governance, political economy, institutional development and economic regulation

Posts tagged ‘ILFS’

IL&FS Robber Baron of India’s gilded age

NBFC Asset Quality RBI

India is deservedly an “emerging market”. Information asymmetries are extreme and caveat emptor rules, making investment riskier than it should be. The rapid implosion of the Infrastructure Leasing and Financial Services (IL&FS) — a private group — bears this out.

Opaque financials

First, consider that no outsider knows how many subsidiary companies it has. Estimates vary from a low of 135 to around 350 — the latter shared by Uday Kotak/Vineet Nayyar,  the new inductees to its board appointed by the National Company Law Tribunal (NCLT). The consolidated group accounts in the annual report are of some help, but not enough.

Craven credit rating agencies

Second, Indian credit ratings seem to count for less than yesterday’s newspaper. IL&FS was proud to state in its 2017-2018 annual report that it enjoyed the highest credit ratings. But barely three months from the year’s close, when incumbent chairman and founder Ravi Parthasarthy (he built the IL&FS brand from 1989) resigned in July 2018, all three rating agencies rushed to protect their credibility by downgrading the outstanding debt in August. Today, it has junk bond status. Why has the Securities and Exchange Board of India not proceeded to penalise all three rating agencies for deliberately misleading investors?

Clueless, complicit & unrepentant “marquee” independent directors 

Third, venerable “names” on the IL&FS board apparently added far less value than the compensation they drew (admittedly small by the standards of Indian corporates) as nominee and independent directors. Not one of them has had the decency to say sorry by refunding the compensation they received from 2014 onwards. By then all of them were guilty of neglecting the public interest and the interest of minority shareholders.

Public funds for private wealth

Fourth, consider also how closely we resemble China in the opaque, patrimonial use of state power.  IL&FS was not even a public limited company. In retrospect, it is highly unusual that government financial institutions, as a group, were the largest shareholders of a private limited company — with no market signals to go by except the credit rating and the “insider information” that their nominee directors had on its sustainability or health.

Government financial entities – Serve private interests

Just like in China, where public entities boost private profits, the Life Insurance Corporation of India (LIC), a public sector insurer, with assets in excess of Rs 25 trillion, chose to become IL&FS’ equity investor with a 25.3 per cent share. In 2015, when the board discussed selling out to a strategic investor, LIC valued its shareholding at Rs 32.5 billion (Rs 1,000 per share). The market feedback for the share value was Rs 17.85 billion at Rs 550 per share. LIC refused to sell. Today they would be lucky if they get Rs 0.3 billion (face value of Rs 10 per share). Their myopia wrote down the value of their investment by Rs 17 billion in three years. Will the top investment manager in LIC be sacked? Not likely.

Other kindly public sector entities also shored up the equity capital of IL&FS. State Bank of India (6.4 per cent); Central Bank of India, one of the 11 scheduled commercial banks under the Reserve Bank of India’s Prompt Correct Action list (7.7 per cent) and UTI ULIP Plan (0.8 per cent). Together they amount to 40 per cent of the equity in IL&FS.

Hubris & implicit government support made Parthasarthy and Sankran hang in there longer than was prudent 

Look out notice

Fallen icons are easy to drag through the mud especially when they hang on beyond their time. Larsen & Toubro (L&T)is another private giant in the infrastructure space with the banyan tree. But to its credit it is run as a very tight ship with a diversified management cadre, low debt leverage and a massive pipeline of projects – a shining beacon of what professional management can achieve even in India where family owned businesses rule the roost. A quick take over by L&T could reassure financial markets.

In it’s heyday, IL&FS too was a private company with chutzpah — the darling of the government and multilateral agencies; a brand leader in professional management and financial innovation and the flag bearer of the 1990s’ financial revolution of leveraging government resources with private capital and management.


Even the government was persuaded. The 12th Five-Year Plan (2012-17),  which was prematurely junked in 2015 by the Narendra Modi government, assumed a never-before share of 48 per cent from private investment. Actual private investment in the 11th Five Year plan was just 36 per cent. Since then reality has dulled this mirage.

Satyam Computers redux a decade later: NCLT replaces the board in public interest

The National Company Law Tribunal, persuaded by consistent default on debt repayments, appointed a new board on October 1, 2018, under Section 242 of the Companies Act 2013. Similar action was taken in the case of Satyam Computers in January 2009, when its chairman courageously, admitted deliberate accounting fraud and took responsibility. Deepak Parekh, the go-to banker for all seasons of the time and financial entrepreneur (HDFC) helmed the new Satyam board then just as Uday Kotak, India’s most respected banker today, now helms IL&FS.


