No insurance and guarantee for IL&FS assets

Infrastructure Leasing & Financial Services won’t provide any insurance and warranties to the potential buyers for the assets which it is selling to repay the debt of about Rs 91,000 crore ($13 billion). People with direct knowledge of the matter feel that this move will drive down valuations steeply. The IL&FS board which was modernized by the government in October after defaults by the company stated that the buyers are the only responsible one for any problem arising in future from the assets. This made many potential buyers negotiate for a lower price.

One of the investors asked “It is a bankrupt company. What is the value of the assurance, at least if anyone is extended to the potential buyer? Potential buyers know about this already and every sale done must go through the National Company Law Tribunal (NCLT).” IL&FS with money crisis had approached NCLT in September to seek relief from being dragged into bankruptcy proceedings by lenders. Another person said that the decision of not extending warranties or indemnity to potential buyers was an intentional one. He said the government appointed board is managing the company and his board will be there only for a certain period of time and it will not be accountable for future liabilities. The company has put up renewable energy units, road projects, education, realty assets, and alternative investment management ventures, and security services business, among others for sale. It announced that more than 300 bidders are showing interest for its road assets which worth around 25,000 and 15 applicants including Tata Power and JSW energy were interested in renewable energy projects worth Rs 2000 crore. In such conditions, a third person said that Lack of insurance and warranties can drive down the value of assets on the block. There are many people ready to buy the assets but at a lower price. In any merger or acquisition deals, the seller compensates and extends warranties to the buyer for future liabilities that arise for the period prior to the deal. They promise to pay future liabilities, including tax and payments, until a period of time during which the assets were under its control. According to the experts’ view, many buyers are worried that they will not get insurance cover for any future liabilities of IL&FS assets. For such type of assets, insurers will charge a heavy premium for taking the risk of indemnity. The entire process will be monitored by the government and the warranty issues will be discussed in several internal meetings. Veteran banker Uday Kotak leads the IL&FS board and he appointed Arpwood Capital and JM Finance to set all the assets.

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