Rescuing IL&FS, the Satyam way

The Central government averted a major crisis when it took over the debt-ridden Infrastructure Leasing and Financial Services Limited (IL&FS) on Monday. Weighed down by a staggering debt pile of Rs 90,000 crore, the infrastructure major which operates through a clutch of subsidiaries has been staring at multiple defaults on repayments, forcing the government to step in. 

Political criticism notwithstanding, the government has done a right thing because untimely failure of the infrastructure and financial behemoth with its assets being more than Rs 1 lakh crore, will not only hurt domestic financial and stock markets but also take sheen off the country’s image globally. Japan’s Orix Corp has 23 per cent stake while Abu Dhabi Investment Authority from UAE has 12 per cent stake in the trouble-hit group.

However, this is not first time that the Central government has come to the rescue of a major private company. In 2009, the then Congress-led UPA government took charge of Hyderabad-based Satyam Computer Services Limited after its key founder Byrraju Ramalinga Raju threw up his hands and admitted to falsifying accounts and inflating reserves.      

The IL&FS’ link with Satyam doesn’t end there though. When Satyam went belly up, it was this infrastructure behemoth which rescued Maytas Infrastructure, an infrastructure company run by Raju’s sons. Maytas was later renamed as IL&FS Engineering.  

The expert team that the government roped in to steer IL&FS group out of woods included Uday Kotak, Chairman, Kotak Mahindra Bank. A banker with an impeccable record, he is widely expected to play a key role in the revival of the infrastructure major. But the other man in the team, who deserves a mention here is Vineet Nayyar, former chairman of Tech Mahindra which eventually took over Satyam. It is not a coincidence that Nayyar had played a key role in the turnaround story of Satyam. That way, IL&FS is in able hands now and the team can fall back on the government’s strong backing whenever things get tougher.

So, every possible effort will be made to avert mini Lehman-like crisis and save the group from the brink. But there is a larger issue at hand. Barring a few roads here and some good infrastructure there, India’s infrastructure is in a dismal state. For long, we have been hearing that India needs not less than a trillion-dollar fund (more than Rs 72 lakh crore) to fix its infrastructure, a perquisite for faster and smoother economic growth. The Indian banking system is now replete with numerous accounts of how banks are reeling under the weight of bad loans thanks to infrastructure projects they have extended finance to. The crisis at IL&FS will make them more cautious and it is unlikely that banks will be willing to make a bet on such projects in future. 

Against this backdrop, the Central government will have to find a way for the infrastructure companies to source funds for their projects. That will pose a bigger challenge for the dispensation at the Centre. It will be interesting to see how the government will handle this and put the infrastructure sector back on growth track.