ilfs transportation networks ltd share price Management discussions

1. Global Economy Overview1

Following its weakest performance since the global financial crisis, the world economy is poised for a modest rebound this year.

Global growth is expected to recover to 2.5 per cent in 2020 up slightly from the post-crisis low of 2.4 per cent registered last year amid weakening trade and investment and edge up further over the forecast horizon. This projected recovery could be stronger if recent policy actions particularly those that have mitigated trade tensions lead to a sustained reduction in policy uncertainty. Nevertheless, downside risks predominate, including the possibility of a reescalation of global trade tensions, sharp downturns in major economies, and financial disruptions in emerging market and developing economies (EMDEs). The materialization of these risks would test the ability of policymakers to respond effectively to negative events. Associated policy challenges are compounded by high debt levels and subdued productivity growth. Many EMDEs need to rebuild macroeconomic policy space to enhance resilience to possible adverse developments.

The COVID-19 pandemic is inflicting high and rising human costs worldwide, and the necessary protection measures are severely impacting economic activity. As a result of the pandemic, the global economy is projected to contract sharply by 3 per cent in 2020, much worse than during the 2008 09 financial crisis. In a baseline scenario--which assumes that the pandemic fades in the second half of 2020 and containment efforts can be gradually unwound the global economy is projected to grow by 5.8 per cent in 2021 as economic activity normalizes, helped by policy support.

2. Indian Economy - Overview2

The economy of India is characterised as a developing market economy. It is the worlds fifth-largest economy by nominal GDP and the third-largest by purchasing power parity.

Global headwinds and challenges in the domestic financial sector moderated the growth of Indian economy in 2019-20. The real GDP growth moderated to 5.0 per cent in 2019-20 as compared to 6.8 per cent in 2018-19. Despite a temporary moderation in the Gross Domestic Product (GDP) growth in 2019-20, the fundamentals of Indian economy remain strong and GDP growth is expected to rebound from the first quarter of 2020-21

3. Indias infrastructure opportunity3

Infrastructure sector is a key driver for the Indian economy. The sector is highly responsible for propelling Indias overall development and enjoys intense focus from Government for initiating policies that would ensure time-bound creation of world class infrastructure in the country. Infrastructure sector includes power, bridges, dams, roads and urban infrastructure development. India was ranked 44th out of 167 countries in World Banks Logistics Performance Index (LPI) 2018. India is ranked second in the 2019 Agility Emerging Markets Logistics Index.

As per figures of the India Brand Equity Foundation infrastructure sector in India has a requirement of investment worth rupees trillion (US$ 777.73 billion) by 2022 to have sustainable development. Only 24 per cent of the highways in India is four-lane, therefore the scope of improvement and work is immense. In view of the opportunities and to cope up with the target of sustainable development initiatives like ‘Housing for All and ‘Smart City Mission have been introduced. Further 100% FDI has been permitted in the infrastructure sector. The sector has been the one of the largest receivers of the FDI inflows into the country.

Infrastructure Sector has attracted US$ 14.7 billion across 74 deals accounting for 40 per cent of the total PE/VC investments in the year 2019.

Indias national highway network is expected to cover 50,000 kilometres by 2019. National highway construction in India has increased by 20 per cent year-on-year in 2017-18.

The government has suggested the investment of Rs 5,000,000 Crore (US$ 750 billion) for railways infrastructure between 2018-2030.

Road sector4

India with a total road network of 5.5 mn Km comprises of national & state highways and urban & rural roads. National highways account for 2% of the total road network and carry over 40% of total traffic.

NHAI has accomplished construction of 3,979 km of national highways in the financial Year 2019-20. This is the highest ever highway construction achieved in a financial year.

‘The construction pace as noticed in last years has seen a steady growth with 3,380 Km construction in the FY 2018-19. Continuing the same trend with the development of 3,979 km of national highways during FY 2019-20

India has a well-developed framework for Public-Private-Partnerships (PPP) in the highway sector. Asian Development Bank ranked India at first spot in PPP operational maturity and also designated India as a developed market for PPPs.

4. Threats

Considering that no further developmental works will be undertaken by the Company, the factors that can threaten the business shall emerge if disruptions are encountered in collection of toll revenues on account of the following: (i) Disruptions on account of COVID 19 and the resultant actions of the government that may restrict the movement of goods and services including passenger movement. Post lockdown period, the opening up of the economy has been gradual and it has attendant impact on the traffic and the revenue.

