IL&FS new board moves to clean up debt mess, introduces austerity measures

The new Infrastructure Leasing & Financial Services (IL&FS) board is discovering several challenges and complexities as it finds new information on the flawed governance practices at the infrastructure financier. 

For the newly reconstituted board of directors of IL&FS, headed by Uday Kotak, chairman and managing director of Kotak Mahindra Bank, the challenging task of turning around the company keeps getting taller. 

For instance, the new board believes that large parts of the IL&FS group operated independently with no boundaries of legal entities and separate managements. 

“The new board is unable to validate whether due processes and transparency have been followed by the previous management in pursuing various asset monetisation activities,” further, “The New Board has also noted that under the previous management, there was no suitably empowered central financial control function that maintained information and accuracy at the group level,” states a report prepared by IL&FS’ board that was presented as a roadmap before the National Company Law Tribunal (NCLT) in Mumbai, on Wednesday. 

Apart from Kotak, Vineet Nayyar, executive vice-chairman of Tech Mahindra, was appointed to the board of IL&FS as its vice-chairman on October 1, along with five other eminent members. 

Since taking over the company, the new board has appointed members to the boards of eight key IL&FS companies, namely: IL&FS Financial Services, IL&FS Transportation Networks, IL&FS Environmental Infrastructure and Services, IL&FS Energy Development and IL&FS Engineering and Construction, to name a few. 

Further, a core operating committee was appointed, which is to be led by Nayyar, to handle day-to-day operations as well as with the final resolution plan of the company. Other members include Kaushik Modak (chief executive of IL&FS Finance Services, Dilip Bhatia (chief strategy officer of IL&FS Transportation Networks), Ashwani Kumar (chief executive of IL&FS Environmental Infrastructure and Services ), and T V Raghunath as special advisor to Kotak. 

The board of directors of IL&FS has withdrawn the post-retirement benefits granted to previous directors and senior management. While the resignation of former key managerial personnel of IL&FS have been accepted by the new board, their settlement payments have been put on hold, the report states. 

All payments of Rs 10 million and above have to be approved by the Managing Director (Nayyar), from henceforth and the board has instituted a standstill on all material contractual commitments of IL&FS group companies. 

The board has sought a “review of documentation concerning the arrangements of the IL&FS Employees Welfare Trust and its inter-connection with IL&FS and its group companies.”

There will be a full standalone and consolidated audit conducted for the six months ended September 30, 2018 for IL&FS and certain group companies, in addition to a special audit of past management actions that have major commercial and governance implications, the board has told the NCLT through the report. Further, the new board is undertaking a review of all preferential actions that creditors of the company and its affiliates provided, including appropriation of balances towards dues and loan repayment set offs, for example.

The board re-appointed Alvarez & Marsal, also advisors to the old board, to help with managing day-to-day cash flow activities as well as to assist and advice as resolution consultants. While Arpwood Capital Private and JM Financial Services, as the joint financial and transaction advisors (FTAs), will help the board asses the current business and financial position of the IL&FS group, and advice on any divestment transactions as that could be available as part of the final resolution plan. 

The FTAs have conducted a preliminary assessment of various assets and businesses that could be monetised in the current economic environment, and the new board feels that there are valuable assets in the group which has garnered market interest. 

Further, the report says, the new board is consulting with all relevant authorities and have requested entities like the National Highway Authority of India and Ministry of Road Transport to settle claims filed by IL&FS’ companies for concessions that the latter is due from the former.

Several examples of mismanagement or bad governance have been noticed by the new board, notes the report.

In what one could term as one of the largest and most complex corporate structures, IL&FS has 346 sub-companies under its ambit including subsidiaries, joint-ventures, associate companies and joint controlled operating companies.

Despite the immense scale and breadth of the structure, the new board found that there is no central repository of bank accounts and that the data is stored in different formats and different systems across the Group.

There are five major challenges for the new board to drive an effective and fruitful resolution of the company and its sub-companies, including how to consolidate and clean up the present structure with multiple layers.

Austerity Measures introduced by IL&FS new board 

• 10 per cent salary rationalisation for all employees with a CTC of Rs 5 million or above 
• 69 superannuated employees retained as consultants are to be discontinued, subject to exception 
• The maximum limit for company owned and maintained cars reduced from Rs 5 million to Rs 2.5 million. 
• Distribution of Diwali gifts on company’s account to be discontinued