IL&FS submits revival plan to NCLT, proposes capital infusion, assets' sale

The new board expects to complete the process in the next 6 to 9 months

The new management of troubled Infrastructure Leasing & Financial Services on Wednesday presented to the National Company Law Tribunal a resolution plan, which includes “significant” capital infusion by shareholders or new investors, divestment of assets, liquidation of a few group companies, and debt restructuring at both group level and business vertical level. The infrastructure financier has taken austerity measures, including a salary cut of 10 per cent for those earning Rs 5 million and more and removing 69 consultants, the resolution plan said, apart from giving instances of fund diversion from the firm.

“We have brought a road map before (the Mumbai bench) that we intend to follow and, from now, it will be the execution of this road map. We have given detailed steps that we intend to follow, the steps already taken and the instances that have come to the notice of the board of directors, as well as on the challenges and threats that were looming when the new board took over," Sanjay Shorey, director of legal prosecution at the corporate affairs ministry, told the tribunal.

In the plan submitted to the stock exchanges, IL&FS said the main problem of the group was its excessive leverage, without commensurate asset values or cash flows, from the perspective of both timing and quantum. “Thus, the new board believes that the final resolution will inevitably involve substantial deleveraging from the current levels, notwithstanding the various challenges. Such deleveraging will necessarily need to be achieved in an orderly manner, considering the scale and complexity of the IL&FS group, in the absence of which there could be dire impact on asset/company values, especially at the level of certain key verticals,” said IL&FS in its Report on Progress and Way Forward filed with the NCLT. 

The new board headed by Kotak Mahindra Bank Chairman Uday Kotak expects to complete the process in the next six to nine months after following the due process in finalisation and implementation of the resolution plan, subject to market and economic conditions. The outstanding dues of the IL&FS group were Rs 942 billion, Shorey informed the tribunal. Besides parent IL&FS, the group has 346 entities, which include subsidiaries, associates, joint ventures, and jointly controlled operations. 

According to the board, the resolution plan will have three choices to make. The group resolution plan will involve significant capital infusion in IL&FS from credible and financially strong investors, with a condition that such investors along with the new board engage with the creditors such that it will lead to a final resolution on a group-wide basis. 

It said the group-level resolution plan might enable continuity of many of the operating entities, and for many employees, and might potentially reduce the complexity of engagements with multiple stakeholders. If successfully implemented by credible investors, this could address the circumstances which prompted government action in a timely manner. But, the report warned that the interests of investors for a group-level resolution needed to be tested and also whether it would lead to value maximisation. It said stakeholder engagement for such a resolution might be complex, and investors would need to demonstrate sufficient capability, commitment and wherewithal to execute the same.

The second choice is to make a business vertical resolution, which will include exploring solutions involving all assets, companies, special purpose vehicles (SPVs) comprising a specific business vertical, on a combined basis (for example, roads vertical). “The buyer interest for the vertical level resolution is expected to be more likely given that focused participants exist for different asset classes in India. For example, a number of private equity and strategic players have significant focused interests in roads, renewables, real estate and thermal power,” it said. 

Finally, the asset-level resolution will involve asset-by-asset solution explored through various methods. “This option compares well on asset level value maximisation and stakeholder engagement as majority of the loan liabilities exist at operating asset level. “However, this option may require liquidation of some businesses or assets that find no meaningful offers from buyers or are significantly unviable,” it said.

“The new board recognises there exist merits and demerits of each of these paths and will be examining these further over the coming weeks with the assistance of its advisors, based on market interest, maximisation of value, complexity and speed of execution, stakeholder interest(s), comprehensiveness of the resolution and transaction certainty,” the company said in a statement.

The board informed that soon after taking over, a “core operating committee” was constituted, comprising IL&FS Vice-Chairman and MD Vineet Nayyar, new IL&FS Financial Services CEO Kaushik Modak, IL&FS Transportation Networks Chief Strategy Officer Dilip Bhatia, IL&FS Energy Development Company CEO Ashwani Kumar, and Special Advisor to the Chairman T V Raghunath for handling day-to-day operations of IL&FS as well as matters relating to the final resolution. 

The new team found that IL&FS Financial Services had negative capital adequacy norms for the last three years and more seriously instances of fund diversion. “We note from records available that loans to one of the companies in the IL&FS group in excess of Rs 15 billion had been routed through eight other companies of the IL&FS group, reflecting adoption of circuitous transactions to circumvent regulatory prescriptions. The new board understands that appropriate authorities are undertaking investigations into the affairs of the IL&FS group,” the report said. 

Besides, IFIN has an exposure in excess of Rs 9 billion to companies which are subsidiaries of associates/JVs of IL&FS (such as HCPL) and IL&FS Employee Welfare Trust. These do not get consolidated into the accounts of IL&FS and, at the same time, have been treated by the previous management as ‘internal debt’. 

The new board also said it was unable to validate whether due processes and transparency had been followed by the previous management in pursuing various asset monetisation activities. For instance, a certain asset of the IL&FS group was transferred from one entity in the group to another entity in the group in June 2017 at a value of Rs 308 million for cash. This was based on an independent fair valuation, and in just about a year (in June 2018), a committee of directors resolved to sell this asset to a third party at Rs 10 million which is at a significant discount to the original intra-group purchase price, the reasons for which the new board finds are inadequately supported, it said.
 

It said the resignations of few former key officials, including Arun Saha, Hari Sankaran, Ramesh Bawa and Vibhav Kapoor, were accepted while placing all their settlement payments on hold. The board has also withdrawn post-retirement benefits granted to previous directors and senior management. The NCLT adjourned the matter to December 3.

Resolution Plan submitted to NCLT

• Significant capital infusion from shareholders/new investors
• Asset monetisation at group/vertical level to retire debt 
• Resolution/compromise with the creditors 
• 6 to 9 months needed to implement plan

Actions taken

• Control of cash flow, with MD clearing all transactions above Rs 10 mn
• Alvarez & Marsal appointed to manage day-to-day cash flow
• Arpwood Capital, JM Financial appointed transaction advisors 
• Reduction in sitting fees of boards and its committees
• Sought full standalone, consolidated audit for six months ended Sept 2018