resignations of Ramesh Bawa, CMD of IL&FS Financial Services, and Vibhav Kapoor, non-executive director, along with three other independent directors aren’t an everyday event. The questions it raises are:
a)Have these directors jumped off a sinking ship?
b)Or, have they stepped down as responsible professionals who are taking moral responsibility?
c)Or, were they asked to go?
Either way, it is not a development that infuses confidence in the institution or its parent. Rather, it creates even more uncertainty about its future. What’s also important to note, is that both Bawa and Kapoor are part of the management board of the parent. Are they stepping down from the management board of the parent too?
That would put the onus entirely on the board of the parent company. Before we delve deeper into some of the implications of the development, let us first get to know the parent, Infrastructure Leasing & Financial Services (IL&FS), a little better.
How The Government Controls IL&FS
IL&FS is a 30-year old financial institution. It was promoted by Central Bank, Unit Trust of India and HDFC. Today, however, these institutions have diluted their stake and its equity is widely held. And while you couldn’t label the institutions holding large stakes in the company today — LIC, UTI, State Bank of India and Central Bank — as promoters, the common factor among a number of them is that they are all owned by the Union government. And if we apply the norm of beneficial ownership, once could say that their collective holding was actually of the government.
As on March 31, 2018, the collective stake of these institutions was nearly 40 percent. Now if we assume, as would normally be the case, that the 12 percent equity held by the IL&FS Employee Welfare Trust was also under the guardianship/control of the management, the effective control would surpass 51 percent. Also, of the 14-member board of IL&FS, three are controlled by LIC, one each by Central Bank and State Bank of India, while another two are executive positions. That is 50 percent of the total board seats. Besides, it would be impossible to appoint an independent director to the board without the consent of this block. Therefore, one can assume that practically the board control is also effectively with Union government controlled entities — and by inference with the government.
If that is the case, a default by IL&FS or its subsidiaries tantamounts to a default by the government. Some of IL&FS’ arms have seen creditors file insolvency petitions in NCLT for liquidation and recovery of their dues. In this age of insolvency proceedings (under Insolvency and Bankruptcy Code), where defaulting company owners are not looked on very kindly, the government risks putting itself in a similar position. And that is not a position of comfort or one offering a moral high ground to espouse credit discipline from.
But there are other serious concerns. We all are aware that LIC is expected to take control of IDBI Bank. And this is being touted as a win-win. But given what has happened at IL&FS and the fact that LIC is designated as one of the promoters of Axis Bank, it raises questions about its ability due to competence outside its core domain or bandwidth to provide the right oversight to ensure another financial institution doesn’t go under.
What Is The Root Cause of IL&FS’ Troubles?
In this connection, the other important question that sparks from the resignation of directors of IL&FS Financial Services is: Has the current problem arisen due merely to an asset-liability-mismatch or because of poor decisions leading to bad quality of assets? If the former, why are people walking away? If the latter, what has transpired over the past few years that an institution of 30 years is now crumbling? Whichever the answer, it isn’t good.
Arising from all the above is the question of accountability. Who is accountable for the IL&FS mess? That is a question that needs answering. And lessons must be taken and questions asked about whether the present policy of large “sensitive” financial institutions having very diffused ownership is really such a good thing. In most companies, the promoters can be held accountable and action taken.
Perhaps, the central bank too needs to review whether having no skin in the game is such a good thing for the managements of large entities in the financial sector.
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