Kotak to Steer IL&FS

Mumbai: The NCLT on Monday allowed the government to take complete control of debt-laden IL&FS that had defaulted on its debt obligation multiple times causing volatility in the markets. This is the third time in less than 10 years where the government have been forced to step in and supersede the board of a listed firm.  

The Mumbai bench of the NCLT approved six-member board comprising Uday Kotak, MD 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 seeking a change in the management of the company arguing that the present crisis could adversely impact the entire financial sector. 

Coming down heavily on the management, the government counsel argued that Ravi Parthasarathy, along with CEOs and CFOs, were painting a rosy picture deliberately despite knowing the truth.  “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 further informed the tribunal that the SFIO had already initiated a probe into the matter. The defaults 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 2-3 trading sessions.   

Management change needed to save IL&FS
The Centre, on Monday, said that after analysing Infrastructure Leasing and Financial Services (IL&FS) group, it came to the conclusion that the governance and management change was necessary for saving it from financial collapse. 

“The IL&FS Group is involved in many infrastructure projects including through equity and debt financing. Any impairment in its ability to finance and support the infrastructure projects would be quite damaging to the overall infrastructure sector, financial markets and the economy, considering its systemically important nature,” said senior government officials. 

They pointed out that IL&FS, incorporated in 1987, is a large Systemically Important Non-Deposit Accepting Core Investment Company (CIC-ND-SI) and has 169 group companies including subsidiaries, joint venture companies and associate entities. 

“The company continued to pay dividends and huge managerial pay-outs regardless of looming liquidity crisis shows that the management had lost total credibility,” said government officials. 

There have also been serious complaints on some of the companies for which an SFIO investigation has been ordered into the affairs of IL&FS and its subsidiaries, it said.

Officials said that there is deep-rooted “mismatch in the debt-equity ratio because of excessive leveraging, which has put a question mark in its ability to continue as a going concern if allowed to continue in the hands of the present management.” “The high debt stress was clearly visible in the company and its main subsidiaries for the last so many years, but was camouflaged by misrepresentation of facts,” they said. 

Move gets analysts’ thumbs up
The surprise move by the government to take over the control and management of Infrastructure Leasing & Financial Services (IL&FS) has come as a major relief to financial markets as fears about further default had triggered widespread risk aversion towards the entire banking sector. 

The change in sentiments was very much visible by the way the share prices of IL&FS group companies responded as soon as the government moved a special petition before the National Company Law Tribunal (NCLT) seeking a change in the management of the company.

“The government has acted fast to avoid any collateral damage. The financial market runs on sentiments and it seems the markets have responded positively to the latest government move,” said Deven Choksey, MD of K.R.Choksey Securities.