After IDBI Bank, LIC now has to bail a huge infrastructure lender out

• LIC is the largest shareholder in the cash-strapped IL&FS, with a 25.34% stake.
  
• The state-owned insurer has reportedly decided to pump ₹40 billion into IL&FS through the purchase of non-convertible debentures as part of a ₹90 billion capital-raising initiative.
  
• IL&FS had around ₹910 billion in outstanding loans at the end of 2017-18, ₹573 billion is in the form of loans to Indian banks - most of which are state-run.

Last month, the Indian government cleared the proposed acquisition of a 51% stake in the debt-laden IDBI Bank by Life Insurance Corporation of India, a state-owned insurer, touting the deal as a “win-win” for both firms. Despite concerns about the use of premium income from policyholders for bailing out a struggling government-owned bank, the deal is set to go through with LIC increasing its stake on a gradual basis.

Now, LIC has decided to bail out another cash-strapped “systemically important” firm, Infrastructure Leasing & Financial Services (IL&FS) - which is India’s largest infrastructure finance company. The infrastructure lender that routinely invests in government projects like highways, ports, bridges and dams.

LIC is the largest shareholder in IL&FS, with a 25.34% stake. It will pump ₹40 billion into IL&FS through the purchase of non-convertible debentures as part of the infrastructure lender’s ₹90 billion capital-raising initiative.

In addition to the debenture sale, IL&FS is divesting its stake in 25 projects to repay its debts. It had around ₹910 billion in outstanding loans at the end of 2017-18, ₹573 billion is in the form of loans to Indian banks - most of which are state-run. Unless it makes good on its immediate debt payments, then its default will lead to an increase in non-performing assets, something that the Indian government is desperate to avoid.

How did IL&FS get here?

IL&FS rose to prominence in the last few decades as the government, which was battling budgetary restraints, outsourced its infrastructure spending obligations to the company. IL&FS, which has a byzantine corporate structure with 169 subsidiaries, reached its current state of high debt and illiquidity owing to a lack of regulatory oversight and inadequate due diligence before spending on projects.

As the prospects for the infrastructure and power sector declined following the financial crisis, the company’s projects were either stalled or faced huge cost overruns. Hence, the returns for IL&FS’s subsidiaries dried up and its debts continued increasing.

The shareholders of IL&FS will now meet at the end of the month to vote on the fundraising plan. Once approved, the board of the company will establish a timeline for the sale of debentures and assets. However, the company needs more than just a capital infusion. It needs an overhaul of its approach to risk management and extending loans to its subsidiaries. Otherwise, it will find itself in a similar position again in a few years.