With the risk of contagion from the collapse of IL&FS threatening to derail the money markets, the government on Monday moved to supersede the board of the infrastructure financier.
With the risk of contagion from the collapse of IL&FS threatening to derail the money markets, the government on Monday moved to supersede the board of the infrastructure financier. A six-member board, headed by Uday Kotak, MD & CEO, Kotak Mahindra Bank, will attempt to resolve what is turning out to be a financial crisis of gigantic proportions.
IL&FS owes lenders a whopping Rs 91,000 crore and has defaulted on several of its commitments; rating agencies failed to spot the firm’s fragile finances, down-grading the company to junk status in a matter of weeks. The stakeholders of IL&FS include Life Insurance Corporation, HDFC, State Bank of India and Orix Corporation.
The sale of assets could fetch an estimated Rs 60,000 crore but that might be an optimistic number. Meanwhile, the Special Fraud Investigation Office (SFIO) is believed to have initiated a probe into “alleged irregularities” at IL&FS.
Indeed, the government’s petition invoking sections 241-242 of the Companies Act presented in the National Company Law Tribunal (NCLT), Mumbai, alleged the non-banking financial corporation (NBFC) was being run in a “manner prejudicial to the interest of the company and of the public” and “where the directors failed to discharge their duties”.
While the move should calm the over-leveraged financial markets, it is unlikely corporate watchers, said a painless solution can be found. “There will be some haircuts and taxpayers’ money could be used because too much has been lost,” a senior financial sector executive observed. The newly-formed board meeting is to be held on October 8 and the government is hoping to be able to provide the firm with liquidity to ensure projects are not stranded.
The government’s counsel on Monday referred to IL&FS as a ‘parasite’. Highlighting the financial mismanagement at the firm, the counsel said it was over-leveraged. IL&FS has 169 group companies, including subsidiaries, joint-ventures and associate companies. He also drew attention to the hugely inflated salaries drawn by the management at a time when the firm was in poor financial health, referring to the salaries of Hari Sankaran, VC and Arun Saha, joint MD and CEO. The annual report shows both Sankaran and Saha drew annual salaries in excess of Rs 7 crore. IL&FS has till October 31 to respond to any observations.
The new board comprises of former IAS and Tech Mahindra executive vice-chairman Vineet Nayyar, former Sebi chairman GN Bajpai, ICICI Bank non-executive chairperson GC Chaturvedi, IAS Malini Shankar and IA&AS (retired) Nand Kishore.
Arijit Basu, managing director, State Bank of India (SBI), told a leading business channel the market sentiment on the NBFC sector was turning negative and it was a concern since the sector is connected with the mutual fund sector. “There are clearly some liquidity mismatches and some resolution plan would be worked out,” Basu said.
Economic affairs secretary Subhash Chandra Garg tweeted: “Government in public interest had moved NCLT to supersede the management of IL&FS on grounds of mismanagement. NCLT has allowed appointment of a new board comprising of people of the proven record of turn around and managing financial and infrastructure institutions. Not a takeover.”
While LIC is the biggest shareholder in IL&FS with a 25% plus stake, Japan’s ORIX has a 23.54% stake, the Abu Dhabi Investment Authority owns 12.56% and SBI has a 6.42% stake. The NCLT will hear the matter again on October 31, and in the meantime, the ministry of corporate affairs will appoint more members.
In its petition, the government said the restoration of confidence of the money, debt and capital markets, the banks and financial institutions in the credibility and financial solvency of the IL&FS Group is of utmost importance for the financial stability of capital and financial markets. There is an emergent need to immediately stop further financial defaults and also take measures to resolve defaulted dues to the claimants.