IL&FS crisis: What are the options before the 6-member board to revive the firm? All you need to know

Infrastructure Leasing and Financial Services (IL&FS), a major infrastructure financing and construction company, defaulted on some of its debt obligations in recent weeks triggering wider concerns about risk in the rest of the country’s financial sector. The Mumbai-headquartered engineering and infra lending conglomerate owes over Rs 91,000 crore to lenders but has been on a defaulting spree since 27 August. The IL&FS group is facing a serious liquidity crisis and has failed to make over a dozen payments. A Mumbai bench of judges M K Shrawat and Ravikumar Duraisamy approved the takeover of IL&FS board by government nominees, saying the mismanagement at the crisis-ridden IL&FS made the present case a fit one for invoking Article 241 (2) of the Companies Act-2013, that provides for the suppression of the existing board. The new members nominated on the board include Uday Kotak of Kotak Bank, GN Bajpai ex Sebi chief, GC Chaturvedi - ICICI Bank chairman, and three retired IAS officers, viz, Malini Shankar, Vineet Nayyar and Nand Kishore. More members will be inducted on the board as Ministry of Corporate Affairs is authorised  to appoint 10 members. How the problems at IL&FS have larger implications  IL&FS’ problems could threaten India’s economic growth as lenders cut exposure to non-banking finance companies (NBFCs) or shadow banks. More concerning, analysts say, is that potential defaults at so-called shadow banks could cripple many mutual funds that are heavily invested in their commercial paper. [caption id=“attachment_4303361” align=“alignleft” width=“380”]  File photo of Uday Kotak. Pic courtesy: IBNLive[/caption] These non-bank finance companies have played a major role in lending growth in India in the last two years, as Indian banks, saddled with roughly $150 billion of bad debt, slowed lending. A string of defaults by IL&FS has led to a series of credit rating downgrades on the company and its subsidiaries that hold some of its 910 billion rupee ($12.48 billion) debt pile. Its fall from grace has spooked financial markets and sparked fears of contagion. Life Insurance Corp (LIC) Ltd, which is IL&FS’ biggest shareholder with a more than 25 percent stake, said last week it would participate in the rights issue. IL&FS’s other large investors are Japan’s Orix Corp with a 23.54 percent stake and Abu Dhabi Investment Authority (ADIA) with 12.56 percent. India’s biggest lender by assets, State Bank of India (SBI), also owns a 6.42 percent stake in IL&FS. HDFC and Central Bank of India hold, 9.02 percent, 7.67 percent, respectively, in the cash-strapped company. ADIA, Orix Corp in talks to acquire a controlling stake Abu Dhabi Investment Authority and Japan’s Orix Corp are reportedly in talks to acquire a controlling stake in IL&FS), Mint reported, citing two people who are aware of the development. ADIA and Orix could raise their combined shareholding to 75 percent from 36.1 percent if the proposed transaction goes through, the report said. NCLT approves govt’s takeover of IL&FS board The Mumbai-bench of NCLT On Monday allowed the government to take over the board of IL&FS. NCLT said the mismanagement at the crisis-ridden company is a fit case of supersession of the board under Article 241 of the Companies Act. The bench said going by the Centre’s petition, it was apparent that the “affairs of IL&FS were being conducted in a manner prejudicial to public interest”. It, thus, approved the Centre’s proposal to let a six-member team take over the IL&FS board. The Finance Ministry in a statement said the move was essential to restore confidence in the financial market. Govt ensures liquidity for IL&FS The government on Monday said it stands fully committed to ensuring that needed liquidity is arranged for the debt-trapped IL&FS to prevent any more defaults in payment of loans by the non-banking financial company. “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,” the ministry said.

IL&FS’ restructuring plan. The company last week said it is working on a detailed restructuring plan and will appoint Alvarez & Marshal to formulate a turnaround strategy.“We will develop a comprehensive plan for restructuring so as to be able to demonstrate to the creditors and the shareholders that the intrinsic value of the group is sufficient in repaying its liabilities. We have decided to appoint a specialist agency – Alvaraz & Marshal–to take this plan forward,” vice-chairman and managing director Hari Sankaran said in a video released on Saturday evening to the media after the board meeting. The group has lined up a plan to divest as many as 24 projects to raise around Rs 30,000 crore. The company has already launched a Rs 4,500-crore rights issue, from which HDFC and the Abu Dhabi sovereign fund, which collectively own a little over 21 percent, are keeping away. The company is also looking for an immediate liquidity of Rs 3,000 crore from lenders. With inputs from agencies