Government of India on Wednesday (September 22) extended the term of Uday Kotak, chairman of Kotak Mahindra Bank as the non-executive chairman of debt-ridden Infrastructure Leasing and Financial Services Ltd (IL&FS) group by another six months. Uday’s tenure was supposed to end on October 2 but the government through a gazette notification extended the tenure.
Kotak’s extension comes a day after he talked about Chinese company Evergrande and how it reminded him of the IL&FS crisis. In the tweet, Kotak remarked that a 61 per cent recovery of outstanding debt had been observed at IL&FS.
Uday Kotak tweeted, “Evergrande seems like China’s Lehman moment. Reminds us of IL&FS. Indian Government acted swiftly. Provided calm to financial markets. The Government appointed board estimates 61% recovery at IL&FS. Evergrande bonds in China trading ~ 25 cents to a $,”
Evergrande seems like China’s Lehman moment. Reminds us of IL&FS. Indian Government acted swiftly. Provided calm to financial markets. The Government appointed board estimates 61% recovery at IL&FS. Evergrande bonds in China trading ~ 25 cents to a $.
— Uday Kotak (@udaykotak) September 21, 2021
A thankless task
Kotak’s extension is indeed laudable as he is undertaking what is undoubtedly a difficult, underappreciated, and thankless task. IL&FS at one time threatened to be India’s Lehman moment, capable of triggering a collapse in the economy. However, the Modi government with its all ‘hands on the deck’ approach quickly accessed the gravity of the crisis and jumped in with its resources.
Uday Kotak was appointed by the government as the head of the lender’s board which also included Tech Mahindra Vice-Chairman, Managing Director and CEO Vineet Nayyar, former Sebi chief G N Bajpai, former ICICI Bank chairman G C Chaturvedi, former IAS officers Malini Shankar and Nand Kishore in 2018 to help the troubled company wade through the rough waters.
Reportedly, under his tenure, the centre-appointed board discovered that there was a complex web of over 250 companies that were part of the overall IL&FS group. Over 90 per cent of the flagship company’s assets were classified as a dud.
The Genesis
IL&FS is a non-banking financial company (NBFC), or ‘shadow bank’ that was founded in 1987 with equity from Central Bank of India, Unit Trust of India and Housing Development Finance Co to fund infrastructure projects when peers IDBI and ICICI were focused more on corporate projects. For a layman, Shadow Bank is a term used to refer to intermediaries in the banking and finance segment that provide similar services as that of traditional banks, however, they are not under similar regulation.
IL&FS’s major shareholders include Life Insurance Corp of India holding 25.3% stake, State Bank of India with 6.42%, Japan’s Orix Corp holding 23% and the Abu Dhabi Investment Authority with 12%.
However, the company defaulted in payment obligations of bank loans (including interest), term and short-term deposits and failed to meet the commercial paper redemption obligations.
A debt of 94,000 crores
Succinctly put, with a consolidated debt of around Rs 94,000 crores, the company was simply unable to find resources to pay its debt and found itself in an asset-liability mismatch. More than 60 per cent of the debt owed by the company was in the road building, power and water work projects.
Following the defaults, rating agency ICRA downgraded the ratings of its short-term and long-term borrowing programs. The defaults also jeopardised hundreds of investors, banks, and mutual funds associated with IL&FS, and sparked panic among equity investors, even as several non-banking financial companies faced turmoil amid a default scare.
Ripple effect of IL&FS’s default
Such was the ripple effect of IL&FS’s default that an entertainment media giant like Zee Entertainment Enterprises Ltd (ZEEL) nearly ran itself into the ground. The IL&FS default resulted in the freezing of already shallow domestic debt markets even as it sent shockwaves into the financial system in a domino effect.
As reported by TFI, Sony and Zee signed a merger deal on Wednesday after the latter’s debt as of March 2021 stood at Rs 3.17 billion. Zee was among the most profitable and professionally run companies. However, the investments of the Zee group in the infrastructure market went truly south due to the collapse of IL&FS.
The banks tightened lending norms after the collapse of the IL&FS Group and this led to a massive crisis in the NBFC market. As the investment of the Zee group was exposed to NBFCs, it led to a sharp decline in the share prices of the Zee group.
Even former Chairman Subhash Chandra pointed out the accumulation of debt to the collapse of IL&FS, “I had admitted the wrong decisions taken by me in the past which caused the occurrence of the default, due to the asset-liability mismatch. Goes without saying, that it was an after-effect of the liquidity crisis triggered by the IL&FS case,”
Read More: Sony-Zee merger: The mother of all entertainment genre mergers is here
Comparisons between Evergrande and IL&FS
Reported extensively by TFI, China’s real estate giant Evergrande’s dipping fortunes could ultimately affect everything from the jobs market to property prices in the country. This is why Fitch Ratings and Moody’s Investors Service seem to have issued warning signs about the likelihood of a default by the Evergrande Group.
Chinese stock markets seem to agree with the larger risks attached to Evergrande Group’s default. They fear a contagion effect from Evergrande’s debt default hitting the property and banking sectors. This contagion effect has escalated the risks associated with investments inequities.
Evergrande’s default has also triggered worries of similar financial troubles gripping other big property developers and causing further mayhem in the Chinese economy. Evergrande, which employs 200,000 people, has a presence in more than 280 cities and claims to indirectly generate 3.8 million Chinese jobs, had been on a reckless buying spree for more than a decade, which appears to have caught up now. Regulators have warned that it is $305 billion of liabilities could spark broader risks to China’s financial system if its debts are not stabilised.
Read More: Evergrande topples, crushes China’s markets under its weight
While Evergrande is purely a market failure and its market resolution — while it may or may not yet require Chinese government intervention given its scale, IL&FS was a monster created by India’s Nehruvian quasi-socialist past and the red-tapism of the bureaucracy, which came to full effect when the audits in the aftermath of the crisis were found to be botched as well.