The National Company Law Tribunal (NCLT) has allowed the government to take control of debt-ridden Infrastructure Leasing and Financial Services (IL&FS) by dissolving the entire board, in a move reminiscent of its move to take the reins of IT services company Satyam in 2009.
In its application with the NCLT earlier on Monday to remove the board of the company, whose recent defaults have roiled Indian markets, the government proposed six new directors led by veteran banker Uday Kotak as the new chairman.
The other members of the board are former Sebi chairman GN Bajpai, ICICI Bank chairman GC Chaturvedi, Vineet Nayyar, former vice-chairman, Tech Mahindra and former bureaucrats Malini Shankar and Nand Kishore.
The government counsel said the directors of IL&FS
had "failed to discharge their duties", adding that the company has been showing a "rosy" picture of its balance sheet.
The counsel also expressed concerns over the cascading impact of the IL&FS crisis on the overall economy. "Many mutual funds will collapse if IL&FS collapses," the counsel said, adding that besides AMCs, government securities would face selling pressure.
The reason why the government is intervening in this matter is that the IL&FS case will have a bearing on the entire economy, the counsel said.
In its first comments after it moved the NCLT to take control of IL&FS, the finance ministry
said the government stands fully committed to ensure that needed liquidity is arranged for the company from the financial system so that no more defaults take place and the infrastructure projects are implemented smoothly.
"I am very happy that the government has bestowed this honour upon me, said Malini Shankar, newly-elected board member. "It is very clear that the finances need to be looked into and cleaned up. It is after all public money."
She will not be able to say anything at this point of time, Shankar said, adding that the board will look at the proceedings and collectively decide the road ahead.
"I have not worked within Il&FS. But I am familiar with their projects that they have been taking up over the years," she added.
The government action is rare and underscores the extent of the troubles at the debt-laden financing and construction behemoth. By proposing the name of Kotak, who is the managing director (MD) and Chief executive officer (CEO) of Kotak Mahindra Bank, the government is looking to shore up sentiment and restore confidence in the market, according to market observers.
Ajay Srivastava, CEO, Dimensions Corp Financial Services, welcomed the proposal to name Kotak as the chairman. “We have a very good example of Satyam, which was in a worst situation than IL&FS. Some of the assets are pretty good quality ones, we may see some of them going around to L&T or may go around to other companies.”
The government application named Ravi Parthasarathy, SB Mathur, RC Bhargava, Arun Saha, Michel Pinto, J Rao, Rina Karmath, Varsha Sawant, Manohar Waghle, among others, as parties in the IL&FS case.
Sandeep Parekh, founder of Finsec Law Advisors, said the IL&FS board messed up, adding that the current issue is that the current board seems to have not done its duty well. He said the government move is good psychologically.
The last time the government moved to take control of a company was during the Satyam scandal in 2009 that shook investor confidence in the information technology sector.
An intervention could derail IL&FS' restructuring plan, reported Reuters. The firm announced on Sunday that its shareholders had approved a plan to raise funds via debt and equity issuances.
A string of defaults by IL&FS in recent weeks have led to rating downgrades on the company and its subsidiaries that house some of its debt. Its rapid fall from grace has sparked fears of a crisis in the country's non-banking financial services sector, prompting the government's bid for intervention.
Parekh said the problem is now far bigger than IL&FS. “The trust in the market, especially the money market, has weakened significantly which has in turn domino effect on equity markets as well. So, the problem is far larger than IL&FS and sorting this out will only be a small step," he said.
Satyam's board was dissolved by the government after its then chairman and founder, Ramalinga Raju, revealed India's biggest corporate accounting fraud. The government then set up a six-member board to stabilise the struggling software company, which was later sold to Tech Mahindra.
(With inputs from Reuters)