The Indian government, which seized control of debt-laden financier Infrastructure Leasing & Financial Services Ltd., has pledged to ensure the beleaguered lender has the money to prevent further defaults.
Superseding the board of IL&FS, which has defaulted on more than five of its obligations, was essential to restore the confidence of the financial markets, according to a statement by the finance ministry on Monday. The ministry said there have been “serious complaints” about some IL&FS group companies and an investigation by the federal Serious Fraud Investigation Office has been ordered.
Government officials on Monday ousted IL&FS’s management and instituted a new six-member board that includes India’s richest banker Uday Kotak and ICICI Bank Ltd. Chairman G.C. Chaturvedi. The dramatic move underscored the government’s concern that defaults at the systemically important shadow bank may spread to other lenders in the world’s fastest-growing major economy. The nation has sought to take control of a company on just two prior occasions, and only followed through once, with Satyam Computer Services Ltd. in 2009.
“The government stands fully committed to ensure that needed liquidity is arranged for the IL&FS from the financial system so that no more defaults take place,” the finance ministry said in the statement, without providing specific details. “It is hoped that financial institutions would be supportive for providing urgent liquidity.”
The newly-constituted IL&FS board must devise a plan for the group and file a response to the National Company Law Tribunal by Oct. 15. The tribunal will next hear the matter on Oct. 31. The other board members named on Monday include former head of the Securities and Exchange Board of India GN Bajpai and retired bureaucrat Vineet Nayyar.
Turning the group around will require a combination of asset sales and fresh fund infusions by investors and lenders, the finance ministry said. A restoration of confidence in the credibility of the IL&FS management was also imperative, it added, as was the need to avoid “any sub-optimal liquidation of assets.”
The indebted group can raise 600 billion rupees by selling assets, according to its biggest shareholder Life Insurance Corp. of India. The nation’s largest life insurer is open to subscribing to IL&FS’s rights offer, LIC Chairman V.K. Sharma said last week.
Other investors in IL&FS include Japan’s Orix Corp., the second-largest shareholder in the company, Abu Dhabi Investment Authority and Housing Development Finance Corp., India’s biggest mortgage lender.
“The solution would need to address how to prevent massive write downs by the banks, not merely by regulatory engineering -- as that would simply defer the real problem by a few years,” said Krishnava Dutt, a managing partner at law firm Argus Partners. “As I see it, someone now needs to bite the bullet.”
Shares of the group’s listed subsidiaries climbed in Mumbai before the decision was announced. IL&FS Transportation Networks Ltd., which develops and maintains toll highways, surged nearly 19 percent to close at 26.80 rupees, paring the year’s slump to 68 percent. Fund manager IL&FS Investment Managers Ltd. advanced about 10 percent. India’s markets are closed Tuesday for a public holiday.
Kotak, managing director of Kotak Mahindra Bank Ltd., has been named as the non-executive chairman of IL&FS, the Ministry of Corporate Affairs said in a statement on Monday.
The new board, while a step in the right direction, may not be able to help revive confidence unless the government bails out the lender, S. Santhanakrishna, partner at accounting firm PKF Sridhar & Santhanam LLP told BloombergQuint.
IL&FS funds infrastructure projects across Asia’s third-largest economy. Its defaults on commercial paper, once considered rock-solid, from August sparked concern among households holding mutual funds invested in such debt, and forced banks, mutual and pension fund managers to brace for further losses.
There was also concern that the group’s troubles could spread to other shadow banks and crimp Prime Minister Narendra Modi’s infrastructure plans before elections next year.