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The government has, for the time being, averted a major financial crisis by taking over the management control of IL&FS through a six-member board with Kotak Mahindra Bank MD & CEO Uday Kotak as its non-executive chairman. Mercifully, this is not a government bailout of the infrastructure leasing and financial services firm that has liabilities worth over Rs 91,000 crore on total assets of Rs 1,15,000 crore. The new board has been tasked with the responsibility of preparing a ‘robust and time-bound’ resolution plan. In order to service immediate liabilities the board has limited options — persuade shareholders to infuse funds in the company, bring in new equity partners, sell assets along with some of the subsidiaries and recover outstanding amounts worth over Rs 10,000 crore from infrastructure companies, particularly the National Highways Authority of India. With the government at the helm of affairs, persuading the key promoters — LIC, Central Bank of India and SBI — will not be difficult. Together, these public sector firms control almost 40 per cent stake in the company.
Although this is the second such case in almost nine years after the Satyam debacle, it adds to the series of ongoing financial crises the country is facing, including the over Rs 10 lakh crore non-performing assets of state-run banks. These episodes repeatedly raise questions on corporate governance and regulatory lapses. The IL&FS case has again proved that the institution of the independent director is merely of ornamental value. Even regulators — the RBI, vis-a-vis IL&FS Financial Services and Ministry of Corporate Affairs for IL&FS — woke up late. It also raises doubts about the country’s preparedness to tackle the meltdown of a widely-held company like IL&FS compared to single promoter-driven firms.
Unmindful of the company’s precarious financial condition, its top executives were enjoying high perks and shareholders, dividends. This is criminal negligence and should be probed. The episode also raises doubts about rating agencies. They must explain how they downgraded IL&FS from an ‘AAA’-rated company to junk status in just a couple of months and risked the savings of millions of ordinary investors in mutual funds. The regulators must plug these loopholes.