Fearing gloom, govt takes over debt-hit IL&FS

Mumbai/New Delhi: The Central government on Monday seized control of debt-trapped IL&FS, superseding its board with one led by India’s richest banker Uday Kotak, and vowed to stop further loan defaults by the infrastructure lending company that has 169 subsidiaries.

The National Company Law Tribunal (NCLT) on Monday allowed the government to take complete control of IL&FS that had defaulted on its debt obligation multiple times causing widespread volatility in financial markets.

This is the third time in less than 10 years that the government has been forced to step in and supersede the board of a listed company in India.

The Mumbai bench of the NCLT approved a new six-member board comprising Uday Kotak, managing director of Kotak Mahindra bank, Vineet Nayyar and Malini Shanker, retired IAS officers, G.N. Bajpai, former Sebi chairman, and G.C. Chaturvedi, chairman of ICICI Bank, and Nand Kishore, a  veteran auditor.

The new board has been given time till October 8 to meet and elect a new chairman.  

In a surprise move on Monday, the ministry of corporate affairs filed a special petition under section 241 and 242 of the Companies Act, 2013, in the NCLT to seek a change in the management of the IL&FS arguing that the present crisis in the company could adversely impact the entire sector.

“The government stands fully committed to ensuring that the needed liquidity is arranged for the IL&FS from the financial system so that no more defaults take place and the infrastructure projects are implemented smoothly,” the finance ministry said in a statement in New Delhi.

The ministry said IL&FS Group, which has assets of Rs 1.15 lakh crore, is presently facing tremendous debt pressure and struggling to service around Rs 91,000 crore in debt which is the outcome of its “mismanaged borrowings in the past”.

The company would require a combination of measures like asset sales, restructuring of liabilities and infusion of funds to prevent defaults.

Major shareholders of IL&FS include LIC, HDFC, Central Bank, Japan’s Orix Corp and Abu Dhabi Investment Authority.

Coming down heavily on the top management of IL&FS, the government counsel argued in the tribunal that management board member Ravi Parthasarathy, along with CEOs and CFOs, were painting a rosy picture of the company despite knowing the truth about its precarious financial condition.

“Fresh funds will be infused into the company when the new board comes up with a revival plan. We have identified a few people who have credibility,” said Sanjay Shorey, joint legal director in the ministry of corporate affairs.

He informed the tribunal that the Special Fraud Investigation Office had already initiated a probe into the matter.  

The default by IL&FS had triggered heavy redemption from mutual fund debt schemes over the past few weeks.

The crisis also led to widespread risk aversion towards the entire non-bank finance companies (NBFCs), knocking down their share prices that wiped out thousands of crores of investors’ wealth in just two-three trading sessions.   

“Given the fact that the group is sitting on a debt of Rs 90,000 crore, the government just couldn’t have stood on the sidelines and watched the issue getting resolved on its own. This is the largest bankruptcy we have ever seen. The decisive step taken by the government is welcome. This will clam the markets,” said Amit Tandon, founder and managing director of Institutional Investor Advisory Services.    

In 2009, the government had taken over the board of erstwhile Satyam Computers after its promoter B. Ramalinga Raju confessed to manipulating his company’s accounts and other wrongdoings of Rs 5,040 crore. In 2017, the government took control of Unitech Ltd alleging mismanagement of funds by the company.