IE: ‘Red’ IL&FS entities account for more than two-thirds of group’s overall debt

16 August 2019: Out of total debt of more than Rs 89,000 crore held by Indian entities of the IL&FS Group, as much as Rs 61,375.6 crore was held by 82 entities which were not able to meet payments to even senior secured financial creditors. These companies have been classified as ‘red’ entities by the IL&FS resolution consultant. Red entities are those which cannot meet their respective payment obligations towards even senior secured financial creditors as and when they fall due in the testing period.

Of the total 302 IL&FS entities, 169 are Indian entities carrying total external fund based debt of about Rs 89,246 crore, as per the fifth progress report on the group’s resolution process and the way forward, submitted to the Mumbai-bench of the National Company Law Tribunal (NCLT) on Wednesday.

Among the 169 Indian entities, the resolution consultant has classified 158 entities into ‘red’, ‘amber’ and ‘green’ categories — based on a 12-month cash flow based solvency test. Classification for remaining 11 entities is underway.

Green entities are those which are able to meet their financial and operational payment obligations through their operations and existing cash flows. These entities do not rely upon other IL&FS Group entities for any financial support to service its debt obligations.

Amber entities, meanwhile, are those which were unable to meet all their respective obligations — financial and operational — during the testing period but can only meet operational payment obligations and payment obligations to senior secured financial creditors.

Question marks over lending practices of financiers

While the quality of loan book of a finance company is key to its liquidity, it has now come to light that over two thirds of IL&FS debt has been in its group companies that are not in a position to repay their obligations, thereby rendering the lenders at liquidity risk. This not only reflects on financial health of IL&FS group companies but also raises question marks over the lending practices of its financiers.

The progress report shows that entities classified as red and amber comprise over 87 per cent of the total outstanding debt of over Rs 89,000 crore. Apart from red entities, 13 amber entities carry debt of Rs 16,372.6 crore. A total of 55 entities have been classified as green, which carry debt of Rs 11,022.9 crore.

This reveals the scale of the challenge at the hand of new board of Infrastructure Leasing & Financial Services (IL&FS) which is trying to deal with the mountain of NPAs that has gripped the financial sector through a series of default. The collapse of IL&FS engulfed the entire NBFC sector, leading to a broader slowdown in the economy and forcing the government to supersede its board.

Separately, as per a March 22, 2019 Reserve Bank of India inspection report on IL&FS included in the progress report, the group did not declare bad loans in the four fiscals till March 31, 2018.

The RBI inspection report also found that that non-performing assets (NPAs) on IL&FS’ books were as high as 70 per cent of its total loans and advances by March 31, 2018. It further noted said that “wide divergences were observed” between the reported and the assessed position of asset classifications and provisions at IL&FS.

“The erstwhile Board failed to exercise oversight over the functions of the entity. They did not monitor the affairs of the downstream entities in which investments were made,” RBI said in its report, adding that that serious deficiencies in credit appraisal, and loans were given to unrated or poorly rated borrowers.

As per the progress report, IL&FS has started process of sale of assets, group companies, real estate, cars and other cost cutting measures to put its house in order. For instance, in the case of IL&FS Engineering & Construction Company Ltd, the manpower on rolls of the firm has reduced by 57 per cent from October 1, 2018 till June 30, 2019, leading to 58 per cent reduction in the wage bill. Cost of contract staff was also fell by 90 per cent in the same period.

Across the group, head count decreased by 43 per cent from October 1, 2018 till June 30, 2019, leading to savings of nearly 47 per cent in annualised wage bill, the progress report said, without specifying the number of employees that were laid off.

However, the process for sale in the case of IL&FS Securities Services Ltd (ISSL) was put on hold due to regulatory scrutiny. The group had invited expressions of interest for a potential acquisition of the company on November 13, 2018. “However, the sale process of ISSL was kept on hold inter alia in view of the investigation of Sebi and EoW (Economic Offences Wing) in relation to certain mutual fund units provided as collateral for trades (in Option Contracts) conducted by Allied Financial Services Pvt. Ltd (a client of ISSL),” the report said.

The Indian Express reported

LM: IL&FS proposes to NCLT sale of wind energy assets to ORIX of Japan

11 August 2019: Embattled IL&FS group has proposed to the National Company Law Tribunal (NCLT) the sale of its wind energy business to Japan’s Orix Corporation, which will help reduce the debt of the company by ₹4,800 crore.

Infrastructure Leasing and Financial Services (IL&FS) said in a statement it has filed the proposal to complete the sale of its wind energy business, held under IL&FS Wind Energy Limited (IWEL) to ORIX Corporation of Japan, with NCLT for final approval.