(ii) Any change in traffic growth rate will significantly impact earning potential. All toll revenues depend on number of vehicles plying on the road and may be affected with changes in traffic volumes. The traffic volume is directly or indirectly affected by factors beyond the Companys control such as toll rates, fuel prices, affordability of automobiles, and the quality, convenience and travel time on alternate routes.

(iii) Availability of alternate means of transport such as rail networks and air transport may also affect traffic volumes. Moreover, these cash flows are also affected by seasonal factors as the traffic tends to decrease during monsoon but increases during holiday seasons.

5. Operational Performance

The financial year 2018-19 witnessed some very significant developments in the Company. The operating environment continued to be very challenging from the Companys perspective. During first half of the year, the Company made efforts to progress on construction of its under-implementation projects. However, the liquidity constraints faced by the Company and its inability to achieve financial closure in 3 of these under implementation projects due to reluctance of banks to lend to the Company and its projects and the banks existing exposure limit, prevented the Company to make any significant progress. The Company therefore, suspended construction activity on all under-implementation projects in second quarter of the year until liquidity situation improved. The Company however continued to carry out Operations and Maintenance services on its Operational Projects.

The Company has witnessed considerable cost overruns and delays in its projects. In some cases, claims and compensation has been sought from the respective Authorities; the realization of which is subject to view points of Authorities as well as significant procedural requirements. Many projects of the Company, have not been able to generate adequate revenue to support and service all their obligations, resulting in their looking up to the Company for providing liquidity support to them. These issues coupled with lack of financial closure in 3 projects, affected the already stressed cash flows of the Company.

Efforts were made by the Company to mobilise financial resources through external as well as group sources. The erstwhile Management Board of the Group also tried to raise resources through third parties including vendors of the Company. The erstwhile management had issued certain letters of awareness to a fellow subsidiary in connection with finances raised by third parties including vendors of the Company from that fellow subsidiary. The Company and its group entities had received loans during the same period from these parties. As part of claim management process, some of the vendors have now represented that they had given financial support to the company by borrowing funds from the fellow subsidiary. The transactions are being investigated by various regulatory authorities. Appropriate disclosures have been made in financial statements in this respect

Due to its deteriorating financial condition, the Company found it very challenging to raise further resources. Consequently, the Company reported default on its bank borrowing obligations on June 30, 2018, followed by defaults in servicing NCDs on October 1, 2018. As a result, the credit rating agencies downgraded the ratings of the Company to ‘D (lowest grade).

The Company had tried to raise resource from its existing shareholders and the Board of Directors passed a resolution on July 27, 2018 to launch a Rights issue. The same however could not be achieved due to lack of investor interest

The Company embarked on divestment of its entire road portfolio in the second quarter of the year and efforts were made by erstwhile management with various institutional investors and market intermediaries to seek their interest for individual asset or on portfolio basis.

Key Corporate Developments since October 1, 2018

However, by end of first half of the year, the overall financial situation of IL&FS Group had worsened with defaults reported by fellow subsidiaries as well as IL&FS, the parent Company. Therefore, pursuant to a report filed by the Registrar of Companies, Mumbai ("RoC") under Section 208 of the Companies Act, 2013, the Ministry of Corporate Affairs (“MCA”) vide its Order dated September 30, 2018, directed that the affairs of the IL&FS and its subsidiaries including the Company be investigated by the Serious Fraud Investigation Office ("SFIO").

The Union of India on October 1, 2018 filed a petition with the National Company Law Tribunal ("NCLT") seeking an order under section 242(2) and section 246 read with section 339 of the Companies Act, 2013 on the basis of the interim reports of the ROC and on the following grounds:

(i) The precarious and critical financial condition of the IL&FS Group and their inability to service their debt obligations had rattled the money market.

(ii) On a careful consideration of the Union of India, it was of the opinion that affairs of the IL&FS Group were conducted in a manner contrary to the public interest due to its mis-governance; and

(iii) The intervention of the Union of India is necessary to prevent the downfall of the IL&FS Group and the financial markets.

It was felt that the governance and management change is required to bring back the IL&FS Group from financial collapse, which may require, among other things, a change in the existing Board and management and appointment of a new management.

