The government has taken control of Infrastructure Leasing & Financial Services Ltd (IL&FS) after the National Company Law Tribunal gave its nod for what is essentially a temporary nationalisation of the company.

IL&FS, which has been in a tailspin of defaults on interest payments and commercial paper obligations, will now have an all new board of directors headed by Uday Kotak, managing director of Kotak Mahindra Bank. Other members include executive vice chairman of Tech Mahindra Vineet Nayyar, former SEBI chairman G.N.Bajpai, former IAS officer and current ICICI Bank chairman G.C.Chaturvedi as well as former IAS officers Malini Shankar and Nand Kishore. With the NCLT allowing the government to appoint a total of 10 board members, more appointments are likely to come soon. The new board will have to find a resolution for the ₹91,000 crore of debt on the books of IL&FS and its subsidiaries and will meet on October 8 to draw up a roadmap for revival. The revival plan has to be submitted to the NCLT before the next hearing scheduled for October 31.

Given that state-owned Life Insurance Corporation of India (LIC) is likely participate in IL&FS’ rights issue worth ₹4,500 crore aimed at keeping the company afloat, revival plan for the crisis-hit company is taking the shape of a modern day government bailout. LIC is already the largest shareholder in IL&FS with a 25% stake, which it may raise. Apart from LIC, India’s largest public sector bank State Bank of India is also likely to participate in the rights issue.

“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. The government stands fully committed to ensure that 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 ministry of finance said in a statement issued in the evening.

It added that to stop further financial defaults by IL&FS and to resolve the defaulted dues to the claimants, a combination of measures including asset sales, restructuring of some liabilities and a fresh infusion of funds by investors and lenders would be required. “There appears to be a significant liquidity gap in the company as estimated liabilities might not have any corresponding revenues/capital flows presently,” the statement said.

The government also said that the replacement of the existing management was ‘’most necessary” and it needed to be done “immediately” for restoring investor confidence. “The government, after analysing the emerging situation of the IL&FS Group came to the conclusion that the governance and management change in IL&FS Group is very necessary for saving the Group from financial collapse,” it said.

For taking over IL&FS, the government had filed a petition under sections 241 and 242 of the Companies Act, 2013. Section 241 allows the central government to move the NCLT if the affairs of the company are being carried out in a manner that is prejudicial to public interest and section 242 gives the NCLT powers to regulate the affairs of the company including the appointment of board of  directors.

While arguing the government’s case at the NCLT in Mumbai on Monday, the counsel of the ministry of corporate affairs said that former CEO Ravi Parthasarthy and other CEOs and CFOs of IL&FS’ subsidiaries were misleading the stakeholders about the situation at the company. The counsel also argued that the difficulties of IL&FS could create problems for the financial sector as a whole.

The government said in its statement that it has also ordered an investigation by the Special Frauds Investigation Office (SFIO). “The fact that the company continued to pay dividends and huge managerial pay-outs regardless of looming liquidity crisis shows that the management had lost total credibility. There have also been serious complaints on some of the companies [IL&FS’ subsidiaries] for which an SFIO investigation has been ordered,” the statement said.

The move is being seen as a positive one by experts, especially given Kotak’s impressive track record at his bank. Sanjiv Bhasin, executive vice president, markets and corporate affairs at IIFL said given the debt-laden company’s size and exposure, it was bound to be rescued by the government. “IL&FS is a shadow bank which is too big to fail. It was bound to be taken over and rescued by the government. They have taken a positive step by asking Uday Kotak to take charge and handle the affairs,” he said.

He went on to say that the previous board was inefficient as they repressed wrongdoings at the company.

Abhishek Rastogi, partner, Khaitan and Co said, “With cases like that of Nirav Modi, Mehul Choksi and Vijay Mallya, it seems that the government wants to be a little careful now. Till the time the judicial intervention is in the best interest of all stakeholders, it should be looked at positively.”

Rastogi was of the view that as long as LIC’s investments are within regulatory norms and limits and did not put the policyholder’s coverage at risk, it should not be a problem.

The IL&FS saga has often been compared to the Satyam fraud case that rocked the nation back in 2009. However, Sandeep Parekh, founder of Finsec Law Advisors says the current case is much graver. “This is a thousand times more serious than Satyam because of the financial contagion. The real economy doesn’t have the problem of the financial sector which is leverage and contagion. The problem came from IL&FS but now it has spread too wide and needs to be contained,” he said.

Parekh added that the government has taken a good step by moving quickly to address the issue. “The credit markets have nearly frozen, people are starting to be scared of even AAA rated papers. This was most necessary,” he said.

Last week saw LIC, which is the biggest shareholder with 25% stake in IL&FS, assert that it would participate in the rights issue and come to the company’s aid. This, especially after LIC’s IDBI deal raised some concerns among experts with respect to policyholders’ money being used to rescue failing entities.

But Parekh says right now, the move is a necessary one. “Right now the house is burning so let LIC come in. There is definitely a moral hazard issue, but right now everything is at stake,” he said.

Going forward, Bhasin believes these steps will help arrest the contagion in the financial space, but warns that some of the damage done will have consequences. “These are all confidence building measures that should stem the rot in the medium term. But the damage has already been done. The contagion has spread to NBFCs and financials as a whole….The more leveraged ones will be hurt,” he said.

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