The proposal has been filed before the Tribunal after completing binding Share Purchase Agreement with ORIX Corporation and obtaining “in-principle” approval from all lenders for completing this transaction, subject to NCLT approval.

IL&FS said it had already received approval for the sale of its wind energy business from Justice (Retd) D K Jain, appointed by the NCLAT to supervise the operation of Resolution Process of IL&FS group companies, earlier last month.

Justice Jain had approved the sale on the conditions that the proposal will be placed before the NCLT for its approval and the bid amount realised from the sale be kept in an escrow account.

This amount in escrow account will only to be disbursed in accordance with the directions in the proceedings, pending before NCLT/NCLAT, as applicable.

ORIX Corporation of Japan, owner of 49 per cent stake in each of seven operating wind power plants of the IL&FS Group, had expressed its intent to buy out the remaining 51 per cent stake held by IL&FS Wind Energy Limited (IWEL).

This intent to buy 51 per cent stake was in exercise of ORIX’s right under the terms of an existing MoU wherein ORIX can match the price offered by the highest bidder for purchasing IWEL’s stake in the wind Special Purpose Vehicle (SPV).

ORIX Corporation decided to match the offer of the highest bidder, of approximately ₹4,800 crore for 100 per cent of enterprise value, contemplating no haircut to the debt of the SPVs aggregating to around ₹3,700 crore.

Some of the major lenders in the SPVs include: Power Finance Corporation, Bank of Baroda (for working capital and project financing), and India Infra Debt Limited – with debt aggregating to approximately ₹3,700 crore (without interest).

The sale to ORIX will lead to resolution of the following seven companies of the IL&FS Group – Lalpur Wind Energy Private Limited, Etesian Urja Limited, Khandke Wind Energy Private Limited, Retadi Wind Power Limited, Wind Urja India Private Limited, Tadas Wind Energy Private Limited and Kaze Energy Limited.

The board of IL&FS has already approved the sale of these entities to ORIX Corporation in its board meeting held on 28 June.

The LiveMint reported

BS: NCLAT raps MCA, IL&FS board over delay in presenting resolution plan

9 August 2019: The National Company Law Appellate Tribunal (NCLAT) on Thursday pulled up the Ministry of Corporate Affairs (MCA) and the newly appointed board of Infrastructure Leasing & Financial Services (IL&FS) for inordinate delay in presenting the final resolution plan for the debt-laden firm.

“In spite of our order dated 12th July, 2019, no progress report has been filed by Union of India/IL&FS. They are allowed to file the progress report by tomorrow. We make it clear that before the next date of hearing, the Union of India must pass final order and settle the claim of all the creditors with regard to three amber or green entities,” a two-judge Bench headed by Chairperson Justice S J Mukhopadhaya said.

The three amber companies, which had to be converted to green and allowed to service debts, are Moradabad Bareilly Expressway, Jharkhand Road Projects Implementation Company, and West Gujarat Expressway.

By the next date of hearing on September 5, the MCA and the new IL&FS board will also have to present a plan for the 82 companies currently placed in the red category, the NCLAT said. The ministry or the board should, however, take permission from Justice D K Jain before selling or creating any third party rights in any of the red group companies, the NCLAT said. The resolution of all IL&FS group companies is being overseen by former Supreme Court judge Justice D K Jain.

The NCLAT has also allowed the MCA, as well as IL&FS, to call a meeting of the financial creditors and lenders to the debt-laden firm, and if needed “take up the matter on day to day basis to ensure that the total process with regard to all the amber entities”.

“They will keep it in mind that already 300 days approx have completed since the interim order was passed on 15th October, 2018,” the NCLAT said, adding that a fresh progress report should be filed by September 3.

On February 11, the central government and the new board of IL&FS had submitted an affidavit detailing three categories — green, amber, and red. The firms of the group had been classified under these categories based on their ability to service routine debt obligations.

The companies which had enough cash to service the debt of secured and unsecured creditors were placed in the green category, while those with cash to pay only secured creditors were placed under amber. Those IL&FS companies which were not in a position to service the debt of both secured or unsecured creditors were placed in the red category. 

The Business Standard reported

FE: NCLT adjourns hearing on IL&FS ex-auditor’ asset freeze case to August 28

7 August 2019: The National Company Law Tribunal (NCLT) adjourned the hearing on the matter of freezing the assets of the former auditors of IL&FS, Deloitte Haskin & Sells and BSR & Associates, to August 28.

