IL&FS: A tale of Bankruptcy & Reincarnation

Another detrimental incident took place in Indian Financial market on Aug 28th when IL&FS, an infrastructure project finance company, defaults on repaying a few hundred crores on their commercial paper but manages to pay the same after 2 days, but later again on month of Sep IL&FS which has borrowed ₹91,000 crores earlier had defaulted in repaying debt on maturity. Speculation of illiquidity created tremendous panic resulting in continuous fall of Indian Indices. Surprisingly, a major loop hole of credit ratings came under scanner of Government as debt instruments of IL&FS were rated as AAA, AA+ etc. in the past couple of months. IL&FS filed an application with the NCLT (National Company Law Tribunal) seeking insolvency cover for itself and 40 other group of companies which was later approved as per Sec 230, Companies Act which will help IL&FS to raise capital from the market & to sell some of its assets for debt repayment. On 30th Sep 2018, a board meeting took place in IL&FS where Mr Hari Sankaran, VC & MD, IL&FS mentioned few points mentioned below:

  • Outlines of group restructuring plan in a comprehensive manner.
  • Appointment of a specialist agency to take the plan forward
  • To implement asset monetisation plan.

On 1st Oct 2018, the government took over the control of IL&FS after getting approval from Insolvency & Bankruptcy court in Mumbai. NCLT allowed government to form a new board & asked for a plan to be submitted by 15th Oct 2018 to get out of the debt trap.

Today, On 4th Oct 2018, the new board was formed which will be headed by Uday Kotak (CEO & MD of Kotak Mahindra Bank) as Non-executive Chairman, along with five others Girish Chandra Chaturvedi (ICICI Bank Chairman), GN Bajpai (former head of SEBI), Vineet Nayyar (Chief of Tech Mahindra) & Malini Shankar & Nanda Kishore (former IAS Officers). The new board members positions are given below,THE_NEW_IL_FS_BOARD__2___1_

Source: Bloomberg

The new board has shown concern over the complexity of 348 IL&FS entities. The quantum of debt obligations by the company is enormous; the board is looking into to all the secured, unsecured and even off-balance sheet financing raised by the company. This will be the first private company to be rescued by the Government since Satyam Computers in 2009. Meanwhile Mr. Kotak has addressed the press:

We will be talking to shareholders at an appropriate time. The current focus today was much more about operating under NCLT process. At the same time taking more immediate steps which needed urgent attention of a board with an open mind”. – Uday Kotak, Non- Executive Chairman, IL&FS

Revival plan for IL&FS, India’s giant project finance company are on its way by the new board members & we have positive expectations for that.

Source:Bloomberg, Moneycontrol

Bonds Vs Debentures: What’s the difference?

Very often in this financial market, people used the word bonds and debentures as the same, but they are both distinctive. Yes! They are both debt capital but there are   differences between them.

 

What is a Bond? : A Bond is debt instrument in which an investor provide loans to an entity (a corporate or government) which they borrow the fund for their need and pays the lender a fixed or variable interest for definite period of time. Owners of the bond are debt holder or creditor of the borrower.

 

  • It is typically a loan that is secured by a specific physical asset.

 

What is a debenture?:  A debenture is also a type of debt instrument that is only backed up by creditworthiness & reputation of the issuer.

 

  • It is not secured by physical assets or collateral. It is secured only by the issuer’s promise to pay the interest and loan principal.

 

Hence this is the main difference between them, otherwise both are debt instrument.