IL&FS' total liabilities higher by Rs 260 billion: REDD Intelligence report

Stressed debt specialist says some loans to subsidiaries and inter-company obligations not included in reported accounts

It may come as a surprise to Infrastructure Leasing & Financial Services (IL&FS) investors that the total liabilities, including parent liabilities, are estimated higher at Rs 1.31 trillion as of March this year, compared to consolidated liabilities of Rs 1.05 trillion mentioned in the annual report, according to a report. 

According to REDD Intelligence, a stressed debt specialist, loans to subsidiaries or inter-company obligations of an additional Rs 260 billion were not included in the reported accounts. 

The research firm arrived at the total liabilities figure by summing up liabilities of the 175 subsidiaries and the parent liabilities, provided in the annual report.

The new board of IL&FS was told that the group has 348 companies in the group.

Citing an example, REDD Intelligence said, in a report dated September 27, that ITNL Offshore Pte,  a subsidiary of IL&FS Transportation, raised a $155 million bond issuance and lent the proceeds to fellow subsidiary ITNL International to fund the acquisition of a 49 per cent stake in Chongqing Yuhe Expressway in China. This liability was recognised in both subsidiaries’ individual accounts, but would be reflected only once in the consolidated accounts, it said. IL&FS Transportation is a listed subsidiary of IL&FS.

It further said IL&FS reported total assets of over Rs 1 trillion in operating subsidiaries, of which operating non-financial assets were Rs 750 billion. “We estimate IL&FS has Rs 250 billion in financial assets, another Rs 270 billion in energy assets, Rs 200 billion in operational road assets, Rs 60 billion in road assets under construction, Rs 70 billion in international infrastructure assets, Rs 40 billion of maritime assets, Rs 40 billion of rail assets, and Rs 77 billion in township, educational, and other assets.”

REDD Intelligence said the Reserve Bank of India (RBI) in its inspection reports required IL&FS Financial Services (IFIN), the financial subsidiary of IL&FS, to consider recognising inter-company exposure as per Section 370 (1b) of the Companies Act. This affected IFIN’s computation of net-owned funds (NOF) and capital to risk assets ratio (CRAR). The RBI has given IFIN until March 31, 2019, to fulfil the minimum NOF and CRAR requirements. According to the RBI rules, IFIN is barred from tapping the commercial paper market till March next year after it defaulted on commercial papers in September. 

IFIN reported total assets of Rs 218.9 billion and liabilities of Rs 194.9 billion as of March 2018. IFIN’s reported net worth in the same period was Rs 24 billion. Further, the total related party transaction at IFIN is estimated to be Rs 32 billion as it made an investment of Rs 1.8 billion in the preference shares of ITNL. There are other loans and related transaction of 

Rs 4.5 billion, according to ITNL’s annual report. IL&FS reported fund-based income of Rs 4.4 billion. “The high presence of inter-company loans could impair the value of the subsidiary,” the report said.

REDD Intelligence has also warned that IL&FS will have to take an impairment of Rs 15 billion before considering recovering any loans from its subsidiaries. It also warned that Rs 300 billion of the company’s loans are at risk, as its power project in Tamil Nadu and a joint venture port project in Dighi, Maharashtra, have been sent to the National Company Law Tribunal by lenders for debt resolution under the Insolvency and Bankruptcy Code, 2016.