Vineet Nayyar, a retired babu and subsequent corporate veteran, is vice-chair. He is a Mahindra insider. He was an inductee into Satyam and become vice-chairman of Mahindra Tech, the company which absorbed Satyam in 2013. Wikipedia lists him as also being a director of Kotak Mahindra Old Mutual Life Insurance.

The new management has been quick to reassure investors that the value in IL&FS shares will not be allowed to be eroded. These are heroic sentiments. But savvy investors are unlikely to be reassured till IL&FS, a widely-dispersed holding company, with a finger, an arm or a leg in virtually every segment of the infrastructure business, is cut up and sold. Secretary, Department of Economic Affairs assesses a 9 month period for resolution. Politically it is sensible to kick the can down the road till after the general elections in May 2019. But the interest on the outstanding debt of around Rs 1.3 trillion will mount over this period. Continuing defaults on short term debt (medium term debt is just around 30 per cent of total debt) and inability to refinance will freeze operations.

Satyam was saved by White Knight Tech Mahindra taking over within 3 months 


Strategic disinvestment worked in the case of Satyam because Mahindra & Mahindra stepped in within a few months. This seems unlikely in the case of IL&FS. Infrastructure is in the doldrums. State and national elections will engross the public mindspace over the next nine months, making it tough for the government to be seen as openly helping a private limited company revive. Also, the viability of the business is suspect. The good news is that under the morass of linked IL&FS companies, just 11 subsidiaries constitute around two-thirds of the net assets and around 50 have a similar share in profits/losses — a tighter restructuring task though by no means easier.

Ravi Parthasarthy and Hari Sankaran, his faithful second-in-command of long standing, are being hounded today by officialdom, which bares its fangs only after the fact. But the future is sure to recognise them as India’s very own “robber barons” in the American mould, like Vanderbilt, Drew, Crocker and Morgan, who shunned convention and used a toxic fusion of privileged access to state power, private finance and infrastructure investment into private engines of economic growth.

But whoever stalks the Rs 12 billion worth, chic, open-plan, fish-bowl interior of the IL&FS head office at Bandra Kurla – a monument to corporate ebullience – is unlikely to have quite the same spring and elan as the original founders and their closely knit management team. A pity it all had to end this way.

Adapted from the author’s opinion piece in The Asian Age, October 9, 2018


Babus as default tycoons


Our style of governance remains “provincial”. Of course nothing wrong in that. The French, despite being the last word in art, films, fashion and style – and now fighter planes – exult in the provincial core of their culture.

The dapper President Sarkozy first became a mayor of a charming French commune – through the simple expedient of marring the Mayors niece – before becoming President of France in 2007. No Indian politician worth his salt would spend a decade in district or municipal affairs, in the hope that this would further his political career.

In politics start at the top and stay there 

No sir, we graduate from student politics directly into the Parliament in Delhi, failing which, to the state level legislatures. Consider, that a Rajasthan dynast of the BJP, now says that he never wanted to be an MLA. But daddy – a BJP big shot from the Vajpayee years, couldn’t get him a ticket for the national elections, so he suffered in a job he was never interested in. He is now open to switch to another party, if he is assured a ticket for 2019.

Ditto that for the civil service

Oddly the government – read politicos – do not consider it strange that it forces bright young appointees to Indian Administrative Service to spend one third of their careers, initially, in the minutia of provincial affairs, “fire fighting” on a daily basis, to manage the perverse outcomes poor public policy, poor delegation, systemic failure or worse, outright corruption. Once their curious minds are suitably dulled and they approach an age, when their cohorts are big names already, in academics, management or technology, they are given a chance to come to Delhi to engage in policy formulation or the State capital to try their hand at program implementation.

It does not help that the existing system for recruitment allows candidates who are approaching middle age to join as a “young” recruit to the IAS. Worse, rather than spending the first decade of their service becoming specialists in their field of choice, these unfortunates become little more than the entitled flotsam of civil administration. They arrive half-baked “by administrative design” to head departments over the heads of existing personnel, who unfortunately were “a few marks short in the UPSC exam”.

Who gains from a plaint civil service?

