The Spreading Fire

The government has brought in a new board to rescue crisis-ridden IL&FS. What can it do quickly to prevent further damage?

- Anand Adhikari

ARE YOU MY FRIEND OR ENEMY,” Ravi Ramaswamy Parthasarathy, or RP as he was called, often joked when asked about floating an IPO of the three-decade-old Infrastructure Leasing and Financial Services Ltd (IL&FS). Till a few months ago, this Mumbai-headquartered infrastructure financing institution was like a black hole. RP used to share information on a ‘need to know’ basis with the outside world. Today, this 1 lakh crore-asset size institution is threatening a contagion in the financial market.

Almost a decade ago, when the Lehman Brothers collapse created havoc across the world, India took pride in its banking regulator, the Reserve Bank of India (RBI). IL&FS is no Lehman, but has emerged as a ‘too big to fail’ institution. At stake is 91,000 crore of debt; nearly two-third of which is from banks. There are short-term commercial papers loaned by big mutual funds and insurers. It has 348 entities under its complex umbrella. This is more than the number of companies listed in the SME exchange. Many are questioning why IL&FS was allowed to continue as a private company for so long. It has marquee names like LIC and SBI as shareholders, Deloitte as auditor and eminent independent directors such as Maruti chairman R.C. Bhargava and former LIC chairman S.B. Mathur. Also, IL&FS was under RBI’s watch as a systemically important NBFC for the last seven years.

“The road towards mending the IL&FS mess is more complex than it looks,” reasons Uday Kotak, post the first board meeting after taking over as chairman of IL&FS. Kotak is among the half a dozen new directors who have been tasked to preserve the group’s value and prepare a roadmap. The immediate task is to prevent the contagion from spreading to the financial market.