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NCLT orders new Board for debt-ridden IL&FS

 

 
 
 
IL&FS is debt-ridden and it is feared that this will lead to a financial crisis similar to what transpired in USA when Lehman Brothers announced their bankruptcy. Government has intervened to stop the situation from worsening.

India’s leading infrastructure finance company, Infrastructure Leasing & Finance Services (IL&FS) defaulted on payments to lenders across multiple instruments, including bank loans, term deposits, short-term deposits, inter-corporate deposits and non-convertible debentures. The defaults directly impacts hundreds of investors, banks and mutual funds associated with this company and has resulted in panic in the market.

Infrastructure Leasing & Finance Services, is the holding company of the IL&FS Group. The group with at least 24 direct subsidiaries, 135 indirect subsidiaries, 6 joint ventures and 4 associate companies is sitting on a debt of about Rs. 91,000 crores.

On October 1, 2018, the government intervened to take control of the crisis and requested National Company Law Tribunal (NCLT) under Section 241(2) of the Companies Act, 2013 to sack 15 members of the Company Board on the account of management failure and replace the company’s management. Following which, NCLT passed an order to replace the existing board with a new board, which will be led by Asia’s richest banker Mr. Uday Kotak. This step might speed up the revival of IL&FS.

This is the second major intervention by the government to bring back the situation under control and stop panic in the market, after the intervention in Satyam Computer Services fiasco in 2009.

Takeaways

  1. According to Section 241(2) of the Companies Act, 2013, the Central Government, if it is of the opinion that the affairs of the company are being conducted in a manner prejudicial to public interest, may apply to the NCLT for an order. NCLT on such application may pass a necessary order for prevention of oppression and mismanagement.
     
  2. The contagion of the defaults and debts of IL&FS are as follows –
  • Investors in the company are in trouble because the rating companies who rated its bond triple A, have downgraded the rating to a lesser level.
     
  • Equity market, being advised by the analysts, is witnessing selloff, particularly in Non Banking Finance Companies (NBFC) stocks and sectors linked with NBFC financing.
     
  • Share of the 3 IL&FS subsidiaries has lost over 70% of their value so far in 2018. Also, there are concerns about the future funding of the subsidiary companies.