Though it is early days, some luck, and timely action by the government in asking PSU financial institutions to provide credit to NBFCs, ensured that the IL&FS collapse didn’t spiral out of control into a Lehman-style contagion. A strategic default by IL&FS SPV Jharkhand Road Projects Implementation Company Limited (JRPICL), however, could play havoc with India’s infrastructure lending.
Infrastructure projects, by their very nature, are difficult to finance, and one reason is that there isn’t much collateral to begin with. While, in a road project, for instance, the land always belongs to the government, an SPV structure offers a solution. Since, barring unforeseen circumstances, the annual revenue stream from a road project will continue, a good idea is to put it into an escrow account with strict guidelines on how this money is to be used, for salaries, maintenance, repayment to lenders, carpeting upgrades, etc. Once such a structure is in place, it doesn’t even matter if the parent firm goes belly-up since the interests of lenders are fully secured.
Indeed, while some ratings firms were, rightly, grilled for their AAA ratings to IL&FS without paying attention to the group-level debt and the ability to service this, in many cases, the allegations were unfair since the ratings firms were rating ring-fenced projects like JRPICL. Normally, a JRPICL will never default since the money can never be diverted, but the IL&FS Group, under a government-appointed board, had NCLAT’s blessings to not pay creditors till it came up with a plan to deal with its `106,000 crore debt; it is not clear, right now, how many other IL&FS group firms/affiliates will do similar strategic defaults.
While giving IL&FS time to work out solutions and agreements with lenders makes sense at a group level, the implications for lenders to projects like JRPICL are large. Since it is now possible for courts to allow such protection from lenders—even if for limited periods of time—this means lenders can no longer find comfort in ring-fenced structures, but will have to look at the health and past behaviour of the parent company. In other words, a perfectly good structure that has helped raise funds is now under question.
It is not just in this, but in other cases, too, that the government has taken action that can have unfortunate consequences. When the NSEL scam broke and investors claimed they had lost `5,600 crore due to this, the government decided it would get the money back from NSEL’s cash-rich parent FTIL (goo.gl/XJ5C16). Apart from the fact that it was not clear that those who lost their money were innocents—those lending money on NSEL knew this was illegal and the government has, since, filed cases against several of them—the move was a bad one, since, it was against the principle of limited liability. Under this, an investors’—in this case, FTIL—liability is restricted to the value of equity. In which case, while FTIL’s liability in the NSEL case was just its equity investment in NSEL, forcing a merger with NSEL—as the government wanted—meant all of FTIL’s profits and other assets were being sequestered. At some point, sooner rather than later, the government needs to examine the implications of these moves.
Source: Financial Express, January 28, 2019