The tribunal on Tuesday heard the arguments of the ministry of corporate affairs for freezing the assets of Deloitte and BSR, following the impleadment of the two audit firms in the NCLT proceedings.

The ministry had on June 8 filed two applications – one for impleadment of the audit firms in the NCLT proceedings of IL&FS, and the second, for the freezing their assets following the impleadment order. On July 18, the NCLT passed an order to implead 23 additional respondents, including the auditors of IFIN, Kalpesh Mehta, Sampath Ganesh and Udayan Sen, in the IL&FS proceedings.

However, the tribunal on July 25 put a 10-day stay on its own impleadment order, allowing the auditors time to file an appeal with the National Company Law Appellate Tribunal (NCLAT). The NCLAT will hear the matter on August 19. The Mumbai bench of NCLT on Tuesday said that if the impleadment order is upheld by the appellate tribunal, the matter of the asset freeze will then be heard.

These applications for impleadment and asset freeze of the auditors were filed by the ministry of corporate affairs based on the findings of the Serious Fraud Investigation Office (SFIO) in the IL&FS fraud case.

The SFIO had on May 28 filed a criminal complaint based on its probe into the affairs of IL&FS fraud case. The report found that the auditors appeared to be hand-in-glove with the former top management of the group in concealing material facts and information from investors and creditors.

Following the SFIO findings, the corporate affairs ministry has also filed an application seeking to ban the two audit firms from conducting auditing activities for five years. The NCLT over the last month has heard arguments and reserved the order in the matter.

The financial affairs of the IL&FS group came into scrutiny last year after the group defaulted on short-term and long-term debt obligation worth `91,000 crore.

The Financial Express reported

MC: NCLAT agrees to hear pleas of IL&FS auditors against impleadment

30 July 2019: The National Company Law Appellate Tribunal (NCLAT) has said it would hear the pleas of auditors of IL&FS — Deloitte Haskins & Sells LLP and B S R Associates LLP — against an order passed by NCLT to implead them in the ongoing case of oppression and mismanagement of the scam-hit firm. The case will be heard on August 19.

A two-member bench of the NCLAT has directed the Ministry of Corporate Affairs (MCA) and others to file their replies in the matter within a week.

“Interim order dated 23rd July, 2019 passed by the National Company Law Tribunal, Mumbai Bench, Mumbai, in MA Nos. 2581 & 2071 of 2019 in CP 3638/241-242/2018 shall continue till next date,” the NCLAT said.

It further added, “However, the interim order will not come in the way of the National Company Law Tribunal and the Union of India to proceed in accordance with law.”

Earlier, the Mumbai bench of the National Company Law Tribunal (NCLT) had on July 18 allowed the MCA’s plea to prosecute Deloitte, BSR Associates and other auditors for their failure to detect and report the scams that took place at IL&FS under their watch as auditors.

Udayan Sen and Kalpesh Mehta, partners at Deloitte, and Sampath Ganesh, a partner at BSR & Associates, had also been impleaded as respondents by the NCLT order.

On July 23, the NCLT Mumbai bench had stayed its own order for four weeks to allow the auditors to appeal against the impleadment.

In its order, the NCLAT, while seeking the government’s response on the auditors’ plea against impleadment, said the NCLT Mumbai bench’s order of stay would continue till August 19, when it would hear the case.

As reported on moneycontrol

MC: IL&FS: NCLT allows govt to prosecute auditors Deloitte, BSR; C Sivasnkaran & 2 independent directors

18 July 2019: The NCLT has given a go-ahead to government to prosecute Deloitte and BSR Associates for their failure to detect and report the scams that took place across the now-bankrupt IL&FS group and 21 other entities, when they were the auditors of IL&FS Financial Services.

The NCLT in an order posted on its website on July 18 said the corporate affairs ministry can go ahead with prosecution based on the findings of the probe conducted by the Serious Fraud Investigation Office (SFIO).

But the posting does not mention its views on the government demand to ban these two auditors for five years from business, though.

The tribunal also allowed to the government plea to implead Udayan Sen, a partners of Deloitte, and BSR Associates partners Kalpesh Mehta and Sampath Ganesh.

Both these auditing companies any longer work with the group of the company, though.

The tribunal allowed prosecution of C Sivasnkaran and his group as the probe has revealed that management of IFIN abused their position by giving loans to the Siva group as some group companies failed to repay the earlier loans granted to them by IFIN.

Investigation also revealed Sivasankaran had personal relationship with Ravi Parthsarthy and Hari Sankran, the former chairman and the former vice-chairman of IL&FS Group.

