IL&FS’ Satyam moment

There is a sense of déjà vu for all those who have been witnessing the gradual fall of Infrastructure Leasing &Financing Services, India’s premier infrastructure financing company. They are reminded of January 7, 2009, when a shocking confession by its founder Ramalinga Raju, saw the beginning of a collapse of the multi-billion dollar Satyam Computer Services, whose footprint spanned 67 countries and served hundreds of global Fortune 500 companies.

While in the case of Satyam the misadventure was directly linked to the inflated cash and balances of more than $1 billion on its September 30, 2008 balance sheet, the case of IL&FS is a little different. IL&FS has repeatedly defaulted on its debt repayments to various financial institutions.

However, the causes of the downfall of both these companies is more or less the same, There was a lack of oversight by the regulatory authorities and board members; auditors, the top management, company committees and rating agency were asleep at the wheel, all of which have now forced the government’s hand. With little faith left in the existing management’s ability to carry out the long-term reforms, the government has appointed a new board.

Much like Satyam, the new IL&FS board too has six experts from different fields. Headed by Uday Kotak, MD of Kotak Mahindra Bank, it includes Vineet Nayyar, executive vice chairman of Tech Mahindra, G N Bajpai, former SEBI chairman, G.C. Chaturvedi former IAS officer and ICICI Bank chairman, and Malini Shankar and Nanda Kishore, former civil servants. Even in the case of Satyam, the government had appointed a six-member board headed by banker Deepak Parekh. The board included Kiran Karnik of Nasscom, C Achuthan, a well-known chartered accountant, Tarun Das, chief mentor at the Confederation of Indian Industry, among others.

The government’s decision to take this extraordinary step under section 241(2) of the Companies Act, 2013 was to prevent further mismanagement of the company and protect public interest. “The decision to supersede the existing board was taken after careful consideration of a report received from the regional director, Mumbai under the Ministry of Corporate Affairs, which clearly brought out serious corporate related deficiencies in the IL&FS holding company and its subsidiaries,’’ the government said in a release.

It also noted that the consolidated financial statement of IL&FS, its subsidiaries, associates and joint ventures did not reflect the actual rot in the company’s balance sheet because of financial misreporting. Not only did it exaggerate the amount locked up in its intangible assets—amounting to more than ₹20,000 crore, but also misrepresented facts, because 50% of its revenues that was supposed to come from receivables, were locked up in litigation and arbitration.

Despite reporting negative cash flows from operations for some years— there was a net outflow of ₹7,020 crore in 2017-18—and a ballooning adverse debt-equity ratio. The beleaguered financial behemoth had also paid dividends and huge managerial payouts without any consideration for the looming liquidity crisis. All this, says the government, puts a question market on the present management’s ability to ensure the continuity of IL&FS as a growing concern.

Setting up a new board, the government felt would be the first step towards in restoring the confidence of the financial market in the IL&FS Group. But it will take much more, concedes the government, to ensure continued access to the financial market by the IL&FS group to meet its present and future financing needs. That would entail fresh capital infusion, time-bound sale and monetisation of assets of the IL&FS group and restructuring of its business.

More importantly, the government has assured the markets that it is committed to providing IL&FS the much-needed liquidity support and also promised to ensure financial resources for infrastructure and other productive sectors of the economy, to keep the growth momentum going.

In fact, a resolution to this effect had been worked out for IL&FS and its subsidiaries on September 29 at the company’s annual general meeting. In a video released to the press, the then vice-chairman Hari Sankaran had announced a three-pronged strategy to turnaround the company. “To successfully complete the on-going rights issue to enable the company to recapitalise itself; to sell assets and repay our creditors; and third is to be able to get liquidity to repay our debtors till our asset sale cycle begins,” he said.

The shareholders at the AGM also approved a slew of measures like withdrawal of further dividend payments, raising ₹15,000 crore through bonds, increasing the borrowing limit to ₹35,000 crore, reappointing Arun Saha as joint managing director and generating funds through the rights issue.

Its decision to raise ₹4,500 crore through a rights issue from its major shareholders like the Life Insurance Corporation of India (LIC), and the country’s top lender, State Bank of India (SBI), and others by October also made eminent sense. It would reduce its dependence on mutual funds and other non-banking financial institutions, to take care of its short and long-term funding requirements.  It will also not dilute the existing shareholding status of its major investors like LIC with 25.34% stake, Orix Corporation of Japan with 23.54%, Abu Dhabi Investment Authority, which owns 12.56% and SBI with 6.42%. It would give them the necessary confidence to make further investments.

Appointing a specialised agency like Alvarez & Marsal to develop, seek approval from the board and other stakeholders and then implement the comprehensive restructuring plan to “demonstrate to its creditors and shareholders that the intrinsic value of the group is sufficient to repay its liabilities’’ and ensure its turnaround, too was a welcome move.

Seeking to reorganise its debts under section 230 of the Companies Act of 2013 too was a prudent move. It would have allowed the company to restructure its debts and reorganise its organisational structure without being bound by any time limit.

It is clear that the government has realised, though somewhat belatedly, that it far more important to save a financial entity like IL&FS at whatever cost, douse the market fire and send the right signals to the economy on an immediate basis, rather than start searching for those accountable for the mess. That is an important lesson that not only the great financial crisis of 2007 taught the world, but even India has two major examples like the Unit Trust of India and the Satyam fiasco.  It is well to remember that by April 2009—three months after the Satyam debacle-- the company was sold to a joint venture of British Telecom and Mahindra Group, which is now a thriving organisation known as Tech Mahindra.