‘STAKEHOLDER ISSUE’ TO NCLT ACTION. WHAT CHANGED?

Till Friday, the Narendra Modi government maintained the problem was for the stakeholders to sort out

Ever since the problems of the beleaguered infrastructure finance company IL&FS surfaced, the central government had maintained that the issue was for stakeholders, including Life Insurance Corporation (LIC) and State Bank of India (SBI), to sort out. This was the stance till last Friday.

However on Monday, the ministry of corporate affairs (MCA) took IL&FS to the National Company Law Tribunal (NCLT) to have the company’s board removed. A new board was constituted and was in place by the end of the working day, with Uday Kotak as non-executive chairman.

So what changed over the weekend? By all indications, the government was on-board with the plans to infuse additional funds into the company, which the stakeholders discussed with the finance ministry and the Reserve Bank of India multiple times last week.

This would include LIC, SBI, Central Bank of India and other stakeholders, including Japan’s Orix Corp, buying more stake in a rights issue and a sale of assets which could fetch as much as Rs 700 billion.

However, as the company defaulted on two more repayment obligations on September 28 and 29, worth ~2.23 billion and ~478 million, respectively, stakeholders, regulators, and the government realised that by the time the rights issue and asset sales actually took place, the repeated defaults would continue impacting investor sentiment and drag down equity and debt markets even further.

There were discussions over the weekend in New Delhi and Mumbai, and by Sunday, finance minister Arun Jaitley had given the go-ahead for MCA to approach NCLT to supersede the company’s board of directors, as well as an investigation by the Serious Fraud Investigation Office (SFIO), sources confirmed. There was added pressure from the very top, as the Prime Minister’s Office took cognizance of the matter and asked how could the financial situation of IL&FS deteriorate without the stakeholders and regulators coming to know of it.

“The present management has lost the confidence of investors. And when that is lost, your rights issue and the asset sale will not get you the proceeds that you would ideally want,” said a top official.

“There is an emergent need to immediately stop further financial defaults and also take measures to resolve defaulted dues to the claimants. This would require a combination of measures of asset sales, restructuring of some liabilities and fresh infusion of funds by the investors and lenders. The confidence of the financial market in the credibility of the IL&FS management and the company needs to be restored,” an official statement by the finance ministry, issued on Monday, said.

“Under the circumstances, replacement of the existing management by the new management appeared to be most necessary and immediately required to be done for restoring confidence and to avoid any suboptimal liquidation of assets,” it said.

The statement says that the decision to supersede the existing board was taken after careful consideration of a report received from the regional director, Mumbai (under MCA), which clearly brought out serious corporate related deficiencies in IL&FS holding company and its subsidiaries.

“We had been monitoring the situation on a daily basis, even before the reports started coming out in the financial media two weeks ago,” said the top official quoted above.

However, no answers were forthcoming on why the government’s decision to supersede the IL&FS board did not come earlier. The step, which the official statement itself calls ‘extraordinary’, was taken under Section 241(2) of the Companies Act, 2013 to apply to NCLT for an order to prevent further mismanagement.

“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 for which an SFIO investigation has been ordered,” the statement said.

Laying out the future course of action, officials and the official statement said that restoration of confidence of investors, ensuring solvency, timebound sale of assets, realisation of receivables, fresh capital infusion, restructuring of business and ensuring continued access to the financial market to meet IL&FS’ present and future financing needs will be the agenda for the new board of directors now.

“Restructuring long-term loans is to be looked into by the new board. The government feels that the company has over leveraged about 10 times of its net worth. The board will meet to assess the companies’ financial health and send a report within 15 days,” an MCA official said. On Monday evening, after the NCLT gave its go-ahead and after the new board was announced, Uday Kotak came to Delhi and met corporate affairs secretary Injeti Srinivas and then Jaitley.

“The government is committed to ensuring that IL& FS group receive the much needed temporary liquidity support. It is hoped that financial institutions would be supportive for providing urgent liquidity,” the release said.