IL&FS: An Indian Company that would have owned 51% of Education City is bankrupt and under investigation

Before the Education City project was cancelled by the PDP government in 2014, due to the National Land Commission pointing out violations of the Land Act 2007, the Education City project had been awarded by the DPT cabinet in April 2012 to a consortium of Infrastructure Leasing & Financial Services Limited (IL&FS) and Infinity InfoTech Parks Limited.

IL&FS would hold the majority and controlling stake of 51 percent while Infinity would hold the rest 49 percent.

The entire Education City Project was supposed to be a 15-year endeavor with a project price tag of Nu 22 bn. This meant the project would be completed around 2027-28.

IL&FS, which is a major infrastructure financing company in India, was supposed to fund a major component of this project apart from owning the majority stake.

Therefore, the financial stability of the Education City project would rest on the solvency and funding ability of IL&FS.

However, IL&FS’ long standing financial and management problems started coming out in the open from July 2018 onwards when its subsidiary companies were unable to pay back loans taken for various projects. It has 348 subsidiary companies under it.

By September 2018, it was a full blown crisis as IL&FS started defaulting on major loans, borrowings from the financial market, inter-corporate deposits and even payments on term deposits.

By the 1st October 2018 the Indian government, in the interest of preventing this from destabilizing the financial markets, stepped in and took over the IL&FS board.

By the end of 2018 the company was worth Nu 54.3 bn but it had unpaid debt of Nu 910 bn making it the highest debt to equity ratio company in India.

The company’s failure also included its 122 foreign subsidiaries, and Bhutan’s Education City project, if approved, would have been the 123rd foreign subsidiary to fail leaving 1,000 acres trapped in foreign hands with no development being undertaken on it.

The DPT cabinet in 2012 had approved Nu 479 mn of capital work like road, bridges, water supply, power station etc. as the government’s expense on the project apart from the 1,000-acre land.

Some infrastructure worth Nu 130 mn were completed at the site after which it was shut down which meant that the government saved Nu 349 mn on a project that would have frozen with IL&FS.

The main job of the new board is to conduct a fire sale of IL&FS’s assets and projects. This would have potentially meant the selling of the 51% stake of the 1,000-acre Education City project and its assets in the project to help pay IL&FS’s debts.

Also, in a project like this, the tendency is to raise debt on the project which means taking loan against the 1,000-acre land and the infrastructure built by the government. This would have further complicated matters for Bhutan as the project land and project could have been acquired by another foreign entity.

IL&FS failed due to a combination of factors which included higher borrowing costs, cost overruns and delays in its many projects, downturn in infrastructure projects and its own corporate culture.

However, there could also be murkier issues as India’s Serious Fraud Investigation Office (SFIO) is investigating diverted funds and mismanagement in projects worth Nu 300 bn.

According to a recent article in The Wire, the same SFIO office is also investigating the IL&FS group’s auditor, Deloitte Haskins and Sells on the basis of a whistleblowers complaint by an employee of Deloitte.

The investigation is into whether the auditor ignored and hid several issues in the books of IL&FS in return for high fees and projects.

The complainant alleged that Deloitte was aware of financial mismanagement and impropriety of the company, but the modus operandi was for any dubious findings Deloitte agreed to rely on the IL&FS management’s explanations and comfort letters.

The ironical part here is that IL&FS was brought in as a major partner as the original bidder Infinity did not have the required capital, size and experience to do an Education City project of Nu 22 bn.

This writer writing for another paper in 2010 found that Infinity had a net worth of only Nu 10 bn and their experience was in information technology with no experience in education city or even colleges. Infinity’s 12 commercial projects mostly comprised of single or double multistory buildings in different locations mainly in and around Kolkata.

The Education City project was notable for the fact that despite an international invitation there were no bidders other than IL&FS and Infinity.

According to DHI Infra officials at the time many international companies were interested but only on the condition that the existing 30 percent commercial area be increased to 40 to 50 percent. DHI following government guidelines flatly refused. As a result, it was left to only IL&FS and Infinity to bid together and take the project.

However, the concessional agreement signed between the ILFS/ Infinity consortium and the DPT government gave space to the Bhutan Education City Board to increase the commercial space in the future.

