THE SHOCK TAKEOVER OF IL&FS

India says ouster of company’s board aimed at restoring investors’ confidence

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, here, and hammered out an ambitious restructuring plan last Saturday to manage a US$12.6 billion (RM52.26 billion) 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 plan 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-andcontrol economy than a freewheeling democracy like India, caught investors by surprise.

Prime Minister Narendra Modi’s government also unveiled an investigation into IL&FS’s 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 people familiar with the matter.

The government had been monitoring the lender for two weeks, said one of the people.

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’s 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,” said the government 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 next year.

The newly constituted board is led by Asia’s richest banker, Uday Kotak. 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 October 15. The tribunal will next hear the matter on October 31.

“The government was left with no choice but had to act quickly and decisively,” said Mathew Antony, managing partner of Aditya Consulting, an advisory firm based here.

The troubles at IL&FS had been intensifying since July, when company founder Ravi Parthasarathy stepped down, citing health reasons. Defaults from August within the group rattled India’s money markets, added to pressure on corporate bond yields and sparked a sell-off in the stock market.

The Reserve Bank of India has initiated a special audit, given the potential systemic risk to other nonbank lenders. There were also worries about upcoming group debt payments.

On Monday, government lawyers sought the National Company Law Tribunal’s approval to oust the board, calling the directors a “parasite on public fund” because of their “hefty” salary packages.

IL&FS “has been presenting a rosy picture and camouflaging its financial statements by hiding severe mismatch between its cash flows and payment obligations, total lack of liquidity and glaring adverse financial ratios,” according to the government’s 44-page filing.

The government was left with no choice but had to act quickly and decisively.

Aditya Consulting managing partner