Is your money safe with LIC raising its stake in IL&FS?
Ten years after Lehman Brothers filed for bankruptcy, plunging not just the US but the entire global economy into a deep financial crisis, India is possibly on the verge of its very own mini-Lehman.
What the IL&FS crisis is
Infrastructure Leasing and Financial Services Ltd (IL&FS) is an infrastructure developer and financing institution.
The company, which has a humongous debt running into Rs 91,000 crore, and its subsidiaries have defaulted on debt repayments and interest payments since August 27.
On September 27, IL&FS Financial Services defaulted on bank loans, including interest of Rs 284.5 crore to five banks. The company also said it defaulted on repayments of Rs 103.53 crore of term deposits and Rs 52.43 crore of short-term deposits. On September 24 and 26, IL&FS Financial Services had defaulted on repayment of commercial papers due on the respective days.
The crisis is only growing bigger with more and more lenders realising that IL&FS is in no position to pay back the borrowed money.
Ironically, Lehman Brothers had filed for bankruptcy on September 15, 2008, the same month in which the magnitude of the IL&FS problem came to the fore.
Stakeholders
The situation could have a direct bearing on Life Insurance Corporation policyholders in the country as LIC has over 25 per cent stake in IL&FS.
LIC with Orix Corporation of Japan, which has over 23 per cent shareholding, are the biggest shareholders of IL&FS.
The other big investors of IL&FS include the State Bank of India (SBI) and Housing Development Finance Corp (HDFC).
While the company owes its lenders about $500 million in the second half of its fiscal year through March, it has only about $27 million available.
In order to raise funds, IL&FS’s Rs 4,500 crore rights issue has been approved.
What a rights issue is
A right offering is a group of rights offered to existing shareholders to purchase additional stock shares, known as subscription warrants, in proportion to their existing holdings. In a rights offering, the subscription price at which each share may be purchased is generally discounted relative to the current market price.
While IL&FS’s plan has received approval, it remains to be seen how enthusiastically it is subscribed.
The LIC angle
Reports suggest LIC, Orix and SBI have agreed to subscribe to the rights issue. What this actually means is that the three aforementioned companies would be raising their stakes in the beleaguered IL&FS.
According to reports, the Reserve Bank of India (RBI) asked LIC and Orix not to infuse more capital into the company during a meeting held on Friday. The meeting was held to decide on the revival and capital infusion plans for the company.
Is the situation under control?
With the rights issues and IL&FS promising to raise funds by selling assets, the situation for now could be under control. But the fact that LIC, which has people’s entire savings parked in it, has gone on to raise its stake in a company which has an evidently flawed model of operation that involves financing long-term infrastructure projects through mostly short-term borrowings, is problematic.
The problem with this model is it lends what it borrows and thus it may find itself unable to pay back at any given point in time. In short, IL&FS operates much like a bank without actually falling within the regulatory framework of the banking sector.
With LIC raising its stake in the company, the stakeholders of the company — mainly middle-class Indians — need to watch their money carefully.