All this is old hat. The real question is why do such perverse incentives continue to prevail? Who gains from it? Yes, lazy, incompetent IAS officers certainly gain from a system in which having once gamed the UPSC exam, they can sit back, smile at every powerful politician, adopt a tunnel vision on the nature their job, create no ripples and wait for good fortune to promote them faster through more vacancies at the top.

But one doubts that merely making life easy for IAS officers is the real incentive. After all, this elite tribe of around 6000 officers represents just 0.1 per cent (one tenth of one per cent) of the 6 million civilian public servants in administration. The real intent seems to be to keep them captive by never encouraging them to develop marketable talents.

A bureaucrat with “connections” is better than one with options

Professionals with international demand are a dodgy bunch. Remember Raghuram Rajan, Arvind Subramanian or even the Columbia professor, distinctly uncomfortable with real life public policy management – Arvind Panagriya. They found the marginal utility of hanging on, progressively reducing, so they left. A small number of babus also leave to go on to become successful entrepreneurs or professionals abroad or in India.

A bureaucrat with options is the last thing our politicians want. They like the humid stickiness of “relationships” developed over a life time. Such people are dependable. And politicians like bringing their sticky babu relationships along with them, as they grow in importance.

A glimmer of lateral competition at the very end of this government’s tenure

To its credit, the Modi government has, at the end of its five year term, initiated what will eventually become a scaled up lateral infusion of talent. Exposing bureaucrats to competition is the right way to go. But there is also a possibility that this mechanism may remain a subtle threat to ensure slavish, bureaucratic compliance, as is widely prevalent amongst the state level cadres of administrators.

Is it fair to crush bright young minds by stuffing their mouths with faux power

It is unfair that the potential of over 100 young IAS appointees, culled from the 500,000 who take the UPSC exam every year, is systematically degraded. Of course no one forces them to join. But where else can the child of ordinary parents get the chance to become an honoured part of the empowered Indian “elite”?  It is wrong to mould those who join for a three decade long career to become feared, often despised but always subservient members of one political dispensation or the other.


Early specialisation within narrow work verticals can enhance professional pride

Change the system. Cadres should be recruited on a narrow basis of skills and then trained for the public workplace. District administration, for example, is not just an incubation period. It should be a life time occupation. An IAS officer interested in district management should join as a Tahsildar and aim to retire as Chairman of the State Revenue Board. Others, who prefer secretarial services, must have the requisite sector skills (secretariat administration, public finance, industrial and commercial policy, agriculture etc.) join as a Section Officer and hope to retire as Secretary. Cross fertilization between the Union and state government secretariats could work. Most likely, those good at field jobs will be useless in the Secretariat and vice versa. In the modern world “general management” is what a spouse does at home every day. You don’t need to specialise as a generalist from day one.

Stop the contagion spreading through “caretaker” top appointments in private banks

Perhaps the most egregious cases of “provincial” type appointments are visible today in the financial sector. IDBI Bank earlier, Yes Bank and the venerable ICICI Bank are now headed by babus as Chair or Vice Chair. The storied ILFS (Infrastrucure Leasing & Financial Services) – a Non Banking Finance Company, which is, could, if it is not quickly sold to Orix, Japan (an existing minority shareholder with deep pockets), also soon be in “safe” babu hands – possibly one of the many IAS officers who have passed through its hallowed portals on deputation and contributed to its debt overhang.

Babus make excellent choices as a reliable pair of hands. The problem is they also make their organisation “safe” from all risk by bringing to the desk obsessive micro management. It is fine if such “senior age” management is inflicted on publicly owned entities. But why destroy the few private sector entities we have? They are in trouble because of indulgent “independent” directors, including pliant PSU nominee directors, who represented political not public interest and an RBI which failed, till recently, to proactively regulate errant management in privately owned, listed financial companies.

Private tycoons can be regulated, “babu” tycoons capture the regulator

James Crabtree in his breezily readable book – “The Raj Billionaires”, typifies top Indian business heads as “tycoons”- with the freedom to dream big on the back of implicit “relationship” based political support with nary a thought spared for minority shareholders. Simply, replacing a corporate tycoon with a babu hoping that things will become better is like mistakenly opening a fizzy wine and them trying to cap it for a rainy day – it goes flat. There are better ways of regulatory risk management than putting your “own man” in charge – that is an undesirable and inefficient “provincial” option, out of step with good governance practices.

Also available at TOI blogs September 25, 2018

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