Based on the above petition, the NCLT vide its order dated October 1, 2018 suspended the erstwhile board of the holding company and appointed the New Board of Directors (hereinafter, "New Board") proposed by the Union of India. The present constitution of the New Board of IL&FS is Mr. Uday Kotak, Chairman, Mr. Vineet Nayyar, Vice Chairman (Managing Director till March 31, 2019). Mr. C S Rajan, Director (Managing Director from April 2, 2019), Mr. Bijay Kumar, Deputy Managing Director from December 24, 2018, Mr. Nand Kishore, Dr. (Ms.) Malini Shankar, Mr. N Srinivasan and Mr. G C Chaturvedi

Pursuant to developments mentioned above, the Board Directors of the Company and its other Committees were reconstituted. The changes in constitution of the Board of Directors of the Company are as given below:

Name	Status
Directors as on September 30, 2018
Mr. Hari Sankaran	Resigned effective October 1, 2018
Mr. Arun Saha	Resigned effective October 1, 2018
Mr. K Ramchand	Resigned effective October 29, 2018
Mr. Mukund Sapre	Resigned effective November 2, 2018
Ms. Neeru Singh	Resigned effective November 1, 2018
Ms. Deepak Dasgupta	Ceased to be director on March 31, 2019 upon expiry of their term
Mr. R C Sinha	Ceased to be director on March 31, 2019 upon expiry of their term
Mr. H P Jamdar	Ceased to be director on March 31, 2019 upon expiry of their term
Appointment of New Directors
Mr. Vineet Nayyar	Appointed as director effective October 25, 2018
Mr. C. S. Rajan	Appointed as director effective October 25, 2018
Mr. Nand Kishore	Appointed as director effective November 15, 2018
Mr. Bijay Kumar	Appointed as director effective May 21, 2019

*Mr. Ravi Parthasarathy, Director had resigned from the Board effective July 21, 2018

The current composition of the Board of Directors is thus as follows:

(i) Mr. Vineet Nayyar

(ii) Mr. Chandra Shekhar Rajan

(iii) Mr. Nand Kishore

(iv) Mr. Bijay Kumar

The changes in constitution of Key Managerial Personnel of the Company are as given below:

Name	Status
Key Managerial Personnel prior to September 30, 2018
Mr. K Ramchand	Resigned as Managing Director effective October 29, 2018
Mr. Mukund Sapre	Resigned as Executive Director effective November 2, 2018
Mr. Dilip Bhatia	Stepped down as Chief Financial Officer effective September 22, 2018
Mr. Krishna Ghag	Company Secretary
Key Managerial Personnel post October 1, 2018
Mr. Dilip Bhatia	Appointed as CEO-Officiating effective November 15, 2018 and re-designated as CEO effective April 24, 2019
Ms. Shaivali Parekh	Appointed as Chief Financial Officer effective December 13, 2018 till January 31, 2020
Mr. Mohit Bhasin	Appointed as Chief Financial Officer effective February 1, 2020
Mr. Krishna Ghag	Company Secretary

The Company is part of IL&FS Group and since October 1, 2018 has been operating under overall supervision, direction and framework established by New Board of IL&FS

The NCLAT vide its order dated October 15, 2018 gave a moratorium to IL&FS and its group entities (including the Company) which inter-alia stated that no creditors can proceed against it except under article 226 of the Constitution. Accordingly, the Company has not been servicing the debt obligations since October 15, 2018.

The New Board as part of the resolution process, has submitted several progress reports to the NCLT. This includes framework for a resolution plan and process, steps undertaken for monetization of assets, appointment of consultants, and classification of group entities based on their abilities to meet various financial and operational obligations, measures for cost optimization and protocol for making payments beyond certain limits.

The resolution plan seeks a fair and transparent resolution for the Company while keeping in mind larger public interest, financial stability, various stakeholders interest, compliance with legal framework and commercial feasibility. It is proposed to have a timely resolution process which in turn mitigates the fallout on the financial markets of the country and restore investor confidence in the financial markets thereby serving larger public interest. The Company being a holding company of transportation vertical of IL&FS having projects through various group entities, depends on its group entities to continue operating as a going concern. The resolution plan and processes for various verticals are under way and options of restructuring business, as well as exits are planned. The plan of the management is to sell/exit from assets at the group entity as a going concern.

The assessment of the New Board, based on analysis of the current position of and challenges facing the IL&FS group, is that an Asset Level Resolution Approach serves the best interest of all stakeholders to achieve final resolution.

The entities in the IL&FS group, have been classified into Indian and offshore entities. Further, the Indian IL&FS entities have been classified by an independent third party, into three categories of entities based on a 12-month cash flow based solvency test viz. "Green", "Amber" and "Red", indicating their ability to repay both financial and operating creditors, only operating creditors, or only going concern respectively.

