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3) Examine the issues that the collapse of IL&FS highlights and discuss steps that are needed for course correction?(250 words)

Topic– Indian economy : issues

3) Examine the issues that the collapse of IL&FS highlights and discuss steps that are needed for course correction?(250 words)

Financial express

Reference

Why this question

The collapse of IL&FS raises several questions with respect to corporate governance structure, lack of transparency and other issues which have been discussed in the articles. The topic has received widespread coverage in news and needs to be prepared in detail

Key demand of the question

We have to briefly explain the turn of collapse events leading to collapse of IL&FS, examine the learnings from the collapse of IL&FS, and discuss steps to prevent such incidents in the future.

Directive word

Examine – When you are asked to examine, you have to probe deeper into the topic,  get into details, and find out the causes or implications if any .

Structure of the answer

Introduction – Highlight that IL&FS is an infrastructure lending company, an NBFC, with significant shareholdings of public sector entities like LIC etc. The company which has several subsidiaries is in the eye of a storm because defaulted on a few payments and failed to service its commercial papers (CP) on due date—which means the company has run out of cash or it is facing a liquidity crunch.

Body

  • Discuss the effects of the crisis – company’s default spells trouble for its investors, which include banks, insurance companies, and mutual funds. Investors and traders have been worried over the cascading effects of IL&FS’s defaults, with further defaults hitting mutual funds with exposure to IL&FS and its group companies. Highlight that LIC has assured that it would not allow IL&FS to default, and that IL&FS has moved to NCLT for relief
  • Examine the learnings – poor quality of credit rating agencies, lack of transparency in functioning of such behemoths, poor regulatory oversight mechanism, issues for infrastructure lending etc
  • Discuss the course correction – better regulation of corporate structures, combined with greater disclosure and transparency and stronger corporate governance. Second, a clearer separation of public and private is needed, rather than the muddy links and ownership structures that now exist etc

Conclusion – Highlight that lessons needs to be learnt and discuss way forward.