Government Keeping Tabs on IL&FS Cash Crunch to Safeguard State-Run Financial Institutionsby Opinion Express October 3, 2018 0 comments
The government is a keeping a close watch on the developments at Infrastructure Leasing & Financial Services (IL&FS), as it seeks to ring fence state-run financial institutions (FIs) against any potential losses.
For only the second time in Indian corporate history, the Government of India has superseded a board of directors and taken over a company. The last time it took over Satyam Computer Services to prevent contagion from spreading in the Indian information technology sector. Now, the Government has been forced to act by taking over Infrastructure Leasing & Financial Services in order to prevent one of India’s leading non-banking financial services company from going under and to keep the entire sector afloat. The decimation in the value of several housing finance firms in stock markets is an indication of the collapse of investor sentiment in the sector. And even if those companies are completely healthy, the collapse of sentiment, thanks to a missed payment by an IL&FS subsidiary, could have meant that it would have been almost impossible to raise the capital at a reasonable cost that is required for day-to-day operations.
Sentiment is a very important for markets, bankers and the public alike. And the Government was left with few options other than to explore a takeover of IL&FS. The problems with the company and indeed with India’s public banking sector and real estate all date back to the heady days of the early 2000s and it appears that the Mumbai-based firm invested in and loaned money towards projects that in the cold light of a post financial crisis world were not sustainable, particularly with valuations that were gold-plated by their promoters. There needs to be a through investigation of IL&FS investments, even those at the flagship GIFT City project in Gujarat. Just like with Satyam, financial investigators have to find out if management in IL&FS colluded with promoters of projects and even politicians. If taxpayer money is being used to bail out the company and some of their projects, the taxpayer has a right to know why the company set up a myriad of subsidiaries across the world and whether there was political pressure from on top to sanction projects. As for the rest of the market, this intervention by the Finance Ministry is likely to soothe some jangly nerves as has been evident in the recent fall of the market. Just like some of the growth was unbelievable some of the companies trading at lows seems quite bizarre. This is what can happen when sentiment collapses even if there is no logical reason for it. India’s economy continues to grow but repairing and dealing with the ineptitude of the past and even the present remains a challenge. And with elections on the way and the need to pour vast sums of money into social sector schemes, the challenges of managing both a ruined financial sector and social security schemes is one Narendra Modi wishes he did not have.
Courtesy: The Pioneer