The Company is classified as a "Red" entity, indicating that it is not able to meet all obligations (financial and operational) including the payment obligations to senior secured financial creditors. Accordingly, the Company is permitted to make only those payments necessary to maintain and preserve the going concern status. Resultantly, construction activities at all ongoing projects have been suspended/ terminated post September 2018. The Company through its various SPVs has also initiated discussions with the respective Concession Authorities for foreclosure/ termination of incomplete / partially incomplete projects.

Construction Activities

The Company reported defaults on its borrowing obligations during the financial year 2018-19 and consequently the credit rating of the Company and its holding company was downgraded to ‘D (lowest grade) in September 2018 Considering the precarious financial situation and various defaults in servicing of the debts and liquidity issues, the Board took a decision to stop all the on-going projects under development and to foreclose / terminate the concession agreements for incomplete road projects and hand over the projects to the authority. The construction activities at all the ongoing projects have been suspended/terminated post September 2018 and discussions have been initiated with the respective Concession Authorities for foreclosure/ termination of the following incomplete / partially incomplete projects: The status of such discussions is as under:

(i) Beawar Gomti Road Project ITNL Road Infrastructure Development Company Limited (IRIDCL), a special purpose vehicle had undertaken the development of the two/four laning works of the Beawar Gomti Road Project for which Concession Agreement was signed on April 01, 2009 with Ministry of Road Transport & Highways (MoRTH/the Authority). However, on account of failure on the part of the Authority to provide encumbrance free land for 4 laning, the work of four laning was stopped in September 2015. However, after discussions with the Authority a settlement was reached wherein IRIDCL was paid a one-time settlement amount of 144.08 Crore on February 19, 2020 and the project has been transferred back to MoRTH on February 25, 2020.

(ii) Srinagar Sonamarg Tunnel Project Srinagar Sonamarg Tunnelway Limited, a special purpose vehicle had undertaken the construction of Z-Morh Tunnel in the State of J&K. After completion of approx. 28% of the work, the project works had to be suspended in July 2018 due to inability of the Company to fund the project. A proposal was made to the Authority for supporting completion of the project under One Time Fund Infusion Scheme which did not materialize. Meanwhile, MoRTH notified new policy guidelines on March 9, 2019 for resolution of stuck

National Highway projects. NHIDCL has agreed to foreclose the Concession on payment of full and final settlement amount as per new Policy Guidelines. NHIDCL have determined settlement amount payable but release of payment is held up due to pending court case filed by construction contractor before Delhi High Court. The project will be transferred back to NHIDCL upon receipt of settlement amount less agreed recoveries

(iii) Amravati-Chikhli Road Project Amravati Chikhli Expressway Limited (ACEL), a special purpose vehicle had undertaken the development works of the Four - laning of Amravati-Chikhli in the State of Maharashtra. After achieving progress of approx. 22%, construction works were suspended in July 2018 due to financial problems faced by the Company. The Company could not achieve Financial Close due to unwillingness of Banks to finance the project. Meanwhile, MoRTH notified new policy guidelines on 9th March 2019 for resolution of stuck National Highway projects. NHAI has agreed to foreclose the Concession on payment of full and final settlement amount as per new Policy Guidelines. NHAI is in the process of determination of settlement amount payable to ACEL. The project will be transferred to NHAI upon receipt of settlement amount.

(iv) Fagne Songadh Road Project Fagne Songadh Expressway Limited (FSEL), a special purpose vehicle had undertaken the development works of the Four - laning of Fagne Songadh in the State of Maharashtra. After achieving progress of approx. 66%, the work on the project had to be suspended since July 2018 due to inability to fund the project. The Authority was requested to fund the balance construction works under the One Time Fund Infusion Scheme which was not accepted. Thereafter, a proposal was submitted to the Authority under the new policy guidelines issued on March 9, 2019 for resolution of stuck National Highway projects. The Authority has agreed to foreclose the Concession on payment of full and final settlement amount as per new Policy Guidelines. The settlement amount has been agreed with NHAI and is pending release. The project will be transferred back to NHAI upon receipt of settlement amount.

(v) 8 Rail Over Bridges Project

Gujarat Rail Bridge Development Company Limited, the special purpose vehicle was awarded the project for developing 8 Rail Over Bridges (“the Project”) by the Roads and Building Department (R&B), Government of Gujarat (“the Authority”) on BOT Annuity basis. After completion of approximately 12% of the Project, the work at the project had to be suspended in August 2018 due to inability of the Company to raise funds for further development. The Authority was then approached with a proposal to grant permission for selling their equity stake in the Company. Government of Gujarat vide their letter dated December 19, 2019 has given NOC for stake sale. Accordingly, proposal has been invited from the interested bidders for stake sale. The stake sale process is yet to be concluded.

