The new board of debt-laden Infrastructure Leasing and Financial Services (IL&FS) could pitch for a government bailout, according to a Mint report. This is on the lines of what the US government had done following the 2008 financial crisis after the fall of Lehman Brothers.
Cash-strapped IL&FS' failure to raise Rs 4,500 crore via a rights issue may force the government to step in for a second time, after it superseded its board in September and replaced it. The board is now led by veteran banker Uday Kotak.
While details of the proposal are still being finalised, sources said it could be akin to the rescue plan under the Emergency Economic Stabilisation Act after the 2008 crisis.
The failure of IL&FS' rights issue, which was open from October 5 to October 19, was a setback to the group and will make way for more repayment defaults due to the liquidity crisis it is currently facing, a sources told the paper.
Another source pointed out that the company's new management and board members had been appointed recently and did not get enough time to reach out to the group's shareholders.
"We couldn't carry out the required roadshows, brief all classes of shareholders about the prices, timing and benefits of subscribing to the issue. The rights issue was heavily undersubscribed," the second source told Mint.
A government bailout is just one option and many other avenues have opened up now that it is apparent that the group is faced with huge issues, people in the know said.
"We can raise money through a major line of credit, which will be much easier because lenders now understand that government is backing us and so the likelihood of their loans going to waste is much lower," a source was quoted as saying.
Bailout programme TARP
After Lehman Brothers' collapse, the US government started a programme called Troubled Asset Relief Program (TARP) to enhance liquidity of secondary mortgage markets by purchasing toxic assets and equity from financial institutions.
Under this programme, companies lost some tax benefits, faced limits on executive compensations and were prohibited from giving bonuses to their top 25 highest-paid executives.
If a TARP-like programme is adopted in India, banks will pay a dividend to the government and will buy back illiquid securities from the government after a particular time period.
"The programme can only be designed after discussion with regulators. It may also require a parliamentary approval. The board feels that the company will need a repayment moratorium for at least a year from now, by when asset monetisation plan will start showing results," a source told the newspaper.
Note: This article had wrongly mentioned that the US had bailed out Lehman Brothers in 2008. The error has been rectified.
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