The roadmap for IL&FS recovery may be similar to that laid out for Satyam Computer Services case of 2009.
New Delhi: A new government-appointed board led by Kotak Mahindra Bank managing director Uday Kotak has taken charge of the ailing Infrastructure Leasing & Financial Services (IL&FS) this week.
The board, which also includes former SEBI chairman G.N. Bajpai, Tech Mahindra chief Vineet Nayyar and ICICI Bank non-executive chairman G.C. Chaturvedi, has been tasked with deciding the future course of action to rescue the troubled firm.
It will hold its first meeting on 8 October.
Government sources said the roadmap for recovery may be similar to the Satyam Computer Services case of 2009.
Also read: India needs to launch a ‘surgical strike’ on IL&FS
What is expected of the board
The immediate responsibility of the board will be to ascertain the current situation and the “exact” magnitude of the problem. Accordingly, it will have to assess the amount of money required to restore IL&FS to some sense of respectability.
The new board will also assess the projects that were being handled and a number of projects under IL&FS’ 150-plus subsidiaries could be put on the block. However, the board will also undertake an investigation to understand if there has been manipulation and fudging of critical financial documents.
“It will also identify the non-core assets that can be hived off at the earliest,” a government official said. The six-member board is expected to look into the loopholes that led to this crisis.
What went wrong
The infrastructure financing company has been in the news for the last few weeks after its group companies started defaulting in repayment obligations.
The problem came to light in June, when a special purpose vehicle attached to IL&FS Transportation failed to honour its debt obligation. Subsequently, other group companies too reported similar problems.
On 14 September, IL&FS Financial Services defaulted in repayment of bank loans. “It is essential to ascertain how the leveraging on a consolidated basis was allowed to be so huge,” said Amarjit Chopra, former president of the Institute of Chartered Accountants of India.
With the failure of the infrastructure lending giant, rating agencies which failed to raise an alarm on time have also came under the scanner.
“It will be clear if the government or the regulator initiates any investigation on the rating agencies and whether action is taken against the executives involved in this case,” Chopra added.
The IL&FS case was referred to the National Company Law Tribunal (NCLT), which asked the ministry of corporate affairs to appoint a new board, while directing the suspended members not to represent the company in any form.
Echoes of Satyam
This is the second time after the Satyam Computers fiasco in 2009 that the government has jumped to the rescue of a private company.
In that case too, the ministry of corporate affairs had taken a similar step by taking control of scam-hit Satyam, replacing the original board with a new six-member board, which was entrusted with reviving the company.
The new board invited bidders for a takeover. Spice Group, Larsen & Toubro and Tech Mahindra were among the companies that had evinced interest in acquiring the IT firm, of which Tech Mahindra eventually won the bid.
Role of independent directors
A senior government official said IL&FS’s independent directors will also come under the scanner.
Manoj Kumar, corporate law expert and managing partner at Hammurabi and Solomon, agreed. “The role of independent directors on mismanaging issues will be tested, and where culpability is found, action from the authorities including the Reserve Bank of India may follow,” he said.
Also read: How Indian rating agencies missed the IL&FS mess
The challenge of making the role of independent directors across private industry more effective remains unaddressed. In the absence of this, there have been repeated instances of mismanagement across many companies, indicating possible oversight by independent directors.