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Govt parachutes into IL&FS crisis

Takes over debt-ridden firm, appoints new six-member Board headed by Uday Kotak, orders SFIO probe

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The central government constituted a new six-member Board of the debt-ridden Infrastructure Leasing & Financial Services (IL&FS) on Monday after the National Company Law Tribunal (NCLT) allowed it to take over the company in an emergency court hearing.

The new Board, headed by Uday Kotak, managing director of Kotak Mahindra Bank and G N Bajpai, former Sebi chairman, G C Chaturvedi, chairman of ICICI Bank, Malini Shankar and Vineet Nayyar, retired IAS officers, and Nandkishore, veteran auditor, as members will take up its responsibility with immediate effect after completing due procedures.

The next hearing for the case at the NCLT is posted for October 31, where the resolution plan and monetisation of the assets will have to be submitted by the new Board.

The court said the mismanagement of the affairs of the company made it fit for invoking Article 241 (2) of the Companies Act-2013 that provides for the suppression of the existing Board.

The dramatic move, which unfolded within the span of a hectic day in Mumbai, highlighted the government's growing concern about IL&FS's defaults spreading to other lenders in the country.

On Monday, the government also ordered an inquiry by Serious Fraud Investigation Office (SFIO) into the books of the company.

The government also moved an application against the senior officials of IL&FS. A separate investigation will also be carried out against the top officials of the company, who will have to respond to queries of the government by October 15. "Continuity of the current Board is prejudicial to public interest," a government spokesperson said.

Registrar of Companies (RoC) in its preliminary enquiry revealed a severe mismatch and the total lack of liquidity in the books of account. "The company had indicated its net worth as positive in its filing till 2017. The company was well aware of the precarious situation, but kept showing a hunky-dory picture to the shareholders," said a government official.

"The auditor of the company had also raised red flags on the company's ability to repay the debt. Management camouflaged the ratings of the company, paid divided and reported its net worth as positive," the spokesperson said.

"It's an extraordinary situation in IL&FS. The company is a sinking ship," said the official.

Until June 2018, IL&FS was an AAA-rated entity saw its debt levels rise alarmingly. Bank loans were used to fund the projects without any strong revenue source. When the debt levels became unsustainable, both the parent company and its subsidiaries are defaulting on a number of repayment obligations. IL&FS has over Rs 16,500 crore of standalone debt and Rs 91,000 crore of consolidated debt. Banks and insurance companies have the largest exposure to IL&FS.

The government said it was forced to intervene in the matter as the affairs of the NBFC as it will have a bearing on the central economy of the country. The total long-term exposure of the group company stands at around Rs 91,000 crore.

The government counsel in the NCLT expressed deep concern on the cascading impact the collapse of IL&FS will have. Many mutual funds will collapse if this company collapses.

"There are various acts of mismanagement from the economic prospective acts of mismanagement prejudicial to the public. AMCs will face redemption pressure from companies. The government securities will face huge selling pressure," the counsel said.

Yields will go up from 8.30% to 8.50% and RBI will have to go for an open market operation (OMO), so the government spending will go down to that extent, the counsel said.

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