(vi) Kiratpur Ner Chowk Road Project

Kiratpur-Ner Chowk Expressway a special purpose vehicle had undertaken the development of Four laning of Kiratpur-Ner Chowk section in the state of Punjab & Himachal Pradesh. However, on account of failure on the part of the Authority to provide encumbrance free land for the work, the Company had notified the Authority of their defaults with a request to compensate the financial losses. The claims were denied by the Authority and did not agree to pay compensation sought by the Company. However, the Authority has agreed to foreclose the Concession on payment of full and final settlement amount as per new Policy Guidelines. The settlement amounts are under final determination with NHAI and pending release. The project will be transferred to NHAI upon receipt of settlement amount.

(vii) Khed Sinnar Road Project

Khed Sinnar Expressway Limited, a special purpose vehicle had undertaken the development of Four Laning of Khed-Sinnar Section in the State of Maharashtra. While the project achieved provisional completion for 76%, work on remaining length could not be completed because the Authority has not been able to handover the land for construction of 5 bypasses totaling approx. 25 km length even after a considerable period of time. As a result the project remained incomplete and could not achieve commercial operation date. Accordingly, KSEL notified the authority of their default in providing the requisite land for the remaining work. In addition, the project was not able to collect toll at one of the toll plazas for various local factors resulting in substantial loss of revenue. After multiple discussions, NHAI has agreed for termination of the project on Authority event of Default and KSEL is in discussion with NHAI for determining the final settlement amount as per new Policy Guidelines dated March 9, 2019. The project will be transferred to NHAI upon receipt of settlement amount.

(viii) Chennai Metro Rail Project

The work on EPC contract for construction of two underground metro stations with 800 m ramp tunnel awarded by Chennai Metro Rail Limited was suspended as the Company was unable to provide funds for continuing with the development activities. As a consequence, the Authority terminated the contract on January 31, 2020. (ix) Zojila Tunnel Project Due to financial problems faced by the Company, the work on EPC contract for construction of 14.5 km Zojila tunnel awarded by National Highways & Infrastructure Development Corporation Limited could not be undertaken. As a consequence the Authority terminated the contract on January 15, 2019. (x) Projects awarded by MPRDC

Due to financial problem faced by the Company, the construction work of following three contracts awarded by Madhya Pradesh Road Development Corporation Ltd. to ITNL IECCL JV has been terminated by the Authority on 25th July 2020:

1) Package 2- 4 stretches of Major District Roads

2) Package 10- 5 stretches of District Roads

3) Package 11- 3 stretches of District Roads

(xi) Barwa Adda Road Project

Barwa Adda Expressway Limited had suspended construction works after completion of work on 81% length due to non-handing over of land by NHAI. The completed length of the project is under commercial operation and Company is collecting toll as per provisions of Concession Agreement. Now almost entire balance land has been acquired by NHAI and therefore NHAI wants to complete the balance works. However, due to financial problem faced by the Company, BAEL has requested NHAI to make available funds for completion of balance works under One Tine Fund Infusion Scheme (OTFIS) of NHAI. Proposal submitted by BAEL on 3rd March 2020 is under consideration of NHAI.

(xii) Ranchi Ring Road Project

The development work on Ranchi Ring Road Sec-VII Project awarded by Government of Jharkhand to Jharkhand Infrastructure Implementation Co Limited (JIICL) on BOT (Annuity) was completed during the year and the project entered into commercial operation with effect from 21st November 2018. Company is receiving annuity payment from the Government of Jharkhand as per Concession Agreement.

(xiii) North Karnataka Road Project

The Concession period of the project has ended on 19th Dec 2019 and after completion of all works as per provisions of Concession Agreement, project has been transferred back to NHAI with effect from 14th Feb 2020.

(xiv) 24 Border Check post Project The Company had completed works on 19 check posts and 2 central controls and same are under operation. Due to non-handing over of land for remaining 5 check posts by the Concessioning Authority, Company suffered financial losses and notified the Authority of their defaults under the Concession Agreement. Company requested the Authority to compensate financial losses. However, Authority denied its default and did not agree to pay compensation sought by the Company. Due to continued defaults of Authority, Company sent the final termination notice for terminating the Concession Agreement on Authority event of default on October 31, 2018 and on November 3, 2018 initiated Arbitration proceeding before the Madhya Pradesh Arbitral Tribunal ("MPAT") under section 7 of The Madhya Pradesh Madhyastham Adhikaran Adhiniyam, 1983. Matter is pending before the Arbitral Tribunal.

