Firm and Decisive Government Action Taken To Preserve Value And Assets Of IL& FS Says Ministry Of Finance

The government stands fully committed to ensure much needed liquidity arranged for the IL& FS from the financial system so that no more defaults take place and the infrastructure projects implemented smoothly, according to a latest press release from the Ministry of Finance. IL&FS, incorporated in 1987, is a large Systemically Important Non-Deposit Accepting Core Investment Company (CIC-ND-SI). It has numerous infrastructure assets and has played a major role in infrastructure development and financing in the country. It has 169 group companies, as in 2017-2018, including subsidiaries, joint venture companies and associate entities.

A series of defaults by IL&FS Group companies in August and September, 2018 on term-deposits, short-term deposits, inter-corporate deposits, commercial paper and non-convertible debentures and the rating downgrades in some and default on some other financial instruments has resulted into massive effect in the financial markets causing redemption pressure on the mutual funds, which held such financial instruments and has also adversely impacted the sentiments on the stock markets, money markets and debt markets. The redemption pressure on mutual funds has created a large systemic risk leading to quality papers being sold at steep discounts to meet the redemption demand. The debt market shocks got transferred to the equity market sparking sell off particularly in NBFC stocks and sectors linked with NBFC financing.

IL&FS Group, as per their latest Balance Sheet has infrastructure and financial assets exceeding Rs 115000 crore is presently facing tremendous debt pressure and struggling to service around Rs. 91000 crore in debt which is the outcome of its mismanaged borrowings in the past. The financial mismanagement of the IL&FS is apparent from its rapid debt built up and misrepresentation of true state of financial fragility, which is being reflected in unprecedented rating downgrade from highly rated to a default category. Considering the capital base of the Group, the leverage is very high. The IL&FS Group is involved in many infrastructure projects including through equity and debt financing. Any impairment in its ability to finance and support the infrastructure projects would be quite damaging to the overall infrastructure sector, financial markets and the economy, considering its systemically important nature.

The restoration of confidence of the money, debt and capital markets, the banks and financial institutions in the credibility and financial solvency of the IL&FS Group is of utmost importance for the financial stability of capital and financial markets. There is an emergent need to immediately stop further financial defaults and also take measures to resolve defaulted dues to the claimants. This would require a combination of measures of asset sales, restructuring of some liabilities and fresh infusion of funds by the investors and lenders. The confidence of the financial market in the credibility of the IL& FS management and the company needs to be restored.

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