The NCLT said the new board must hold its meeting by October 8 and come out with a road map before the next hearing on October 31
The National Company Law Tribunal (NCLT), Mumbai, superseded the board of beleaguered infrastructure financier Infrastructure Leasing & Financial Services (IL&FS) with six new directors after the government moved a petition to remove the previous board of directors.
The NCLT agreed to a new board, which includes Kotak Mahindra Bank managing director (MD) and chief executive officer (CEO) Udak Kotak, former Securities and Exchange Board of India chairman G N Bajpai, ICICI Bank chairman G C Chaturvedi, former Tech Mahindra vice-chairman Vineet Nayyar, director general of Shipping Malini Shankar and former Indian Administrative Service officer Nand Kishore.
The government wants to have a 10-member board. The board in its next meet is likely to elect Kotak chairman.
“After considering the impacts of the case as filed in the petition by the Union of India, this Bench is of the considered view that this is a fit case to invoke the jurisdiction prescribed under Section 241 of the Companies Act, 2013.
"And to declare that the conduct of the IL&FS management was prejudicial to the public interest,” said the NCLT Bench of Justices M K Shrawat and Ravi Duraiswamy.
The NCLT said the new board must hold its meeting by October 8 and come out with a road map before the next hearing on October 31.
The NCLT also asked the new members to elect a new chairman of the company. The NCLT said the suspended board members would not represent.
IL&FS in any case. All previous directors, including independent directors, have been made respondents in the case by the government.
The old directors, who have been removed, include former IL&FS chairman S B Mathur, retired IL&FS chairman Ravi Parthasarathy, vice-chairman and MD Hari Sankaran, joint MD and CEO Arun Kumar Saha, and independent directors R C Bhargava, Jerry Rao, Michael Pinto, and Rina Kamath.
The government’s swift move came after the IL&FS and its subsidiaries started defaulting on their loan payments in the last one month.
There was a fear in the market that the collapse of IL&FS, which has a consolidated debt of Rs 91000 crore, would lead to a contagion with many mutual funds and pension funds losing money.
“It’s a positive move and we welcome it. IL&FS has a very complex organisational structure and the government’s move will have a positive impact on the markets and give confidence to investors,” said State Bank of India (SBI) MD Arijit Basu soon after the announcement.
SBI is expected to participate in the Rs 4,500 crore rights issue of IL&FS along with Life Insurance Corporation of India to bail out the company.
The government alleged that there was a mismatch in the books of IL&FS and there was a significant liquidity crisis in the company and its 150-plus subsidiaries.
The government said it has initiated a probe by the SFIO and an enquiry by the Ministry of Corporate Affairs brought out the deficiencies in the company, the government’s counsel informed the court.
“A change in management was absolutely necessary to prevent a collapse of the company,” the government said.
Insiders said the dramatic move by the government was approved by Finance Minister Arun Jaitley, who held a meeting of the top finance ministry officials on Sunday morning in Delhi.
The government action was initiated despite IL&FS shareholders on Saturday clearing a turnaround plan for the company, which includes raising funds via a rights issue.
The finance ministry swung into action following a nudge from the Prime Minister’s Office to resolve the issue.
In a statement, the finance ministry on Monday said the confidence of the financial market in the credibility of the IL&FS management and the company needed to be restored.
“There appears to be a significant liquidity gap in the company as estimated liabilities might not have any corresponding revenues/capital flows presently.
"In the circumstances, replacement of the existing management by the new management appeared to be most necessary and immediately required to be done for restoring that confidence and to avoid any sub-optimal liquidation of assets,” the statement said.
Justifying its stand to remove the board, the finance ministry said the financial mismanagement of the IL&FS is apparent from its rapid debt build-up and misrepresentation of true state of financial fragility, which is being reflected in unprecedented rating downgrade from highly rated to a default category.
“Considering the capital base of the group, the leverage is very high,” it said.
The IL&FS group is involved in many infrastructure projects, including through equity and debt financing.
Any impairment in its ability to finance and support the infrastructure projects would be quite damaging to the overall infrastructure sector, financial markets and the economy, considering its systemically important nature, the ministry said in a statement.
“The government stands fully committed to ensure 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 ministry said.
“Besides, the fact that the company continued to pay dividends and huge managerial payouts regardless of the looming liquidity crisis shows that the management had lost total credibility.
"There have also been serious complaints on some of the companies for which an SFIO investigation has been ordered into the affairs of IL&FS and its subsidiaries,” the statement said.
The SFIO swung into action and began investigations in the IL&FS office in Mumbai on Monday.
An investigating officer with the SFIO said they are checking and examining the books of the company to find potential discrepancies.
It will also examine the role of senior executives and some board members for not raising alarm about severe liquidity crisis.
The SFIO may also question rating agencies for not being more vigilant, accountable, and red-flagging the situation much in advance.
The SFIO will also consult other investigating agencies and may engage them to widen the probe.
With inputs from Shrimi Choudhary
Photograph: Francis Mascarenhas/Reuters