Projects under operation

In order to maintain going concern status of the SPVs for which Operation and Maintenance (“O&M”) activities are carried out by the Company, it has continued to perform its obligations with respect to the said activities post September 2018 and O&M activities are carried out uninterrupted. Due to reluctance of various SPV lenders in releasing O&M payment to the Company and insistence of paying the O&M vendors directly, the Company in consultation with these lenders, with effect from January 1, 2019, novated O&M contracts with 10 SPVs in favor of Elsamex Maintenance Services Limited, a wholly owned subsidiary of the Company

As on date the following 16 road projects of the Company are under operations and maintenance:

1. Noida Toll Bridge, Uttar Pradesh

2. Jetpur-Gondal-Rajkot Project, Gujarat

3. Pedda Amberpet-Bongulur (Outer Ring Road) Project, Telangana

4. Mega Highways Road Project, Rajasthan

5. Thiruvananthapuram City Road Improvement Project, Kerala

6. Hazaribagh-Ranchi Project, Jharkhand

7. Jharkhand Accelerated Road Development Programme, Jharkhand

8. Pune-Solapur Project, Maharashtra

9. Moradabad-Bareilly Project, Uttar Pradesh

10. Warora-Chandrapur Project, Maharashtra

11. Sikar-Bikaner Project, Rajasthan

12. Baleshwar-Kharagpur Project, Odisha/West Bengal

13. Jorabat-Shillong Project, Assam/Meghalaya

14. Chenani-Nashri Tunnel Project, Jammu & Kashmir

15. Khed-Sinnar Project, Maharashtra

16. Border Checkpost Development Project

Divestment Initiatives

Pursuant to the Report on Progress and Way Forward dated October 30, 2018 (“Report”) submitted by IL&FS to the Ministry of Corporate Affairs, Government of India, which in turn was filed with the Honble NCLT, a publicly solicited bid process for certain assets in the domestic roads vertical was initiated on December 18, 2018 and expressions of interest (“EOI”) were sought for a potential acquisition of IL&FS Groups (including of the Companys) equity stake(s) / interest(s) in 15 operations, 4 under construction and 3 business verticals of the Company.

In response to the divestment process binding bids received for 5 road projects were accepted by the New Board. Bids in respect of 5 other assets were considered significantly lower than the average ‘fair market value, obtained by the New Board for the relevant ITNL SPV in the manner as contemplated in the Resolution Framework and hence not progressed. Further, for another asset, namely a stadium complex, binding bids have been received and under evaluation by the New Board. In respect of other assets / business verticals, no bids were received

For the 9 SPVs after careful evaluation of alternate resolution options, the New Board has given its in-principle approval to establish an infrastructure investment trust (“InvIT”) under the Securities and Exchange Board of India (Infrastructure and Investment Trusts) Regulation 2014. The proposal envisages establishment of an InvIT for holding the equity and other receivables from the relevant SPVs in consideration of units to be issued by the InvIT which will then be distributed to the creditors of relevant IL&FS group entity (including the Company) to resolve the debt extended by them

In furtherance of the same, the following steps have been undertaken: (i) the Company has incorporated a wholly owned subsidiary to act as the Sponsor to the proposed InvIT; and (ii) The application for registration of the InvIT has been made to the Securities and Exchange Board of India, which is under consideration.

The Company expects to complete the setup of the InvIT and transfer of the projects to the said InvIT in financial year 2021.

An InvIT is being considered due to possibility of a higher value accretion on account of the following key reasons:

It is an efficient mechanism of transferring ownership and economic benefit of the underlying SPVs to the creditors of the IL&FS Group Holdcos having exposure to these SPVs; It provides potential for higher recovery through issuance of units in InvIT at yield closer to lending rates of creditors as compared to higher discounting factor that may be applied by potential acquirer through bid process; More tax-friendly for creditors of Holdcos. InvIT may significantly overcome tax in-efficiencies of a multi-layered structure as income is taxable primarily in the hands of the unit holders; Marketable / tradable instruments (InvIT units) with liquidity offered through a proposed listing on recognised stock exchange(s) providing exit whenever desired.

