Why Did Indian Govt Not ‘Save’ IL&FS And Avoid Pain & Destruction?

The Quint’s Founder-Editor Raghav Bahl explains the govt’s folly of not saving IL&FS – and its consequences.

6 min read

Imagine you are just one answer away from a million dollars on Kaun Banega Crorepati (Indian TV’s version of Who Wants To Be A Millionaire). The towering anchor asks in a soft baritone, amplified by electronic reverb, using intriguing pauses, creating tantalising tension:

Q: Bharat Sarkar (Indian Government) is staring at three failed companies. Which one will it bail out?

A: The sarkari (publicly-owned) company

B: The private but systemically critical company

C: The merely private company

D: None of the above

The Quint’s Founder-Editor Raghav Bahl explains the govt’s folly of not saving IL&FS – and its consequences.
Disclaimer: Design inspired by the show Kaun Banega Crorepati, in keeping with the theme and text of the article’s introduction.
(Graphic: Shruti Mathur / The Quint)

You suddenly relax, a million dollars gleaming in your eyes. Heck, what an incredibly easy question for a million bucks. You lean forward, supremely confident, and answer in a measured tone:

“A, the sarkari or publicly-owned company”.

Anchor (hissing his response): Afsos, galat jawaab! (Sorry, wrong answer). C, the merely private company, is the sahi jawab (correct answer).”

The Quint’s Founder-Editor Raghav Bahl explains the govt’s folly of not saving IL&FS – and its consequences.

You slump, disbelieving. It must be a clerical mistake. Then you spring upright, determined to challenge the anchor:

“No sir, you’ve got it wrong. Our statist policymakers will never rescue a ‘merely’ private company and allow a sarkari (publicly-owned) one to go bust. It’s just not possible. I dare you to name these three companies.”

Anchor (amused): “A is IL&FS; B is Yes Bank; and C, the correct answer, is Satyam Computers, now called Tech Mahindra. If you still don’t believe me, perhaps I should tell you their stories?”

The Quint’s Founder-Editor Raghav Bahl explains the govt’s folly of not saving IL&FS – and its consequences.

“Here, listen.” (the soft baritone took on a harder tone)

What the Govt Could’ve Done Instead Of Pulling The Plug On IL&FS

Nearly two years ago, on a fateful day in September 2018, the government pulled the plug on Infrastructure Leasing & Finance Company (IL&FS), which was groaning under a debt of over Rs 90,000 crore. Bureaucrats asserted “it’s a private entity; the government should not back-stop its defaults; let the bankruptcy system work itself out”.

That was sheer folly. IL&FS was considered a quasi-sovereign entity, owned and controlled by a clutch of public sector giants, including State Bank of India (SBI) and Life Insurance Corporation (LIC). It had already defaulted several times in the weeks leading up to the crash. It needed to repay a relatively paltry Rs 34,000 crore until 31 March 2019. Its operating cash flow was negative, but it needed to be saved –– otherwise the contagion would be devastating. And it was.

The markets wiped out over Rs 10 lakh crore (USD 150 bn) of investors’ wealth.

The credit economy gummed up. Public sector banks had to provide for a direct exposure of Rs 40,000 crore in term debt. Provident and pension/insurance funds saw an additional Rs 30,000 crore evaporate. NBFCs, mutual funds and others were forced to write off the balance Rs 20,000 crore.

(The baritone softened again) Afsos, galat decision (tragic, it was the wrong call).

A USD 3 trillion economy should not have been held to ransom for a few billion dollars of liabilities.  

And now, two years out, we also know that Rs 57,000 crore out of the Rs 99,000 crore of debt is being recovered. If only the government had infused those Rs 34,000 crore upfront instead of pulling the plug…


Yes Bank’s ‘Creative Destruction’

Anyway, let me jump straight to Yes Bank. Once upon a time, it was a poster boy of India’s private banks –– until it imploded upon the alleged avarice and crimes of its suave co-founder. Forensic enquiries showed a frightening erosion of the loan book. Over Rs 2 lakh crore (USD 30 bn, or 1 percent of India’s GDP) in bank deposits were at risk. The government faced a Hobson’s choice – if it intervened, after having let IL&FS, a quasi-sovereign entity, go belly-up, it would be accused of ‘selection bias’ and nepotism; if it stood still, a fragile financial system could crack to smithereens.