This got highlighted in the Detailed Project Report of the Education City which proposed building 699 luxury villas each with a size of 0.5 acres to 1 acre coming to 350 acres to 699 acres leaving hardly any land or no land for the Education City turning it from an Education project to a real estate project.

These properties were to be built for rich tourists wanting to stay in Bhutan. The original project planned to have a built up area of 500 acres and 500 acres of green area.

Project Background

The Education City project was initially an idea of the Royal Education Council (REC) as far back as 2007.

It was even presented to the DPT cabinet in 2008, who shot down the project.

A year later in December 2009, the project came back to life when a family member of the first elected Prime Minister representing Infinity said that the Kolkata company wanted to build a USD 1 bn education city project on the same location. It was also revealed that another family member of the then PM was also working on the project.

In June 2009 the company had approached the MoEA and the then government set up an inter-ministerial committee based on the project proposal.

On February 17, 2010 a cabinet website press release said, “The cabinet has approved giving about 1,000 acres of land to DHI to be used as equity grant in the proposal to build a knowledge city in Bhutan by the Indian-based company, Infinity Techno Parks.”

This meant that the the government would be owning a part of the project to the extent of at least 30 percent.

This overshot the government’s own draft Public Private Infrastructure (PPI) framework that recommended tendering for such projects instead of giving them directly. The cabinet, however, gave a backdoor entry for the project saying that some project proposals can be green lighted without tendering.

Soon after the news stories by this writer, controversies followed the project as questions were raised over transparency in the project, the inherent conflict of interests, the capacity of the Infinity and the potential impact of the project.

The DHI Infra, as mentioned above, was only able to get the original Infinity and IL&FS due to the refusal of the then government to expand the commercial space as requested by other international companies.

However, once IL&FS and Infinity got the project then the BEC had the flexibility to increase the commercial space.

After the bid the government was no longer taking a 30 percent equity stake in return for 1,000 acres as originally planned. Instead a 2.01 percent of the revenue and a Nu 10 mn annual land lease fee were agreed too along with 50 acres of land to be given to the government as space.

The government also allocated around Nu 470 mn to be spent over the next three years in providing facilities like road connectivity and water facility for the project. Of this Nu 130 mn has already been spent so far.

The project and the institutions in it had been granted a 100 percent tax holiday till 2030. By contrast, Special Economic Zones in India give only a five-year complete tax holiday with a 50% tax holiday for the next 10 years.

The National Assembly passed an Education City Bill which was toned down by the National Council with seven amendments.

The project during its under two-year inception period was not able to attract any prominent educational institutes internally or in the region. There were a couple of MoUs for short term courses but there were neither binding nor did it mean establishing an institute.

The viability of the project as an education project came under question especially after the DPR report of the project proposed 699 luxury villas for tourists.

The Bhutanese in an earlier investigation had also found that several ministers and key government officials involved in the project would indirectly benefit from the final location of the Bhutan Education City project as their land was located nearby.

Many possible areas had been looked at in Punakha, Wangdue Phodrang, Bumthang, Paro, Thimphu Dzongkhag and Tsirang.

The issue over the legality of the Education City project land cropped up around September 2013 when the National Land Commission said that the project land was illegal and could thus not be allotted.

This stand was reiterated in letters from the NLC in January and February 2014 which said the project directly contravenes Section 308 of the Land Act 2007 which states that the duration of the lease shall not exceed 30 years. It says the provision to aggregate three consecutive terms of 30 years lease period also pre-empts Section 310 of the Land Act and Section 38 of the Rules and Regulations for Lease of Government Reserved Forest Land and Government Land.

The NLC said that the project proposal to give land on lease to the developers who would further sublease it to the operators contradicts Section 251 and 265 (a) of the Land Act 2007 as no sub-leasing is permitted.

The NLC letter talks about commercial activities including the proposed construction of luxury villas and resorts within the proposed Education City where 30 percent or more of the land is a commercial area.

The letter said this deviated from the core businesses and contradicts the Land Act 2007 which promulgates allotment or lease of land for specific purposes.

The NLC said that the land was supposed to be registered under the Ministry of Education and not the Bhutan Education City project and so any commitments stood null and void.