The resolution process for the IL&FS Group is being undertaken in accordance with the Third Progress Report Proposed Resolution Framework for the IL&FS Group dated December 17, 2018, the Addendum to the Third Progress Report dated January 15, 2019 and the Second Addendum to the Third Progress Report dated December 5, 2019 (collectively the “Resolution Framework”). The New Board has till date submitted five progress reports to the NCLT on the resolution plans and latest of which were submitted on August 9, 2019. The New Board also submitted a revised Resolution Framework for all Group Companies to Honble NCLAT vide an affidavit dated January 9, 2020, an addendum to the said affidavit was filed with Honble NCLAT on February 7, 2020.

The Honble NCLAT vide its judgement dated March 12, 2020, has approved the revised Resolution Framework submitted by New Board along with its amendments.

International operations

As stated herein above, the New Board of IL&FS has taken a decision to discontinue activities at all the international locations by closing down the operations/ divestment of stakes. The status is provided as follows:

(a) Binding bid has been received in respect of 49% stake held in Chongqing Yuhe Expressway Limited, China by ITNL International Pte Ltd (IIPL), a wholly owned subsidiary of the Company and the divestment process is expected to be completed by Q2 FY 20

(b) the divestment process for Dubai Supreme Court Project being executed by entities in Dubai namely, ITNL International DMCC and ITNL Infrastructure Developers LLC, could not progress due to lack of interest. In view thereof, it was resolved to file application for insolvency for both these entities for which necessary steps have been initiated and

(c) After evaluating all available options for resolution of Elsamex SAU, Spain, it has been resolved to file an application for voluntary insolvency of the Company. The process has been delayed due to declaration of State of Alarm in Spain on account of the outbreak of COVID - 19. In the meanwhile, one of the creditors of Elsamex S.A.U has filed an application for mandatory insolvency of the Company.

(d) IIPL Operations is US have been wound up and the Comoany is in the process of being dissolved

6. Risks and Concerns

Given the developments mentioned above, from the Companys standpoint, the situation remains critical and the key concerns and risk envisaged are as under:

(a) Completion of Divestment process for assets where binding bids have been accepted, in time bound manner to ensure resolution of these entities;

(b) Achieving timely settlements of incomplete roads projects and other compensation claims with respective Concessioning Authorities. Some of these settlements are subject to judicial process;

(c) Set up of InvIT platform after seeking all requisite approvals for transfer of ownership and economic benefit of the underlying SPVs to the creditors of the IL&FS Group Holdcos having exposure to these SPVs;

(d) Completion of the Resolution process in accordance with approvals received from Honble NCLAT;

(e) Monitoring and reviewing the liquidity position of the Company, with assistance from the External Resolution Consultant appointed by the New Board on key oversight functions such as

(i) Preparing monthly cash budget

(ii) Reviewing operational issues,

(iii) Tracking key liquidity parameters, and

(iv) Identifying avenues for cash generation/ preservation.

(f) Revenues from toll road projects

The revenue from toll collections will be significantly affected during the current financial year owing to restricted movement of fleet across various modes of transport because of Covid-19 outbreak that has put most of the country in a lockdown.

In addition, since a significant portion of the Companys operational assets are toll-driven, any change in traffic growth rate will significantly impact earning potential. All toll revenues depend on number of vehicles plying on the road and may be affected with changes in traffic volumes. The traffic volume is directly or indirectly affected by factors beyond the Companys control such as toll rates, fuel prices, affordability of automobiles, and the quality, convenience and travel time on alternate routes. In addition, the availability of alternate means of transport such as rail networks and air transport may also affect traffic volumes. Moreover, these cash flows are also affected by seasonal factors as the traffic tends to decrease during monsoon but increases during holiday seasons. The Company tries to maintain a balance between the annuity and toll projects and also looks to securitise future cash flows from toll receipts to reduce risk impact

In view of the Company not undertaking any project development/construction activities at present there will be no risks related to Project Financing, Cost Overruns, Internal & External Credit Shortfall , Participation of Banks, Land Delays, Environment, Health and Safety issues relating to construction activities.

7. Outlook

Taking into account the various challenges facing the IL&FS Group, including the complexity posed by its structure, width of operating business, scale, group-wide levels of leverage, public interest, financial stability, legality, various stakeholder interests (including interests of the joint venture partners) and commercial feasibility, the New Board has put in place a resolution framework to have a timely resolution process, which is fair and transparent and incorporates well established legal principles and seeks to address concerns of all stakeholders of the IL&FS Group. The implementation of the resolution framework is presently under way and the Company expects to make significant progress on various initiatives describe above in the current year.

