Govt moves to supersede existing IL&FS board; says committed to ensure liquidity

After several defaults by Infrastructure Leasing and Financial Services rattled financial markets and soured sentiments on the wider non-banking financial services sector, the government took a decisive step to stop the contagion on Monday, as it moved to restructure the board of the cash-strapped infrastructure finance giant. The Mumbai-bench of the National Company Law Tribunal (NCLT) has given a green signal to the government's move.

“On the basis of foregoing discussions and after considering the facts of the case, as narrated in the petition filed by the Union of India, this bench is of the considered view that, it is judicious to invoke the jurisdiction prescribed under section 241(2) of the Companies Act, 2013 and the tribunal is of the opinion... the affairs of IL&FS were being conducted in a manner prejudicial to public interest,” Judges M.K. Shrawat and Ravikumar Duraisamy said in their interim judgement.

The new board of IL&FS will be led by Uday Kotak, the managing director of private sector lender Kotak Mahindra Bank, former chairman of the Securities and Exchange Board of India G.N. Bajpai, ICICI Bank's non-executive chairperson G.C. Chaturvedi, retired bureaucrats Vineet Nayyar and Nand Kishore and IAS officer Malini Shankar.

The NCLT bench further directed that the present board of IL&FS be suspended with immediate effect and the six new board of directors will take over the company immediately.

The finance ministry separately said that firm and decisive action had been taken to preserve the value and assets of IL&FS and it “stands committed” to ensure much needed liquidity is arranged.

“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,” it said.

It further added that there have also been serious complaints on some of the companies for which an SFIO investigation has been ordered into the affairs of IL&FS and its subsidiaries.

“The government is committed to ensure that IL&FS Group receive much needed temporary liquidity support. It is hoped that financial institutions would be supportive for providing urgent liquidity,” the ministry added.

IL&FS is struggling with debts of Rs 91,000 crore. The company has defaulted on interest payments on its non-convertible debentures (NCD) and had last week scrapped final dividend to its shareholders.

It had also approved a rights issue of Rs 4,500 crore, to shore up the capital. IL&FS had also identified 25 projects for sale, which would help reduce debt.

Experts say the government's move to supersede the board will instill some confidence in the market, but the key for the new board will be to stem the defaults and get the much needed fund raising.

“The government is trying to protect the contagion. You can't allow an institution to fail and it has so many linkages. They moved in considering the gravity of the situation, which means they are on top of it and this is good for the markets. I am sure they will have resolution for the whole (liquidity) issue in due course. Once that is done, the whole NBFC rout will also in a way get contained,” Harendra Kumar, managing director and head of institutional equities at Elara Capital told THE WEEK.

Life Insurance Corporation of India, which holds a fourth of IL&FS equity and is the largest investor in the group, along with other shareholders like State Bank of India are expected to increase their stake via the rights issue.

LIC has already said that IL&FS will not be allowed to collapse, while SBI chairman Rajnish Kumar had said recently that the bank will decide on it once they receive a concrete proposal.