What Is The IL&FS Crisis And How It Is Linked To Your Money: 10 Points
IL&FS crisis: The ratings downgrade of IL&FS led to significant write-offs in mutual funds, which led to panic among investors
New Delhie: Infrastructure Leasing & Financial Services or IL&FS is in deep trouble. After the corporate affairs ministry moved the Mumbai bench of the National Company Law Tribunal, the NCLT has named six people to take over the board and management of the major infrastructure lender to defuse the crisis. The IL&FS group has a debt burden of over Rs. 90,000 crore. Panic among investors set in after the company defaulted on short-term debt repayment a month ago, followed by more defaults that eventually led to a ratings downgrade. The IL&FS crisis is likely to affect people who have invested in mutual funds.
Here’s your 10-point cheat sheet on the IL&FS crisis:
- Finance Minister Arun Jaitley has said the government will take all measures to ensure that adequate liquidity is provided to non-banking financial companies or NBFCs, mutual fund houses, and small and medium enterprises or SMEs, after the stock and bond markets were rattled by the IL&FS crisis.
- The ratings downgrade of IL&FS led to significant write-offs in mutual funds, which led to panic among investors as they would like to see their liquidity intact and not get stuck with negative returns.
- Debt mutual fund investors and their managers have been caught off guard because the debt securities of IL&FS group enjoyed the top rating A1+ a little over a month ago. But late last month the company was downgraded to D — that swift development would not have given enough time for investors to work out a safety plan.
- Investors are questioning whether debt mutual funds are safe at all now. Debt funds go to a mix of debt or fixed-income securities and they usually have a fixed maturity date and pay a fixed rate of interest, considered to be safe.
- But the massive exposure of mutual funds in IL&FS securities and the company’s inability to service its debts has rattled people who have invested in those instruments.
- An escalation of panic may lead to people withdrawing their investments from fund houses, leading to a destructive ripple effect across sectors.
- Of the Rs. 90,000 crore debt that IL&FS group is burdened with, Rs. 57,000 crore is owed as bank loans, mostly to public sector lenders.
- LIC is the largest shareholder with a little over 25.34 per cent stake in IL&FS. Orix Corporation of Japan owns 23.54 per cent. Abu Dhabi Investment Authority holds 12.56 per cent, and Housing Development Finance has 9.02 per cent. Central Bank of India and State Bank of India hold 7.67 per cent and 6.42 per cent, respectively.
- The suspended management of the IL&FS cannot represent the company anywhere, the National Company Law Tribunal has said.
- The new board, which includes banker Uday Kotak, will meet before October 8 and submit a roadmap before the next hearing of the tribunal on October 31.