Further, the tribunal also asked the corporate affairs ministry to implead Surinder Singh Kohli and Subhalakshmi Panse who were independent directors of IFIN and were part of the audit committee, but asked the government not to prosecute them the SFIO probe did not name them.

“Therefore, their prosecution is not justified at this stage but both Kohil and Panse, can be impleded as they were independent directors and were thus part of the audit committee,” the tribunal said.

According to the SFIO complaint it was alleged that the auditors were aware that IFIN was lending to defaulting borrowers through group companies hence suppressing its non- performing assets and not provide for the bad debt.

Moreover, SFIO report said, auditors failed to verify the end-use of bank loans and money raised via NCDs despite it being a regulatory mandate for verifying such things.

The SFIO report has found that the audit committee members colluded with the management and overlooked many impairment indicators in contravention of the accounting standards and principles of prudence.

In case of Panse and Kohli, the investigations revealed they were aware of the NPAs of the company and also knew that loans were being granted to group companies of existing defaulting borrowers in order to prevent them being classified as NPA.

As reported on Moneycontrol

ET: Three IL&FS group companies to service Rs 3,300 crore debt

13 July 2019: Three group entities of debt-laden Infrastructure Leasing and Financial Services with outstanding loans of about `3,300 crore are set to begin servicing them after lenders and IL&FS reached agreements to restructure debt, according to submissions before an appellate tribunal.

L&T Finance and its other arms, as well as Aditya Birla Sun Life Mutual Fund, are major lenders to these three companies, with L&T Finance alone having an exposure of about Rs 1,500 crore.

IL&FS on Friday also submitted before the National Company Law Appellate Tribunal (NCLAT) that it will follow a similar procedure to begin servicing debts of 10 more group entities with total outstanding debt of around Rs 13,000 crore.

Ramji Srinivas, counsel for IL&FS and Union of India, told NCLAT that all lenders of West Gujarat Expressway and Jharkhand Road Project Implementation Company had signed term sheets restructuring loan agreements with IL&FS and that once final documentation was signed, the companies would begin servicing their debts.

Srinivas also said all lenders, barring Bank of India, had agreed to similar restructuring for loans of Moradabad Bareilly Expressway, and that Bank of India was expected to agree to terms within two days.

A two-member NCLAT bench led by Justice SJ Mukhopadhaya, however, asked the IL&FS counsel how the group planned to resolve the debt of 82 other domestic group entities — a total of Rs 61,375 crore.

All group companies of IL&FS have been classified according to their ability to meet payment obligations. Group companies able to meet all payment obligations are categorised as ‘green’. Those companies able to meet only operational payments and senior secured debt obligations are categorised as ‘amber’. Those that are not able to meet any payment obligations are categorised as ‘red’.

The NCLAT bench gave IL&FS 15 days to reach similar agreements with 10 other ‘amber’ companies and questioned IL&FS on its plan for resolution of ‘red’ companies.

“Why should we not release red companies (from the moratorium)? Let somebody who want to trigger (insolvency) because you will not be in a position (to pay lenders),” it said.

The bench also directed IL&FS to file an affidavit on the measure it would take to release payments to provident funds, pension funds and said NCLAT may direct IL&FS and Union of India to release any funds generated to these and other employee related funds who have invested in IL&FS group entities.

The Economic Times reported

ET: IL&FS board shortlists firms to recast its books

1 July 2019: After the Serious Fraud Investigation Office (SFIO) took a strong view against the big four audit firms, the board of IL&FS has shortlisted Indian firms to reopen and recast IL&FS’ books and the mandate for the job is likely to go to Borkar & Muzumdar and GM Kapadia and Co.

The recast is expected to be completed in three months once the matter is conformed. Since the Ministry of Corporate Affairs and the SFIO have taken a strong view against some of the big four agencies that were auditors to IL&FS and are being probed for their role in not being able to raise the red flag, the choice may fall upon Indian firms from a list of potential firms available with the board.

“Borkar and Muzumdar would be auditing IFIN and IL&FS while GM Kapadia would be auditing ITNL accounts for the past five years from FY13-FY18,” a person aware of the matter said on condition of anonymity.

The IL&FS board has already shared its recommendations with the MCA, which in turn will seek the court’s approval, the person said. An IL&FS spokesperson declined to comment on the development. This move by the board follows the Supreme Court order on June 4, 2019, allowing the company to reopen and recast past five-year books of accounts to ascertain the extent of irregularities by the erstwhile management in case of IL&FS, IFIN and ITNL.

NCLAT had already approved the reopening and recasting of accounts of IL&FS and group companies but it was challenged in the Supreme Court, which was vacated by the apex court recently.

