NCLT allows govt to take control of IL&FS board

In an attempt to salvage the debt-laden IL&FS, a special bench of the National Company Law Tribunal (Mumbai) on Monday agreed to a petition by the Ministry of Corporate Affairs to constitute a new six-member board to take charge of the beleaguered company.

The existing 10-member board has been suspended, in effect giving the Centre direct control over the company.

“The suspended directors henceforth shall not represent the company as a Director and shall also not exercise any powers as a Director in any manner before any authority as well,” said the Tribunal, comprising Members MK Shrawat and Ravikumar Duraisamy.

Evidence of mismanagement

During the hearing, the Ministry argued that the company’s management was responsible for negligence and incompetence by failing to discharge its fiduciary duties. The Registrar of Companies conducted an enquiry and found evidence of mismanagement and compromise in corporate governance norms by the indiscriminate raising of short-term loans. The Centre told the NCLT that the company was presenting a rosy picture and camouflaging its financial statements by hiding a severe mismatch between cash flows and payment obligations.

On the recommendation of the Ministry, the NCLT approved the induction of six directors — Uday Kotak, MD & CEO, Kotak Mahindra Bank; Vineet Nayyar, IAS (Retd.) and former Vice-Chairman of TechMahindra; GN Bajpai, former Chairman of SEBI and Life Insurance Corporation of India; GC Chaturvedi, Non-Executive Chairperson, ICICI Bank; Malini Shankar, IAS; and Shri Nand Kishore, IA&AS (Retd) — on the reconstituted Board.

The Tribunal said the newly-constituted Board is required to hold a meeting on or before October 8.

“Liberty is granted to the board of directors to select a Chairman among themselves. Thereafter, report the roadmap to the NCLT, Mumbai Bench, at the earliest possible not later than the next date of hearing (October 31),” NCLT said.

The new Board, which has been tasked with the responsibility of preparing a time-bound resolution plan, will take up its responsibility with immediate effect, after following due procedures.

With the new Board taking charge, Life Insurance Corporation of India and State Bank of India, which have a 25.34 per cent and 6.42 per cent stake, respectively, in IL&FS, may now be more willing to participate in the rights issue of the company and also extend it lines of credit. However, it remains to be seen if Orix Corporation of Japan and Abu Dhabi Investment Authority, which have 23.54 per cent and 12.56 per cent stake, respectively, will subscribe to IL&FS’ proposed rights issue of ₹4,500 crore.

Similarities to Satyam

The Centre had taken similar action earlier in the Satyam case in 2009, when the IT services company’s board was disbanded and the Company Law Board appointed 10 new nominee directors.

In the last month or so, IL&FS and some of its subsidiaries have seen their credit ratings being downgraded. There were also defaults on repayments of commercial papers, non-convertible debentures, bank loans and inter-corporate deposits of some.

With IL&FS Group’s outstanding borrowings at ₹91,000 crore (of which ₹55,870 crore is by way of term loans from banks and ₹24,297 crore via debentures) as of end-March 2018, the Centre may be fearful of the ripple effect further debt defaults by IL&FS and some of its subsidiaries have on the banking system, mutual funds and non-baking finance companies in the run up to the elections.

Hence, the move to suspend its board and asking the new dispensation to take over immediately.