Absence of Financial Sector Resolution Process Could Stymie IL&FS’s Asset Distribution: Rs50,000 Crore Recovery Anticipated
The anticipated recovery of nearly Rs50,000 crore from the resolution of the beleaguered Infrastructure Leasing & Financial Services (IL&FS) is unlikely to fix the problem over its default. In the absence of a clear financial sector resolution process, actual disbursement of the funds recovered could remain stuck in a legal quagmire, unless the government puts together a quick resolution process. 
 
Persons close to developments believe that the government-appointed board at IL&FS, with plenty of cooperation from state governments and public sector units (PSUs) partners, has a fighting chance to recover nearly Rs45,000 crore to Rs50,000 crore. This is about 50% of IL&FS’s debt estimated at anywhere between Rs94,000 crore and Rs100,000 crore. Although we now have a higher recovery estimate than before, the absence of a resolution process that meets the demands of thousands of creditors, across geographies, needs to be addressed, especially when money from the sale and resolution is beginning to flow in. 
 
The hydra-like IL&FS group, with 347 entities (with four holding companies and layers of step-down entities), began to default on its financial commitments in July 2018. Since then, a forensic audit and investigation agencies have exposed how a small coterie of executives, headed by founder Ravi Parthasarathy, had run this global corporate empire like a private fief, in cahoots with willing bureaucrats and dodgy businessmen.
 
A few months ago, the IL&FS board classified 169 of the 437 IL&FS entities into: Green (going concerns with a debt of Rs10,472 crore), Amber (partly recoverable debt of Rs16,372 crore) and Red (covering Rs61,375 crore which was largely irrecoverable). On 24th July, the company confirmed that it was close to recovering Rs20,000 crore. What is the basis of this expectation? Here is a quick run-down. 
 
1. Around Rs4,000 crore has been recovered through sale of assets and from the borrowers of ILFS Financial Services (IFIN) who have begun to pay up.
 
2. Nearly 40% of the group’s assets, spread across hundreds of special purpose vehicles (SPVs), are in road projects. The board has issued advertisements seeking expression of interest in January and April. It now hopes to call for final binding bids in the next 15 days and complete the sale. If all goes well, these bids could fetch around Rs10,000 crore. An internal botch-up led to serious mistakes about board decisions of subsidiary companies (including mistakes about which board members attended the meetings) being conveyed to Justice DK Jain, who has been asked by NCLAT (National Company Law Appellate Tribunal) to approve the resolution proposals. A furious Justice Jain is understood to have conveyed his displeasure to the board in writing. This caused some delay, especially since one board member even speculated that the mistakes may have been deliberate.
 
3. Justice Jain has approved the acquisition of wind power assets held under IL&FS Wind Energy by Orix Corporation of Japan, one of the large investors in IL&FS, on 22nd July. This sale is expected to fetch Rs5,000 crore. Orix held 49% stake in the wind power companies and is exercising its right under the contract by matching the highest bidder. The matter is pending before the insolvency tribunal for approval.
 
4. The board is hopeful of extracting good value from several joint ventures (JVs) with state governments and PSUs, such as ONGC Tripura Power Company Ltd (OTPC), Mangalore SEZ and IL&FS Paradip Refinery Water Ltd.  However, there is a catch. The JV agreements specify that if one of the partners faces financial trouble, the buyout of its stake will be at 20% below the face value. In many cases, these are strategically important projects with good value. Hence, the IL&FS board has written to NCLAT seeking an order that the sale of equity should be at fair value. The fair value, in many cases, may be higher than the face value. If the bankruptcy court approves, it is likely that the PSU partners and state governments will agree to what amounts to a bailout of IL&FS’s JVs. 
 
IL&FS has 26% stake in the Rs3,800 crore OTPC power project and 50% stake in Mangalore SEZ Ltd, with state entities holding the rest. The Paradip project, with Indian IOC is a BOOT (build-own–operate-transfer) project with a 25-year concession period and was completed in 2014. It has similar projects in Jharkhand and Karnataka with state entities. 
 
5. GIFT City is a joint venture in which the Gujarat government has 50% stake. The Gujarat chief minister had, however, announced that the government would buyout IL&FS’s stake. The problem, as I wrote earlier, is that IL&FS had drawn up such a gold-plated deal for itself that it was the subject of a public interest litigation (PIL) filed by a former director, DC Anjaria. Sources say that an independent valuer has been appointed to decide what the government would pay. The government has also replaced the managing director of GIFT City; but the final decision would, probably, depend on the withdrawal of the PIL. 
 
