How a giant collapsed

When an AAA-rated company with shareholders such as Life Insurance Corporation of India, State Bank of India, Orix Corporation and Housing Development Finance Corporation, regulated by the Reserve Bank of India, with an outstanding debt of Rs 91,000 crore falls, it is bound to cause ripples. The fall of Infrastructure Leasing & Financial Services (IL&FS) did exactly that. It shook investors’ confidence in the non-banking financial companies (NBFCs) and led to more defaults and an eventual downgrading of the sector.

In Never Too Big to Fail Sandeep Hasurkar, a former investment banker, who managed energy projects for IL&FS for a few years, tries to put together the story of this mammoth company and circumstances that led to its fall. The story starts 30 years ago, when former Citibanker, Ravi Parthasarathy , IL&FS’ chief, set up the company to beef up India’s infrastructure-building capabilities.

Interestingly, Mr Parthasarathy was helped initially by HDFC Chairman Deepak Parekh, both in putting together the concept of the NBFC and with the seed capital from various public sector banks and financial institutions, the Unit Trust of India and Central Bank of India. So, while IL&FS was a private sector company, a large holding of public sector companies ensured that the firm enjoyed the confidence of both central and state governments.

Unfortunately, the two founders were to go their different ways soon because Mr Parekh believed in a process-driven system while Mr Parthasarathy was a deal-maker by instinct, and considered the organisation his baby.  

In the late 1980s and early 1980s, public goods such as infrastructure were seen as “free”; the government was responsible for providing it. And the concept of generating revenues from public goods that could be deployed in other projects was an alien concept. This is where IL&FS stepped in. In the initial years, it had two distinct divisions — a financial services firm that undertook its main business of investment banking and lending, and an infrastructure services unit that undertook advisory services for the central and state governments as it helped build the framework for public-private partnerships (PPP).

Mr Parthasarathy, as the book describes, was the ultimate dream merchant. “He was a hustler to some but was particularly adept at pulling the proverbial survival rabbits out of the hat,” Mr Hasurkar writes.

For example, he sold the Iridium — the satellite-based mobile telephony project with Motorola — to Indian bankers. The company launched with much fanfare in 1998 and closed within a year after it could garner only 30,000 global customers. In India, the number was only 170 subscribers. Insiders say that Mr Parthasarathy even invested in Thakkar’s, a single-outlet eatery in Mumbai, known for its reasonably priced thali.

After Prime Minister Narasimha Rao, aided by Manmohan Singh, liberalised the economy and industrial policy in 1991, more doors opened for IL&FS with primacy given to the PPP model. The Noida Toll Bridge was the first of its kind: A public infrastructure project built with private resources in return for concessions. The best part — the project would collect fees from users to recover the investment. Given that the fund requirement was significant, IL&FS was able to showcase its skills by arranging finance through public sector banks and 20 per cent of the loan requirement was advanced through a World Bank Line of Credit.

Of course, the concept used to raise funds — using lower debt financing cost to shore up super-normal profits for equity holders — ran into controversy. And, so did IL&FS’ fees for putting together the project. But all these were brushed aside with the argument of the high risk and uncertainty in pioneering a new format. The Noida Toll project, followed by the Tirupur Water Supply and Sanitation in Tamil Nadu, set the template for the firm’s future projects. This template allowed the company to book fees as revenues from these projects, thereby allowing it to declare robust profits and pay dividends.

The book goes on to record the other developments, including the group’s mega office in Bandra-Kurla complex with a well-stocked bar following the template of “work hard, play hard” for its top executives, clients, and those in its 350-plus subsidiaries, many in the process of being sold by the new board that superseded the original board.

The book, mostly, is about recklessness and failures, starting from Mr Parthasarathy, who was a dealmaker and not a builder of infrastructure, board members who represented the top financial institutions in the country, the regulator Reserve Bank of India, credit-rating agencies and marquee institutional investors. Tragically, all of them failed and/or refused to see the writing on the wall.

Unfortunately, the book does not provide much new information and heavily relies on already-published material. It is repetitive about IL&FS’ “Rs 91,000 crore debt” and other well-documented failings. In addition, it is complicated for someone new to the arcane subject of project financing. But for someone who wants to understand the IL&FS scam, it could be a good start.