As an earlier article showed, the roots of the IL&FS financial crisis lie in its limited accountability. It was not under the full and continuous scrutiny of the Reserve Bank of India (RBI) as banks are. And it was not under the continuous rigorous scrutiny of Securities and Exchange Board of India (Sebi) either as listed companies and their managements generally are. Only the listed entities reported to Sebi. The parent’s books, and group exposure was never come under scrutiny. The emerging saga of defaults is a bad consequence of the same.
A shadow of this is seen in other areas as well, like the IL&FS shareholding pattern, which is worth a closer look.
One important thing that stands out is that no one holds a 26 per cent stake in the company. This percentage has a legal significance, termed as significant minority stake. Some of the privileges given to a 26 per cent stakeholder, apart from the compulsory board seat, include regular and systematic flow of relevant information and assent for vital matters like capex, borrowings, joint ventures, equity structure changes and so on. In short, there is a great deal of accountability to a 26 per cent shareholder. Thus, technically, and legally, there is no anchor investor.
The absence of a 26 per cent shareholder in the equity pattern is therefore just another evasion tactic. The current ownership of IL&FS is vested 25.34 per cent with LIC and 23.54 per cent with Orix Corporation, Japan. Media reports suggest that Orix did try to assume the role of anchor investor. It wanted to pick up the stake of equity holders who wanted to exit at some point of time or the other. But, India’s regulators perhaps did not permit this.
Other notable domestic shareholders include HDFC, SBI and Central Bank of India. One very high-profile overseas investor is Japan’s Orix Corporation, which is part of a very large group with diverse interests.
It is interesting to note that Orix was keen to acquire Central Bank of India’s stake in IL&FS in 2014, at a time when the bank had officially planned to divest its stake for financial reasons. However, this move was blocked. Even last month, media reports indicated that Orix again proposed to raise its stake through taking up unsubscribed portion in the Rs 4,500-crore share sale meant for existing investors. As of now there is no positive move on this plan of Orix.
In blunt terms, Orix seems to be getting blocked in its aim to get a higher stake which would have nuisance value and necessitate tolerance of external scrutiny and guidelines. Orix, in addition, is a major subscriber to preference shares and also had a joint venture with IL&FS where it bought out the Indian partner.
Now what is more interesting is the background of Orix. It was, at that point, an advisor to the Japanese government on its LNG imports – Japan has traditionally been among the largest LNG importers.
Just at this juncture, since around 2013 the Rangarajan committee had been recommending increased gas prices, a proposal which was among the earliest struck down by the current government once it assumed responsibility in 2014. While the Rangarajan committee was tabling its recommendations, Orix was simultaneously advising one of the consistently largest importers on long-term pricing at a higher benchmark of $15-17/mmBtu.
By itself, each action need not excite caution, but in conjunction it does. Just when the Rangarajan committee report was being finalised, the Japanese government was being advised on long-term contracts which would influence global pricing trends. What the new benchmark would have done is again a matter of looking at the compasses. Qatar’s Ras Gas, the main gas supplier to India, was then (naturally) very keen to get an upgraded pricing.
Subsequently, two developments took place. The newly (re)elected government of Shinzo Abe in Japan whittled down Orix’s role in negotiating LNG imports. At the same time, the Modi government too decided not to accept the Rangarajan Committee’s recommendations.
Thereafter, the Modi government, in fact, renegotiated better prices from the existing levels (not the elevated levels) in 2016.
Maybe there is nothing to all this, except for the fact that consistent denial of higher stake to Orix then and now does beg for closer scrutiny. After all, in the current environment, IL&FS needs all the money it can get. However, any lifeline now must now have greater transparency and accountability.
The resignation of Ravi Parthasarathy, the non-executive Chairman, in July 2018, just shortly before the defaults and other issues emerged, is likewise another possible indicator that things looked to be getting out of hand. Parthasarathy had joined IL&FS in 1987 and had served in different capacities, including MD and Executive Chairman.
Given the massive impact of IL&FS on the financial system – at least eleven fund houses hold some paper of some IL&FS entity across different schemes and the aggregate amount right now is Rs 2,500 crore and still counting – it is imperative that prompt action is done. Defaults means yields go up immediately, the security price falls and therefore the scheme NAV gets negatively impacted. The contagion has to be contained and this entire saga must be taken as a clear case study to pre-empt any future attempts to bypass control, scrutiny and accountability.