6. A similar situation exists at the two water companies that are JVs with the Tamil Nadu government—both ‘Green’ companies. In Tamil Nadu Water Investment Company Ltd (TWICL), the state government holds 48% stake. This, in turn, set up the New Tirupur Area Development Corporation Ltd (NTADCL) which is embroiled in a legal dispute pending in the Supreme Court. IL&FS, along with bureaucrats and bankers, had unilaterally reduced the shareholding of its 27% institutional partner, AIDQUA of Mauritius. Significantly, the new team at IL&FS has made no attempt to discuss a resolution with NTADCL or AIDQUA, almost 10 months into their term, probably indicating the continued malevolent influence of the IAS (Indian Administrative Service) officials on these companies, irrespective of what is needed in public interest. In fact, Bijay Kumar, the government-appointed deputy managing director (DMD) of IL&FS has yet to follow the directive of the ministry of corporate affairs (MCA) with regard to appointment of a full-time managing director (MD). 
 
This apart, the new board at IL&FS needs to focus on some internal cleaning up. It may be recalled that a whole-time director, Bijay Kumar, has filed a formal complaint with MCA about the conflict of interest in with Cyril Amarchand Mangaldas (CAM) remaining a legal advisor to the new board. In an exclusive report, I had pointed out that this complaint was weird because Mr Kumar himself was among the three whole-time directors empowered to replace CAM in February this year. This has still not happened. I now learn that four or five firms have been shortlisted and a decision is expected shortly. However, CAM continues to be the legal advisor for the final bids on the road project, to ensure that the process is not stalled. This raises questions about the motive behind filing a formal complaint. MCA is understood to have sought a response from the IL&FS board. 
 
Moneylife had sent a list of queries to IL&FS about various issues related to this complaint and Justice DK Jain’s notes of displeasure, in May, over serious factual inaccuracies in IL&FS’s submission of resolution proposals to him (these pertained mainly to road project in Dubai and elsewhere). The official response to my queries was: ‘no comments’.
 
While things are moving ahead on the resolution, a lot of core issues clearly remain unresolved, including the disbursement of funds recovered by the new board. The fate and hopes of many investors in mutual funds (MFs), pension funds and others remain tied to the outcome. If the government takes a greater interest in ironing out some of the issues flagged here, the faith and normalcy in the non-banking financial sector will be restored faster. 
  • Like this story? Get our top stories by email.

    User

    COMMENTS

    B. KRISHNAN

    2 weeks ago

    It is difficult to imagine that a couple of charlatan executives and officers have been able to weave such a poisonous web of financial misdeeds spread over the whole country, without attracting the attention from watchdogs of the government like RBI etc. who are otherwise notorious for nitpicking with honest entrepreneurs.

    REPLY

    gcmbinty

    In Reply to B. KRISHNAN 2 weeks ago

    And, all these charlatan executives have been educated at the best of the institutions in India and abroad, and that is what they have delivered to us - the society. Who to shame, these charlatans or the political bosses or the bureaucrats passing out from the Lal Bahaur Shastri Institute at Mussoorie.

    gcmbinty

    2 weeks ago

    How much money would have been lost in the fight recover mentioned nearly Rs45,000 crore to Rs50,000 crore, besides the crucial time?

    Kochar Bipin

    2 weeks ago

    Over 15000 cr of IL&FS dues are stuck in arbitration - some of these for years. If NCLT. IL&FS board should approach the courts and arbitration panels to expedite these cases and determine the awards within 6 months as a large of this amount is the retirement savings of millions of employees.

    Harish

    2 weeks ago

    Well-written.

    MCA asks NCLT to freeze assets of IFIN auditors Deloitte and BSR
    In a bid to tighten its noose over audit majors Deloitte and BSR, the Corporate Affairs Ministry (MCA) has filed an application at the Mumbai bench of the National Company Law Tribunal (NCLT) to freeze the assets of the auditors of the defaulting firm IL&FS Financial Services (IFIN) to prevent fund diversion.
     
    The plea comes over nearly two months after the MCA asked the tribunal to ban both the firms from audit operations in the country for a period of five years.
     
    According to the Serious Fraud Investigation Office (SFIO), Deloitte had disregarded the Reserve Bank of India's (RBI) regulations and turned a blind eye to IFIN's "evergreening" of loans, and never cross-checked any of the certificates the company used to mislead lenders. 
     
    Both Deloitte and the KMPG arm BSR & Associates, the investigation showed, had failed to fulfill their duties as auditors.
     
