State-run Life Insurance Corp of India (LIC), the largest shareholder in debt-laden Infrastructure Leasing & Financial Services (IL&FS), on Tuesday said that the infrastructure company will not be allowed to collapse and that all options were on the table towards that objective.
“We will all try to see that it does not collapse,” LIC chairman V K Sharma said after a meeting with Finance Minister Arun Jaitley to discuss the implications of the default on debt repayment by IL&FS group companies.
The meeting was also attended by Reserve Bank of India deputy governor Viral V Acharya and State Bank of India chairman Rajnish Kumar.
When asked about the government’s response to the IL&FS crisis, Jaitley said: “It is not necessary for everyone to speak out of turn. The LIC is a shareholder and its chairman has already spoken to you and, therefore, it is not necessary…as far as the government is concerned, we are closely in touch…and monitoring the situation and I have nothing further to add to what the LIC chairman has said.”
While LIC chairman Sharma tried to allay concerns over the crisis, a senior Finance Ministry official said RBI may consider various options to ease liquidity conditions after default on debt papers by IL&FS group companies.
“RBI may conduct more OMOs (open market operations), which is an option. The other option is slightly more extreme but it could consider a CRR (cash reserve ratio) cut,” the official said. The cash reserve ratio, the amount of interest-free cash balance banks need to maintain with the RBI, is currently at 4 per cent.
Incidentally, IL&FS and its subsidiaries Tuesday filed a petition with the Mumbai Bench of the National Company Law Tribunal (NCLT) seeking to restructure debt under Section 230 of the Companies Act 2013.
The government-owned entities, which are major stakeholders with an aggregate holding of 40.25 per cent in IL&FS, also have high exposure to its debt papers.
While LIC owns 25.34 per cent stake in IL&FS, Central Bank of India and State Bank of India own 7.67 per cent and 6.42 per cent. UTI holds 0.82 per cent in the company. Amid concerns of IL&FS default leading to contagion in other non-bank financial companies, Sharma said efforts are being made to ensure that doesn’t happen.
IL&FS and its subsidiary IL&FS Financial Services Ltd have defaulted on repayment of debt in recent weeks. This has led to a steep fall in shares of many non-banking finance companies. The possibility of further defaults by IL&FS group companies has led to a liquidity squeeze.
A Finance Ministry official said “solutions to manage liquidity should be from the monetary side, from the RBI side.” To inject liquidity in the system, the RBI last week announced it would purchase Rs 10,000-crore worth of government securities through open market operations.
LIC was earlier roped in to pick up a 51 per cent stake in IDBI Bank. As of June-end, LIC had a 7.98 per cent stake in the bank, with the government holding at 85.96 per cent.
This article was first published on http://www.wakeuppost.com.