INSUBCONTINENT EXCLUSIVE:
When even a 24-year-old Indian entrepreneur has no difficulty raising $1 billion in a day from global investors, it's easy to forget that
it wasn't always like this.Only two decades ago, a storied Mumbai financier could get away with raising $25 million of debt for a client,
giving it just about half of that money five years later, and making the company service the full amount thereafter.But what goes around,
The institution that made a business of exploiting India's desperation for funds, particularly for long-gestation infrastructure projects,
is now seeking to protect its assets from unpaid creditors trying to push it into bankruptcy.Infrastructure Leasing Financial Services Ltd
had 30 years to spawn an Indian clone of Macquarie Group: a powerhouse of finance, investments, asset ownership and risk management
Instead, Ravi Parthasarathy, the founder who stepped down recently as chairman, went on to build an unwieldy, debt-fueled empire that has
Shareholders will have to move in to rescue ILFS in their meeting on Saturday.What went wrong The $25 million that ILFS arranged in 1997 via
floating-rate notes - guaranteed by USAID and sold to Bear Sterns Co
- illustrates the chutzpah that sank the firm
New Tirupur Area Development Corp., the borrower, was floated as a lifeline for a textile center in Tamil Nadu where industrial waste had
Tirupur's knitwear business and its households were suffering, but the state didn't have the $250 million required to draw river water,
treat it and supply it to the town.ILFS showed the way out
Let New Tirupur get a 30-year contract for private water supply and handling of sewage, and a reasonable 20 percent annual return to lure
investors who would share the equity risk with the government and ILFS
The financial institution, which was also one of the lenders to the project, paid its share in September 2002, just as work on the
water-treatment facility was about to start
But instead of the committed 1.4 billion rupees in equity, senior and subordinate debt - $29 million at the time - Parthasarathy released
less than 1 billion rupees.The big hole was a 46 per cent shortfall in the 900 million-rupee ($25 million) senior debt, owing to an
inexplicable 150 million-rupee deduction
ILFS said it was "costs relating to the USAID loan." A third of it was a commitment fee, and the rest was precious Bear Sterns dollars that
had lain in an escrow account and bled, with net losses compounding at 12 per cent a year.Thus, before New Tirupur could put a single brick
on the ground, its stakeholders lost money they never even got to touch
The economics of the project became shaky, and a tussle began between equity holders and creditors
The government of Tamil Nadu had to pump in more public money
As a Madras High Court judge would later note, "Water started flowing (or trickling down) to the common users, both industrial and domestic,
What flowed thereafter appears to be only litigation."This became a pattern of behavior
For ILFS to win, other stakeholders had to lose
Never mind if a 30-year concession on a toll road became a license to collect money from commuters in perpetuity
In New Tirupur, even state-run Life Insurance Corp
water company.The irony is that the same Life Insurance Corp
may now have to lead the rescue of ILFS before the money market's exposure to its toxic debt deepens a liquidity crisis for other shadow
banks - a sort of a mini-Lehman moment for India
The employees seem to have fared very well: Parthasarathy took home $3.65 million in his last year.Next will come the inevitable question of
Why should a systemically important financial institution have units running border check posts in an Indian state, or computerizing land
records in the Philippines The empire that Parthasarathy built has to go under the knife, and pretty soon.