Mercifully, the government marshalled its majority-owned battle-scarred titan, SBI – ahem, the same guy who had looked away as IL&FS blew up even though SBI was a principal shareholder of the defunct company – to jump in and rescue Yes Bank. SBI shovelled in a billion dollars, vowing to stay invested with a minimum 26 percent stake to calm nerves. A clutch of other punters put in more cash, ending with a couple of billion dollars raised from a public offer.

Earlier, equity and bond holders were decimated, in a classic play of capitalism’s ‘creative destruction’.

And lo behold, this week, Yes Bank posted a tiny profit, signalling it was off the ventilator.

(Softening his baritone, the anchor said): “Aur is tarah (in this manner), B, the private but systemically critical company, was saved. However, now I will take you back ten years, to the story of C, the ‘merely’ private company, but one that was rescued even more aggressively.”


Satyam (Dictionary Meaning = Truth) Was a Billion-Dollar Rip-Off

Satyam Computer Services Limited was a multi-billion-dollar company spanning sixty-seven countries and six continents (it served over 650 global companies, 185 of which were Fortune 500 corporations).

On 7 January 2009, its founder, Ramalinga Raju, faxed a shocking confession to the stock exchanges:

“The Balance Sheet carries as of September 30, 2008 inflated (non-existent) cash and bank balances of over USD 1 billion. The gap in the Balance Sheet has arisen purely on account of inflated profits over a period of last several years. I am now prepared to subject myself to the laws of the land and face the consequences thereof.”

All hell broke loose.

The Satyam stock tanked 78 percent, and Indian markets fell over 7 percent before the stock was swiftly removed from the Sensex. Later that evening (IST), the New York Stock Exchange halted trading in Satyam. Broking firm CLSA called it “India’s Enron, an accounting fraud beyond imagination (and) an embarrassing and shocking episode in Indian corporate governance.”

On the third day, India’s Company Law Board used its exigent powers to sack the entire board of Satyam Computer Services; but unlike in the past, the government did not nationalise the company or take direct charge. “The current board has failed to do what they are supposed to do. The credibility of India’s IT sector should not be allowed to suffer” –– saying this, the Manmohan Singh government appointed a couple of private sector professionals with unimpeachable integrity and global credibility.

Unfortunately, Satyam’s shares had fallen from a high of Rs 544 to Rs 12, so the average six-month price was working out to nearly five times the current scandal-hit market price of the company.

It was simply impossible to sell Satyam under the Security & Exchange Board’s (SEBI’s) rigid pricing guidelines. To everybody’s surprise, SEBI took less than five weeks to notify new, flexible rules to handle abnormal situations.

On 13 April 2009, just three months after that fateful 7 January, Satyam Computer Services was sold to a joint venture of British Telecom and India’s Mahindra Group at Rs 58 per share. The Satyam stock more than doubled after it was re-christened Mahindra Satyam. This week, Tech Mahindra (Satyam’s re-re-christened parent) posted a handsome profit!


A good government is supposed to thrive on institutional memory. As it experiments, it accumulates wisdom, learning from successes and failures alike. But our own government often behaves randomly, whimsically.

What else can explain its astonishing success with Satyam Computers in 2009, which was completely forgotten a decade later, leading to the tragic failure of IL&FS in 2018.

The Quint’s Founder-Editor Raghav Bahl explains the govt’s folly of not saving IL&FS – and its consequences.

And then, magically, one-and-a-half years later, the same government re-discovered its shining armour when it salvaged Yes Bank.


Why was IL&FS, a quasi-sovereign and systemically critical operation, not saved?

So much pain and destruction could have been avoided.

But then, inscrutable are the ways of the Mandarins of Raisina Hill…

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