This move of completing the recast in a time-bound manner will also help in divesting assets in these companies, as the bidders would be able to take an informed, call-based decision on the revised audited accounts of the company, the person cited earlier said.

The board has already announced divestment of various businesses, including roads, which are in various stages of due diligence by companies that have participated in the expression of interest process. It has raised funds by selling renewable energy business. Stake sale in seven wind energy SPVs is in the final stage after Japan’s Orix has conveyed its decision to match Gail’s offer.

Last week, the board reviewed the progress on divestment of all domestic and overseas assets and decided to constitute a six-member empowered committee — including four directors Vineet Nayyar, CS Rajan, Bijay Kumar, N Srinivasan, and COO N Sivaraman — to discuss and finalise the asset-wise framework of resolution with lenders. The board also decided to allow the bidders for toll road assets to jointly monitor traffic data and assess the revenue stream.

The Economic Times reported

FE: IL&FS panel to explore loan recast options

29 June 2019: The Uday Kotak-led board of IL&FS on Friday set up a six-member committee for exploring debt restructuring of at least five identified entities, sources told FE. The committee, which includes board members Vineet Nayyar, N Srinivasan and CS Rajan, will meet bankers over the weekend to discuss the same.

The board, which met on Friday, has identified entities, including IL&FS Tamil Nadu Power Company, Road Infrastructure Development Company of Rajasthan, West Gujarat Expressway, Jharkhand Road Project Implementation Company, for debt restructuring.

The objective of this restructuring is to secure at least the principal payment of all outstanding debt, including dues to pension funds, one of the people with knowledge of the matter said. “Next two-three days we will meet with bankers. We are trying to restructure loans so that we reach sustainable debt level. The total outstanding in some cases now may be higher than sustainable level,” the source said.

The source added: “We are trying to bring the lenders on board, to see if they can agree to adjust on certain terms of these loans — such as the interest rate or the tenure. We’re also negotiating if lenders can write off certain portion of the debt.”

In case of Moradabad Bareilly Expressway, which had in May been reclassified as “green” from its earlier “amber” classification, the board is planning to modify earlier terms so that pension funds also get their dues. Bankers have already agreed to make changes to the terms of repayment, the source added.

Under the Reserve Bank of India’s new prudential framework for stressed asset resolution, once a borrower is in default, lenders must undertake a “prima facie review” of the account within 30 days. During this period, lenders may decide on the resolution strategy. In case of the above identified projects, lenders have time till June 30 to make provision of these as stressed assets or restructure the loans, the source said.

Following an order passed by the NCLAT in February, the government-appointed board of IL&FS classified its group companies into green, amber and red. The 55 companies categorised as “green” so far can fully service their debt; 13 “amber” companies can only service their debt to senior secured financial and operational creditors and 82 “red” companies are unable to service their debt altogether.

The Financial Express reported

ML: HSBC issues notice to IL&FS arm seeking its dues worth $145 million

27 June 2019: In a fresh hit for the lending major IL&FS, Hongkong and Shanghai Banking Corporation (HSBC) has issued a notice to the former’s arm ITNL Offshore Private Ltd asking it to pay 1 billion Chinese Yuan ($145 million).

A trust deed was signed by ITNL Offshore, IL&FS Transportation (ITNL) as the guarantor and HSBC as a security trustee in January 2018. 

In a regulatory filing, IL&FS Transportation said: “HSBC has issued notice dated June 19, 2019 to the issuer (ITNL Offshore) with a copy to the company (ITNL) that the RMB 1,000,000,000 7.50 per cent Guaranteed Notes due 2021 have become due and payable at their principal amount together with accrued interest to the date of payment.

Implying its inability of paying back the amount, ITNL said that HSBC may act against the the company and ITNL Offshore as per the clauses in the trust deed.

“As per the the notice and conditions stipulated in the trust deed, HSBC may, at its discretion and without further notice, institute such proceeding against the issuer and/the company (as the guarantor) to enforce the terms of the trust deed and,or notes and/or security documents thereto (as the case may be),” it said.

The liquidity crisis in Infrastructure Leasing & Financial Services Limited (IL&FS) and its group companies including ITNL came to light when IL&FS first defaulted on a commercial paper in September last year, which have raised questions on the actual liquidity status of the country’s NBFC sector.

Following the incident, the group and its erstwhile management has been under the scanner of investigative agencies and an interim IL&FS board has been installed headed by Uday Kotak and the matter is in the National Company Law Appellate Tribunal. 

More and more rot has been unearthed as audit firms and credit rating agencies too have been found veiling the crisis in the lending major.

As reported on