Bankruptcy proceedings have been initiated for the first time against an IL&FS group company, a Tamil Nadu-based thermal power unit. Lenders to the entity have taken it to the National Company Law Tribunal (NCLT) after it defaulted on loan payments.
The parent company, IL&FS itself, is facing a massive cash crunch and will default on loan repayments by this month-end unless its shareholders come forward with cash by way of equity or debt infusion. At a consolidated level, IL&FS has a debt of Rs 910 billion, making it one of the most indebted of corporate groups in the country.
IL&FS Tamil Nadu Power Company Ltd operates a 1,200 Mw imported coal-based plant at Cuddalore. Around Rs 106 billion has been invested in the project, financed by Rs 60.8 billion of loans from public sector banks (PSBs) and Rs 45.6 billion in equity by IL&FS Energy Development, a group subsidiary.
The project saw a cost overrun of about Rs 42 billion. The first phase was commissioned in September 2015 and the next one in April 2016. The decision to take the company into insolvency proceedings was taken by Power Finance Corporation with the other PSBs. An IL&FS official said the lenders did so on “technical reasons”, based on the restructuring of its term loan agreements.
The bankers said as the promoter entities were themselves facing a liquidity crisis, it would be difficult for IL&FS Tamil Nadu to meet its financial commitments, due this month-end. The power company reported a loss of nearly Rs 2.4 billion on revenue of Rs 30.3 billion as of end-March. “Sending the company to NCLT will save everyone a lot of hardship,” said one banker.
Once the project is admitted to the NCLT process, the lenders will have to make 15 per cent of provisioning for the loan, by Reserve Bank of India (RBI) regulation.
In its discussion with the banks, the company blamed rising coal prices in Indonesia for impacting its cash flow. Besides, it does not have a power purchase agreement in place for the second phase and had to sell electricity in the spot market, where the prices are currently below its cost.
RBI has started an audit of IL&FS’ account books and banned its subsidiary, IL&FS Financial Services, from access to the commercial paper market after a default in loan repayment at August-end, as well as last week. To raise money, IL&FS is talking to real estate funds for selling its headquarters at the Bandra Kurla Complex in Mumbai for Rs 15 billion. Further, it has sought bids for its financial services arm.
It is also in talks with its main shareholders, State Bank of India and Life Insurance Corporation, to raise Rs 30 billion in loans and another Rs 45 billion by way of a rights issue. If both or either does not happen, the company would default on commitments to its subsidiaries, with spreading implications.