8. Internal Control Systems and their Adequacy

The Company had a risk management framework and compliance systems including the risk management policy adopted by the erstwhile management. Given the circumstances in which the New Board was appointed on October 1, 2018, the New Board has reviewed and put in place a revised and updated risk management framework which takes into account the complexity of IL&FS Group structure and the situation with respect to operations/liquidity management. It has also implemented certain key initiatives to protect interests of the stakeholders in order to mitigate the risks being faced by the Company (and the IL&FS Group).

The normal business operations of the Company as they existed until September 30, 2018 have ceased. The New Board has taken certain steps to continue the current operations of the Company and its operational project SPVs and is focused on achieving resolution as mandated by NCLT.

An internal audit is carried out by independent Chartered Accountant firm which report findings and observations directly to the Audit Committee. The Internal Auditors scope and authority are derived from the Internal Audit Plan which is approved by the Audit Committee at the beginning of each financial year.

Internal audits are conducted at periodic intervals and cover operations, accounting and finance, treasury, secretarial and administration functions. They also review the SOPs and report on the adequacy and effectiveness of internal controls, including internal controls on financial reporting. They also provide special reference to compliances, based on the audit plan. Internal audit reports are placed before the Audit Committee at regular intervals for review, discussion and suitable action.

Every employee plays a key role in fostering a strong internal control environment of responsibility, accountability and ethical behaviour

9. Financial and Operational Performance Standalone

During 2018-19, the Companys reported gross revenue of 786.24 Crore compared to 4,709.48 Crore.

Earnings before interest, tax, depreciation and amortisation (EBITDA) reduced to (931.65) Crore in 2018-19 compared to 1,996.22Crore in 2017-18.

Financing cost for the year was 1,275.55 Crore compared to 1,642.12 Crore. The lower finance cost is on account of non-recognition of finance cost for the period October 15, 2018 to March 31, 2019 in view of the NCLT approving the cut-off date of October 15, 2108 in terms of the Resolution Framework submitted by the New Board vide its Judgement dated March 12, 2020.

As a result of the various events during the financial year 2018-19 which are more fully discussed in the notes to the Financial Statements, there was significant uncertainty around the recoverable amounts and valuations, and related provisions for impairment, of the various investments made and loans, trade and other receivables of the Company from its group companies. The Board in consultation with the Management has performed an assessment to determine the recoverability of the carrying amounts of the investments, loans, trade and other receivables from its subsidiaries and other entities. Based on the above assessment, the Company has made an impairment provision in respect of the balance of loans, receivables, Contract assets, Other financial assets and investments from its subsidiaries and group companies aggregating to 5,682.77 Crore, 2,229.59 Crore, 368.51 Crore, 50.44 Crore and 5,971.71 Crore respectively, and recorded net loss on fair value changes of 101.67 Crore on financial assets measured at fair value through profit and loss, arising from transactions upto September 30, 2018.

In the view of the Company, the impairment provision made is prudent and represents the economic substance of the amounts recoverable.

Earnings per share on basic and diluted basis stood at (516.79) per share for the year ended March 31, 2019, against 7.65 per share for the year ended March 31, 2018, due to loss after tax for 2018-19.

10. Human Resources and Industrial Relations

Pursuant to defaults in obligations in terms of servicing of debts by the Company and subsequent action by the Union of India suspending the Board of Directors of IL&FS, the holding company, there was a lot of uncertainty amongst the employees. This resulted in increased attrition rate across all level of the employees. Since then, the Company has been facing capacity issues due to loss of key employees while meeting the need for servicing information requirements and providing clarifications to multiple investigating agencies, providing information to enable the ongoing asset monetization and restructuring activities and meeting ‘going concern requirements. The Management is taking all possible efforts to retain employees at all levels and is in the process of recruiting talent from outside to ensure adequate manpower to cope up with the ongoing resolution plan. Your Company considers its employees the most valuable resource and ensures the strategic alignment of HR practices to business priorities and objectives. The Company strongly believes in fostering a culture of trust and mutual respect amongst its employees and seeks to ensure that values and ethos are understood by everyone and are the reference point in all people matters.

11. Cautionary Statement

Certain statements made in the Management Discussion and Analysis Report relating to the Companys objectives, projections, outlook, expectations, estimates and others may constitute ‘forward looking statements within the meaning of applicable laws and regulations. Actual results may differ from such expectations, projections and so on whether express or implied. Several factors could make significant difference to the Companys operations. These include climatic conditions and economic conditions affecting demand and supply, Government regulations and taxation, natural calamities and so on, over which the Company does not have any direct control.