In Confidential 2018 Letter, DEA had Red-flagged IL&FS Crisis

New Delhi: The Department of Economic Affairs had earlier raised red signals over the likely collapse of IL&FS in a confidential note on September 30, 2018 and expressed concerns over its impact on the Indian economy, according to a latest affidavit filed by the corporate affairs ministry.

The Ministry of Corporate Affairs (MCA) in the affidavit said the DEA had opined that if IL&FS group collapses, the Indian economy may have to face repercussions as redemption pressure would continue, debt market sell-off expected, may create liquidity crunch and NBFC licenses could be cancelled.

"DEA had raised red signals of the likely collapse of IL&FS and had expressed its deep concern of such a collapse on the Indian economy," said MCA in the affidavit filed before the National Company Law Appellate Tribunal (NCLAT).

Immediately after that, the MCA had moved the National Company Law Tribunal to take over the management of IL&FS, which had a debt exposure of over Rs 91,000 crore.

According to DEA, "AMCs having exposure of Rs 2,800 crores to IL&FS bonds would get redemption pressure from Corporate Clients".

It further added that it was impossible for such mutual fund schemes to get the redemption amounts in a short period of time.

"Further, illiquid Corporate Debt Market and DHFL saga may force AMCs to sell government securities. Hence, the government securities would face a huge selling pressure so either Bond Yield will shoot up to 8.30-8.50 per cent levels or the RBI has to do OMO (open market operations).

"If RBI opts for OMO, then the government's spending capacity will reduce by an equal amount," it had said.

DEA said that NBFC licenses could be cancelled also.

"In the wake of the IL&FS crisis, as many as 1,500 smaller NBFCs may have their license cancelled because they do not have adequate capital," it had said.

Moreover, there also could be liquidity crunch and recent events hitting market sentiments will lead to cost of fund for NBFCs increasing, impacting profitability.

The RBI's liquidity inducing measures and announcements have helped government bond yields to drop to 8.05-8.08 levels, but corporate bond yields have risen further by about 40-50 bps post IL&FS crisis.

"Primary market in Corporate bonds has completely dried up as no one is willing to bar currently in expectation of further redemption from MF's," it added.

Though IL&FS group is not inconsequential, but exposure of the banks to the NBFC sector is about 16 per cent.

"Therefore, there is a substantial public interest in ensuring financial solvency and good governance and management of this group," it added.

According to the affidavit, IL&FS has an aggregate debt of Rs 94,215 crore as of January 2020, in which Rs 10,173 crore (around 10.79 per cent) is collectively from public fund creditors as pension funds, provident funds, employee welfare funds, gratuity funds and army group insurance funds etc.

Rs 44,075 crore debt, which is 47 per cent, is collectively from the commercial banks, the affidavit said.

Moreover, the aggregate debt of its four key holding companies -- Infrastructure Leasing & Financial Services (IL&FS), IL&FS Financial Services, IL&FS Transportation Networks Ltd (ITNL) and IL&FS Energy Development Company Ltd (IEDCL) - is almost 51 per cent, which is Rs 48,000 crore.

IL&FS group comprised of 302 entities, of which 169 entities are incorporated in India and 133 entities abroad.

The new board has classified the 169 companies into different categories and has asked to release 55 companies from its protection shield of order dated October 15, 2018. In the affidavit, it has also asked the NCLAT to release nine other companies from the scope and operation of the October 2018 order so that they can discharge their debt obligations.

While for rest 105 IL&FS group companies, it has sought additional 270 days to complete their resolution process.

Passing an interim order on October 15, 2018, the NCLAT had stayed all proceedings against IL&FS group companies, whose total debt is Rs 94,215 crore.

The government is conducting resolution process of IL&FS based on the principles enunciated in the Insolvency and Bankruptcy Code. It has appointed retired Supreme Court judge Justice D K Jain to supervise the entire process.