The untold tale behind Modi’s shock takeover of a risky lender

MUMBAI: With the future stability of the Indian financial system on the line, executives running a giant infrastructure lender gathered at the company’s glassy, modernist headquarters in Mumbai and hammered out an ambitious restructuring plan last Saturday to manage a US$12.6bil debt burden after a string of defaults.

Except that they weren’t really calling the shots any more. The very next day, the government in New Delhi authorised a move to sweep in and seize control of Infrastructure Leasing & Financial Services Ltd (IL&FS), a vast conglomerate that’s raised billions of dollars in the corporate bond market and powered the nation’s public project building boom. The stunning move, more typical of China’s command-and-control economy than a free-wheeling democracy like India, caught investors by surprise. Prime Minister Narendra Modi’s government also unveiled an investigation into IL&FS’ management by the Serious Fraud Investigation Office.

The decision to oust the company’s board was taken by Finance Minister Arun Jaitley after the government had quietly reached out, at least two days earlier, to former bureaucrats and current bankers to orchestrate a board coup, according to a source. The government had been monitoring the lender for two weeks, the source said.

Following a series of meetings last week, and months after the first defaults by the systemically important lender, the ministry was worried about the multiple shocks to the financial markets that would follow from IL&FS’ collapse.

“The restoration of confidence of the money, debt and capital markets, the banks and financial institutions in the credibility and financial solvency of the IL&FS Group is of utmost importance for the financial stability of capital and financial markets,” the government said in a statement on Monday.

In addition to handpicking a new board of directors, the government is expected to overhaul the management and monitor any future restructuring plan, a process that seems likely to extend well into 2019. The newly constituted board led by Asia’s richest banker, Uday Kotak is likely to meet Thursday. It must devise a plan for the group and file a response to the National Company Law Tribunal, which endorsed the government’s move, by Oct 15. The tribunal will next hear the matter on Oct 31.

Modi’s government concluded it had few options. The economy was already grappling with surging fuel prices and a plunging currency. The last thing the government needed was more turmoil in the debt market, with plans underway to raise a net 2.47 trillion rupees (US$34.7bil) through March to bridge India’s fiscal gap. — Bloomberg