Seminar 2020
SPA New Delhi
Fig- Increase in debt-to-equity ratio in the case of IL&FS (from 2015-2018) Source: (Rakheja, 2019)
This graph indicates that the debt-to-equity ratio increased from 9.47 to 16.78 in the years 2015-2018. Inflation in short-term loans from 22.9% to 28.3% in this period worsened the asset-liability mismatch - increasing short-term loans for long-term projects. Rubbing salt to the wounds was the alarming “current ratio”- which is defined by Will Kenton as, “the ratio that measures a company’s ability to pay short-term obligations or those due within one year.” In other words, it is the ratio of the current assets of the company to the current liabilities of the company. In the case of IL&FS, this current ratio was less than 1, which was a clear indication that the capital in hand with IL&FS was insufficient to meet its short-term obligations if they were all due at the same time, but still, they opted for it. The 3 credit rating agencies of IL&FS were ICRA (Investment Information and Credit Rating Agency), CARE (Credit Analysis & Research Ltd), and India Ratings and Research Pvt Ltd. They gave ratings to the NCDs (Non- convertible debentures), CPs (Commercial paper), and ICDs (Inter-corporate deposits); in which the NCD was given the highest ratings. This continued till August 2018. But from August 17 to September 17, the rating got downgraded which brought a serious financial loss to investors. 20
