Refinance and list not wind up il&fs

Refinance and list not wind up il&fs

Develop bond market to fund infrastructure. The government is right to supersede the board of Infrastructure Leasing & Financial Services (IL&FS), given the large size and exposure of insurance, mutual funds and provident funds to the entity. Its troubles should not spread to other non-banking financial companies and destabilise the markets. The new board must swiftly come up with a resolution plan and pay off its debt. There are two options: infuse fresh capital to rescue the company or liquidate IL&FS. It makes sense for IL&FS to have fresh lines of credit and raise additional capital via a rights issue. LIC and SBI, which hold 25.34% and 6.42% stake respectively, would be more willing now to participate in the rights issue and offer fresh lines of credit. The government must also pay its dues to IL&FS, which claims it is owed ₹16,000 crore by concession-granting authorities. This would enable IL&FS service its debt. Listing the company would also improve its disclosure standards that have been found wanting.

IL&FS is a private company, but has an aura of a PSU, making it easy to seek and give favours at political and bureaucratic levels. That must end. Its financing model that entails using short-term borrowings to fund long-term infrastructure projects is unviable. It partly explains why a systemically important non-deposit-taking, core investment company has brought the markets down. No NBFC is able to raise funds now and they are unable to service their debt. Infrastructure must be financed by the bond market, rather than loans. The market is shallow, with no ready demand for long-tenure bonds. Reform should focus on deep and fully liquid markets for bonds.

While the new board gets busy with rescue, investigating and regulatory agencies must focus on what went wrong. But a crisis of this nature puts the spotlight again on the entire framework of corporate governance, particularly the institution of independent directors. Not enough has changed, evidently, after the Satyam scam. India has a distance to go to make independent directors sufficiently accountable.