The government Monday seized control of debt-trapped IL&FS, superseding its board with one led by India's richest banker Uday Kotak, and vowed to stop further loan defaults.
This is only the second time after Satyam Computer Services Ltd that the government has taken control of a company board. The government in 2009 superseded the board of Satyam.
The Mumbai-bench of National Company Law Tribunal (NCLT) approved six directors, including Kotak Mahindra Bank MD Uday Kotak, former SEBI chairman G N Bajpai and ICICI Bank chairman G C Chaturvedi, to takeover the board.
This followed the Ministry of Corporate Affairs moving NCLT against IL&FS and its subsidiaries, seeking a change of the board and management control of the company.
Kotak was named as non-executive chairman of the new board. The other directors approved by the NCLT are retired IAS officers Malini Shankar and Vineet Nayyar, and veteran auditor Nandkishore.
The move to take over IL&FS followed its recent defaults roiling Indian markets.
"The government stands fully committed to ensuring that needed liquidity is arranged for the IL&FS from the financial system so that no more defaults take place and the infrastructure projects are implemented smoothly," the Finance Ministry said in a statement in New Delhi.
"Restoration of confidence" across markets and the financial system in IL&FS group "is of utmost importance for the financial stability of capital and financial markets".
The NCLT allowed the Union government's interim prayer to reconstitute the board of IL&FS, observing that the company's affairs were being conducted in a manner "prejudicial" to the public interest.
The Finance Ministry in a statement said the government found "serious corporate related deficiencies" in the IL&FS holding company and its subsidiaries and has ordered an SFIO (Serious Fraud Investigation Office) probe into the alleged financial irregularities in the NBFC.
"The restoration of confidence of the money, debt and capital markets, the banks and financial institutions in the credibility and financial solvency of the IL&FS Group is of utmost importance for the financial stability of capital and financial markets. There is an emergent need to immediately stop further financial defaults and also take measures to resolve defaulted dues to the claimants," it said.
The company would require a combination of measures like asset sales, restructuring of some liabilities and a fresh infusion of funds by investors and lenders to prevent defaults.
"The confidence of the financial market in the credibility of the IL&FS management and the company needs to be restored," the ministry said.
The government, it said, had approached the NCLT after it was convinced that the governance and management change in IL&FS Group is very necessary for saving it from "financial collapse".
"Continuance of the present Board had become prejudicial to the interests of the company and its members and this management was affecting public interest because of its adverse impact on financial stability and making capital markets so adversely affected," the ministry said adding its prayer before NCLT was to supersede the board of IL&FS and its substitution by the new Board of Directors.
The ministry said IL&FS Group, which has assets of Rs 1.15 lakh crore, is presently facing tremendous debt pressure and struggling to service around Rs 91,000 crore in debt which is the outcome of its "mismanaged borrowings in the past".
Before the NCLT, the government said the IL&FS directors had failed to discharge their duties and that many mutual funds would collapse if the company collapses.
There were concerns that default by a large NBFC like IL&FS would create liquidity crunch in the financial markets.
Approving the immediate takeover of the IL&FS board by six government nominees, an NCLT bench of judges M K Shrawat and Ravikumar Duraisamy said that the suspended directors of IL&FS must henceforth cease to represent the company anywhere.
"After considering the government's case, we are of the view that prima facie, this is a fit case to invoke sections 241 (2), 242 of the Companies Act and to declare that the affairs of IL&FS were being conducted in a manner prejudicial to the public interest," the bench said.
The government said in its plea said that it had chosen to intervene as it impacted the entire nation's economy.
It also told the NCLT that it had already ordered for an investigation into the company's affairs through the Serious Fraud Investigation Office.
The government cited the precedence of the 2009 takeover of erstwhile Satyam Computers and urged the bench to invoke the jurisdiction of sections 241(2) and 242 of the Companies Act, 2013.
Meanwhile, a senior official said the new board of Infrastructure Leasing & Financial Services (IL&FS) is likely to hold its first meeting this week.
The priority for the newly appointed board would be to assess the company's financial situation, the official added.
"There is a need to take a look at the short-term and long-term debts of the company and the viability of servicing those debts. The new board will take a holistic view of the situation and draw a viable resolution plan for the company," the official said.
(This article has not been edited by Zeebiz editorial team and is auto-generated from an agency feed.)