come in the first instance and therefore, the maturity profile of these assets which is much longer than the liability profile - that mismatch began to get stronger and stronger and more and more elongated. When the mounting receivables problem took place - that culminated in a crisis of liquidity because these are all long dated assets; they are 30 years of concessions, 25 years of concessions being financed on 10-15 and 5 year money. So the intrinsic nature of these projects requires refinancing. When that window began to close because most of the public sector undertaking (PSU) banks had to vacate this space and they were the biggest source of longish term money, this crisis became very large.
Q: But that started off in FY14 itself?
A: You will be surprised to know that from 2015 onward in ITNL, we haven't taken up a single new BOT project. It is not a new problem; it's an old problem. Its manifestation was that we had agreed to invest into ITNL, a significant amount of money which unfortunately could not transpire; the investor backed out because of sector condition. As a consequence the crisis got triggered.
Q: If you knew about the crisis this early, your annual report also indicates that there are fairly large bonuses given to the former chairman Ravi Parthasarathy and some others - that on hindsight seems like something which should have been avoided, isn't it?
A: One, the numbers reported were incorrect. They were actually then reflected so in the same paper that showed the numbers. Second, they were market competitive. Third, IL&FS itself is not in a problem. IL&FS is doing well, in fact it has been steadily improving performance till March 31, 2018. The liquidity crisis happened because of lack of financing culminating with a lack of infusion of capital that has been agreed upon through a term sheet which was to come by June 30. When that didn't come up, this whole thing became a crisis of liquidity.
Q: Who didn't honour their commitments?
A: They had to go through a DD and through that process of DD they felt that this is not the right opportunity from their point of view.
Q: So the banks didn't restructure?
A: There was no restructuring process because on February 12th the RBI had actually abolished all restructuring schemes.
Q: So it was some 5:25 scheme?
A: We didn't have an opportunity to restructure our assets because those schemes were no longer existed. The refinancing had stopped and the investor who was looking at IL&FS Transportation Networks India Limited (ITNL) felt that it was no appropriate for him to come in with such a large investment. All three confluenced in order to make this a liquidity crisis which required the parent sponsor to step in - that dragged the parent into the crisis.
Q: Who was this person who was speaking to ITNL?
A: It has come in the press. I am under NDS so I should not be disclosing this - that survives the withdrawal of the offer.
Q: There are a lot of people out there who are just waiting to know whether IL&FS crisis can be resolved. Your liquidity payments can start. What can you tell them. There are mutual fund guys who are holding IL&FS paper and who could be faced with redemption, who probably have already seen a little bit of redemption and then of course as I told you, insurance companies, provident fund guys. What is your message to them. When will you be able to tell them with clarity that from this date I will start servicing?
A: I cannot give you a date because there are a lots of decisions to be taken before that can be done but I can tell you this that we are working round the clock to create a comprehensive plan through divestment which will give back the money that we have borrowed to build these assets and to run this business.
Q: I guess the two important people are LIC and SBI?
A: LIC is our largest shareholder. SBI is a significant shareholder but they do not have such a big shareholding.
Q: Their shareholding is only 6.4 percent but they are big lenders in the market. So is there any commitment from either of them and or if you can give us a date by which they will come back to you?
A: A date for what.
Q: To come back to you for giving you a line of credit and to pay for the shares, for the rights issue?
A: I just need the legal framework in which I can pursue aggressively my asset, divestment programme. I do not believe I need anything more than that.
Q: What is this legal framework. Do you need permission from courts. from whom do you need this permission?
A: I need permission from court for the simple reason that today if I were to sell an asset how do I establish, by which process I establish the fair price of the asset. Once I receive the money for the asset how do I distribute this money. So these are legal issues that need to be resolved.
Q: The permission that you said in your communication after the board meeting that you need permission under section 230 of the Companies Act. Is that what you are referring to?
A: That's the one I am talking about.
Q: By when do you expect to get the permission?
A: As early as possible.
Q: That is within a month?
A: Yes, I would imagine so.
Q: Is that was Alvarez is working towards?
A: Alvarez is working towards comprehensive plan and they are going to work with us as special agency to built the plan with us, present it to our board, get their approval. Present it to each class of creditors, get their approval, get our shareholders approval and then implement the plan.
Q: So this permission under Companies Act 230 is why you have gone to NCLT?
Q: And so you are really awaiting the NCLT's word?
A: That's right.
Q: Is a hearing slotted?
A: That is a legal process. I should not be speculating or second guessing the courts.
Q: They haven't set a hearing for the case or anything?
A: They have their own process, they will follow it of course.
Q: So we should expect in a month some permission to come from the NCLT?
A: I will be extremely happy to share the details as I receive it myself.
Q: It will be helpful for people who are holding paper in their mutual fund and in their insurance funds, if you can tell us when your shareholders and your bankers have agreed to pay for the short-term liabilities at least?