    In June, BSR & Associates resigned as the statutory auditor of the financial arm of IL&FS after the MCA sought a ban, while Deloitte was the statutory auditor of IFIN till the financial year 2017-18.
     
    The NCLT has already reserved its order on the plea to ban both the firms. 
     
    The crisis in the infrastructure lending major IL&FS came to light in September last year when it defaulted on its commercial papers, a short-term debt instrument. Following the crisis, the government appointed a new board led by Uday Kotak.
     
    Investigations into the matter have opened a can of worms with both the auditors and the rating agencies of IL&FS and its group companies along with the erstwhile management under the scanner. Few of the prevous IL&FS top officials have also been arrested in this connection.
     
    Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
  • Like this story? Get our top stories by email.

    User

    IndiGo resolution on governance will give false impression: Gangwal
    Adopting a resolution on the corporate governance issues arisen between the co-promoters of budget carrier IndiGo will convey a false impression, IndiGo Co-founder and Director Rakesh Gangwal said on Tuesday.
     
    In a letter addressed to the airline Board, Gangwal said that he will not vote for a special resolution for "Alteration in Articles of Association of the Company" unless the Rahul Bhatia-controlled InterGlobe Enterprises (IGE) is prevented from getting more powers.
     
    Gangwal said: "I recognize the timing constraints and the need to call an AGM. However, many emails were exchanged after our Board meeting of July 20, 2019, and based on serious unresolved issues, I again reiterate that I am no longer in a position to vote affirmatively on the special resolution for 'Alteration in Articles of Association of the Company'...
     
    "...unless, as discussed in numerous emails, a complementary Board resolution is passed to prevent IGE Group from getting even more rights and abilities than they have today and the new RPT (related party transactions) policy is adopted, language for which has already been agreed."
     
    Gangwal also said that the AGM notice, along with the "unnamed sources"-planted "press reports that the Chairman has brokered peace and matters have been resolved, leaves a misleading and false impression that issues on RPTs and changes to the Articles have the support of both promoter groups".
     
    Besides, he said that the full Board, including the Chairman, agreed on a package deal for RPTs and on the size of the Board, both of which would be finalised at the same time.
     
    "Instead, now, there's a suggestion from the Chairman to get shareholder approval for a Board of 10 Directors (IGE Group with 5 Directors), with the large loophole, while we try and get 'a final view acceptable to all' sometime later," Gangwal said.
     
    "As for the agreed upon RPT policy...there is only silence on when or if it gets adopted by the Company. This was not our agreement at the Board meeting and after the Board meeting."
     
    Gangwal said that by seeking shareholder approval for the new size Board without closing "this large loophole" amounts to negligence in governance and tramples on the rights of minority shareholders. 
     
    The development assumes significance as last month, IndiGo decided to expand its Board of Directors up to 10 members and that the expanded board would consist of four independent directors.
     
    Currently, the company has six Board members, including the Chairman M. Damodaran, who was earlier the chief of the Securities and Exchange Board of India (Sebi). 
     
    On July 19, the company said its board has decided to seek shareholders' approval for expanding, to enable the induction of an independent woman director.
     
    Apart from Bhatia and Gangwal, other members on the board of InterGlobe Aviation are former World Bank executive Anupam Khanna, chartered accountant Anil Parashar and Rohini Bhatia, the wife of Rahul Bhatia.
     
    Following Gangwal's recent allegations of "collapsing" corporate governance, the Corporate Affairs Ministry has sought "information or explanation" from the airline. Market regulator Sebi is also looking into the alleged governance lapses in the company.
     
    Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
  • Like this story? Get our top stories by email.

    User

    We are listening!

    Solve the equation and enter in the Captcha field.
      Loading...
    Close

    To continue


    Please
    Sign Up or Sign In
    with

    Email
    Close

    To continue


    Please
    Sign Up or Sign In
    with

    Email

    BUY NOW

    online financial advisory
    Pathbreakers
    Pathbreakers 1 & Pathbreakers 2 contain deep insights, unknown facts and captivating events in the life of 51 top achievers, in their own words.
    online financia advisory
    The Scam
    24 Year Of The Scam: The Perennial Bestseller, reads like a Thriller!
    Moneylife Online Magazine
    Fiercely independent and pro-consumer information on personal finance
    financial magazines online
    Stockletters in 3 Flavours
    Outstanding research that beats mutual funds year after year
    financial magazines in india
    MAS: Complete Online Financial Advisory
    (Includes Moneylife Online Magazine)