The IL&FS Crisis – From Mayhem to Makeover

IL&FS Crisis

September 2018 brought a major earthquake/tsunami in the Indian Stock Markets. The major reason, however, was the default of IL&FS. It’s October 2018 and the markets are still not out of the after effects of the major debacle of India’s Lehman version.

September 2018 became a month when the markets completed the decade of the Lehman Crisis of 2008, there were many articles, blogs, write-ups about what India did and didn’t learn out of the global crisis.

But no one knew that an India-original series of default is in the making.

The story in short:

The NBFC major Infrastructure Leasing and Financial Services (IL&FS) Group in September 2018 defaulted on deposits, commercial papers, non-convertible debentures. This was followed by simultaneous rating downgrades and default in other financial instruments. A cycle of crash took place with massive sell-off in shares of NBFCs.

As a result, came the redemption pressure in mutual funds holding such financial instruments. Sentiments of Stocks, money, debt turned negative. Many systematic risks unfolds happened leading to good quality debt papers getting sold at huge discounts to meet the redemption demand.

The lazy bears of stock market came into action making the markets take a blood-bath during a single day.

The Single Day Blood Baths in Indian Markets:

The Single Day Biggest Blood Baths witnessed by Indian Stock Markets’ BSE SENSEX are as under:

Sr Date Sensex Drop by
1 February 1, 2008 834 points
2 February 2, 2018 840 points
3 January 6, 2015 855 points
4 July 6, 2009 870 points
5 January 22, 2008 875 points
6 March 3, 2008 901 points
7 March 17, 2008 944 points
8 October 24, 2008 1071 points
9 January 21, 2008 1408 points
10 August 24, 2015 1625 points

There is no end to the drops and bloodbaths that happened after the IL&FS crisis took place, the #Sensex fell continuously fell from 38,000 levels to almost below 34,000 in September-October 2018.

The rise and fall of IL&FS:

On the lines of Rome was not built in a day

Incorporated in 1987, once jointly promoted by Central Bank of India (CBI), Housing Development and Finance Corporation (HDFC) and Unit Trust of India (UTI), the company continued to attract investments from other renowned dignitaries such as Life Insurance Corporation of India (LIC), State Bank of India (SBI), Abu Dhabi Investment Authority (ADIA) and Orix Corporation of Japan over the years.

IL&FS for 30 years has been a helping hand for development and financing of projects of about 1.8 lakh crore. Going by the website of IL&FS, one can see that even its transport subsidiary is building about 14000 lane kilometers in 30 or more projects.
India’s 9 km longest road tunnel, the Chenani-Nashri Tunnel is one of the remarkable built up by IL&FS

But Hiroshima and Nagasaki were destroyed in a day
As of now, the group is a cause of concern for every investor in and out of the loop. The outstanding debt stands to INR 91,000 crore, out of which INR 57,000 crore is from the Public Sector Banks.

As of 2017-18 IL&FS has 169 group companies which include subsidiaries, joint venture and associated entities
The Impact

Over the years, the mutual fund industry has grown in India. NBFCs have been favorites of Mutual Fund Houses so far. With the IL&FS default, the redemption pressures also increased which came in the form of a scare for the Stock Markets. As many reputed fund houses started selling Debt instruments of various companies, the confidence of the bulls started turning into carnage which reported the biggest fall in a day in the history of stock markets.

The sell of Dewan Housing Finance Limited (DHFL) commercial papers by DSP triggered panic in the stock markets and became the reason for further sell-off in the markets.

In summation, the IL&FS Crisis resembles the 2 sides of the same coin.

The Positives:

Firstly, let’s take the positives for long-term investors:

  • As the markets fell, the small investors who wanted to invest small amounts in good stocks, have the opportunity to do a value-buy – Buying quality stocks at a cheaper price
  • Existing investors can switch to the Accumulation mode, purchasing more at every fall, a value buying proposition
  • Stock markets run over many such bloodbaths over the years and simultaneously also stabilize with bulls in motion, so an investor should not fear to hold on the quality stocks
  • The fall has set the stage for the new budding investors to enter in the markets. It is a time to buy quality stocks at cheaper rates and also at lower levels of Sensex and Nifty50

The Negatives:

  • Inefficient and liberal reporting as well as audit standards
  • The early signs of warning of the upcoming crisis still remain a question
  • The Key management’s lack of responsibility to avoid big impact in the form of crisis
  • Risk of sort of concentrated portfolios of mutual funds
  • SEBI and Government intervention should have come in much earlier to avoid the crash that happened

From Mayhem to Makeover of IL&FS Crisis:

IL&FS Crisis came in as a mayhem for the markets and the investors fraternity almost lost the confidence in the markets. Even the small amounts of SIPs were a question at the time.

Thankfully, Govt. Intervention and the creation of a new board with the leadership from the leaders of the industry like Mr. Uday Kotak helped mildly to regain the lost confidence. The new developments from the lessons learnt are in the process and utmost care is being taken to ensure that no such debacle takes place in the years to come.

At the same time, investors need to take care that there is no focused concentration on just a couple of segments of the markets while making investments in the markets.

Mutual Fund houses and regulators of the markets should also ensure that a fall in a particular company or sector does not create panic for Investors portfolio, stricter norms of disclosure and responsibilities of the key management personnel should be made more transparent.

Well, not to forget a piece from the past:

The stock market crash of 1865.

The back bay Reclamation shares fell from 50000 to 2000 parallelly Bank of Bombay fell from 2850 to 87. Prominent Merchant Princes went bankrupt. The population of Mumbai decreased from 816000 to 644000 between 1864 to 1872 due to a crashed economy.

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