Sucheta Dalal :Where Is IL&FS Headed? (9 Feb)
Sucheta Dalal

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Where Is IL&FS Headed? (9 Feb)  

Finance minister (FM) Jaswant Singh’s interim budget speech said that the Industrial Development Bank of India (IDBI), recently converted into a bank, will be designated the “lead developmental finance institution” and would coordinate an effort to make available timely finance at reasonable rates. This is considered essential to sustain the high economic rate. In making this transition, IDBI would be supported by the government. The FM’s brief and rather cryptic statement on these lines has lent itself to several speculative interpretations. Does it mean that the FM sees a clear role for development financial institutions, but thinks that a ‘designated’ bank is better suited to take over the role? At the same time, he announced the demise of the beleaguered IFCI, but added an element of customary confusion by suggesting that instead of ceasing to exist, it would be stronger after its merger with Punjab National Bank. The FM also said that State Bank of India and Infrastructure Development Finance Company (IDFC) would work closely with IDBI to lead long term project financing. But that too has raised more questions. Had the FM forgotten the original infrastructure development institution, which goes by the name of Infrastructure Leasing & Financial Services (IL&FS)? Of course, he may have had good reasons to forget. IL&FS has done more of other things than infrastructure financing.

Not very long ago, there was talk about merging IL&FS with IDFC, but since the latter had seriously objected to such a move, the proposal seems to have gone into cold storage. But where does that leave IL&FS? We will come to that later.

Although the FM’s emphasis on a development finance role for IDBI has caused some confusion, the top brass at the institution see no problem. According to sources, IDBI is financially still not out of the woods, and would need a bailout to clean up its books and resolve humongous problems such as Enron’s Dabhol power project, which show no sign of going away. Insiders say that the size of the government bailout may have to be in the order of Rs 8,000 crore, but it would be structured as a bond issue or a financial instrument that does not involve a cash outgo. The money may even come out of the Rs 50,000 crore that the FM has earmarked for funding core sector projects at concessional interest rates.

My sources also say that the FM’s speech does not change any of IDBI’s future plans, which include a merger with a nationalised bank, with or without an additional merger with IDBI Bank. They think that this hybrid bank will be able to successfully combine the role of a development finance institution and a commercial bank with a retail network that does commercial lending and runs a treasury operation. Also, that the IDBI Bill hasn’t tied the newly minted bank down to the misguided suggestion of the Standing Committee of Finance that it must focus on development finance and eschew retail banking.

According to the plan, IDBI’s Mumbai office will be the headquarters of the new organisation and will retain its sharp focus on development banking, without major reinvention and reorientation of itself, its staff and its functions. The retail banking network and skills will come entirely from the commercial bank/s that it merges with.

As of now, all options are open to IDBI. But whether its revival will go according to plan will depend entirely on which bank it is merged with and who leads the institution into its complex new role.

As for IL&FS, the government seems to have decided that its hydra like growth into a multitude of financial businesses needs to be checked. Although some of its shareholders have been pushing IL&FS to divest a few businesses, the first real move has happened with the surprise takeover of its mutual fund schemes by UTI Mutual Fund.

There is an interesting background to this too. For almost a year now, right until the day it sold its schemes to UTI, the Dutch insurance giant, Aegon was doing a due diligence of the mutual fund with a view to acquire a 49 per cent stake in IL&FS’s Asset Management Company. While the Dutch couldn’t seem to make up their minds, UTI Mutual Fund snapped up its numerous schemes, minus its expensive staff and Asset Management Company (AMC).

The hush-hush move, that followed a quick due diligence by Pricewaterhouse Coopers on behalf of UTI, has most of IL&FS’s mutual fund team in a state of shock. Our sources however say that UTI chairman M Damodaran ensured that the jolt of the sudden merger on the mutual fund was cushioned by personally calling up each of the top investors to tell them about the deal, assure them of an even better performance and request them to stay on with the schemes. Most of them, we understand, have agreed to stay on.

With IL&FS’s mutual fund under its belt, can UTI not be eyeing its brokerage outfit too? Currently, IL&FS is among the most aggressive clearing brokers in the market and as a finance company, it is one of the biggest providers of IPO and broker funding. Acquiring it will be a coup for UTI and its top brass doesn’t deny the possibility. Similarly, IL&FS is expected to shed its many varied businesses such as Schoolnet.

Where would that leave the core institution? Well, mainly as an infrastructure development intermediary and consultancy. In line with this, it announced its appointment as advisor for providing project development and financial advisory to the Rewas Aware Port in Maharashtra, on the very same day that it shed its mutual fund schemes. Once IL&FS is more clearly focussed on infrastructure, rather than leasing, fund management, stock broking and financial services, it will be much better placed for a merger with IDFC, if the new government wants to pursue the original plan. After all, IDFC was only created because the then finance minister P Chidambaram wanted a development finance institution headquartered in his home state of Tamilnadu.

-- Sucheta Dalal