India: Govt to ensure liquidity for IL&FS to prevent defaults: FM

• The government on 1 Oct 18 said it stands fully committed to ensuring that needed liquidity is arranged for the debt-trapped IL&FS to prevent any more defaults in payment of loans by the non-banking financial company.
• On a day when the Mumbai-bench of NCLT allowed the government to take over the board of IL&FS, the Finance Ministry in a statement said the move was essential to restore confidence in the financial market and hoped that financial institutions would provide the Non-Bank Financial Company liquidity.
• Certain sections of the finance ministry were also uncomfortable with state-run institutions infusing more capital to save the firm.
• Observing that the company continued to pay dividends and huge managerial pay-outs regardless of looming liquidity crisis, the statement said, “it shows that the management had lost total credibility.”
• The government was also concerned about defaults by IL&FS and its group companies to other state-run institutions, which in turn would have had a contagion affect.
• If further said that there have also been serious complaints on some of the companies for which an SFIO investigation has been ordered into the affairs of IL&FS and its subsidiaries.
• The NCLT on 1 Oct 18 approved reconstitution of IL&FS board appointing six members including Uday Kotak as non-executive chairman.
• The bigger task will be the clean-up. A thorough investigation will be needed to identify exactly what went wrong, fix responsibility and take action against the existing management.
• The next step will be to re-examine the IL&FS business model itself of being a financier and a developer/operator of infrastructure projects. In India, this model is fraught with risk that has clearly blown up in IL&FS’s face.
• An option could be to separate the financing and infrastructure business into two separate legal entities. It will also mean that investors will have to contend either with the project risk or the financing risk and not both.
• This will also make it easy to find investors, who specialize either on the infrastructure or financing front.

External Link: https://economictimes.indiatimes.com/news/economy/policy/government-to-ensure-liquidity-for-ilfs-to-prevent-defaults-finance-ministry/articleshow/66030176.cms

External Link: https://www.livemint.com/Money/QGKt9KPIUGwDMw68ZjfNWN/The-road-ahead-for-new-ILFS-board.html

External Link: https://economictimes.indiatimes.com/news/economy/policy/government-didnt-want-rescue-at-expense-of-state-run-fis/articleshow/66036548.cms