The resolution and action in Infrastructure Leasing and Financial Services (IL&FS)—a massive financial conglomerate of 347 entities that went bust with an outstanding debt of over Rs95,000 crore and triggered huge turmoil in the financial world—has been slow, patchy and selective. This is surely a blot on a government that takes pride in fast and decisive action. And, increasingly, it is clear that the buck stops with the government.
After putting a dynamic banker like Uday Kotak in charge of resolution, along with a pack of bureaucrats on the board, IL&FS’s biggest hurdle is with distribution of assets. A proposal under the bankruptcy law has been caught up in legal wrangling for over 14 months.
The Insolvency and Bankruptcy Code (IBC) gives secured creditors (in this case, many banks that colluded with the previous regime) the biggest share. IL&FS has offered a different formula. Under this, secured creditors get liquidation value, but any recovery above that value will be divided equally among secured, unsecured and operational creditors. Typically, creditors will continue to fight for a greater share until the court arrives at a decision, and it is eventually ratified by the Supreme Court.
Instead of ensuring a specific solution in public interest for a complex, atypical situation like IL&FS, the government has been trying to work on another, half-baked financial resolution Bill that is likely to stir up more controversy. IL&FS, over the past 25 years, pretended to be a public sector enterprise with hundreds of joint ventures with state government entities and, thus, attracted significant investment from pensions and mutual funds and has dues to large infrastructure contractors that cannot be easily dismissed as unsecured operational creditors.
The biggest impact of the delay is being felt on the resolution of road projects where IL&FS has accepted binding bids of Rs7,580 crore, which have an expiry date, and bidders are getting restive. These could lapse and the process would have to be restarted, if there is no quick decision. IL&FS is also sitting on recoveries of nearly Rs7,000 crore lying in banks that cannot be distributed.
At the annual general meeting (AGM) early this month, chairman, Uday Kotak, has already postponed the timeframe for recovering around Rs 47,000 crore of outstanding debt from March to July 2020. He also spoke of the infrastructure investment trust (InvIT) being set up for nine road assets with a debt of over Rs11,000 crore; but InvIT’s fate also hangs on the distribution formula.
While all this is pending, IL&FS has wrangled blanket immunity from the National Company Law Tribunal (NCLT) on 27 January 2020, for directors on the boards of hundreds of step-down subsidiaries. The NCLT order says, “We hereby clarify that the immunity granted by this court not only covers the directors appointed by this court but also such of those directors to whom the IL&FS board would appoint for subsidiaries, other group companies and trustees of IL&FS Employees Welfare Trust.”
Many senior executives and bureaucrats close to the Ravi Parthasarathy-led cabal remained on the boards of subsidiary companies for continuity. Now, they too could enjoy the benefit of NCLT granted immunity.
Other Signs of Flagging Resolution
After one explosive forensic report from Grant Thornton and a second tepid one, there is no further revelation on what was happening even in the main holding companies of IL&FS. This is another sign of flagging momentum in the resolution process and its impact is seen even in actions of the investigation agencies such as SFIO (serious frauds investigation office) and the ED (enforcement directorate).
There is silence on the role of various former bankers on several IL&FS companies or to investigate quid-pro-quo deals. There is also a clear view that Ravi Parthasarathy, who founded and built the giant conglomerate and controlled all decision-making throughout, is being protected. Five of his close associates—Hari Sankaran, Ramesh Bawa, Arun Saha, K Ramchandran and Mukund Sapre (arrested on 8thJanuary by Delhi economic offences wing) have been arrested and in jail for over six months, but he, and a couple of others, are surprisingly untouched. There is a clear signal in this regard to investigation agencies as well.
Here’s an update on some key companies, some of which have been flagged in a letter to the prime minister’s office (PMO) at the end of November, by a whistleblower signing himself as ‘Mahesh Inamdar’.
The Orix Deal: The whistleblower has questioned the lack of investigation against public sector banks (PSBs) and institutions that invested in IL&FS and its group entities. He specifically raises the valuation of IL&FS’s sale of its 49% stake in wind energy assets to Orix Corporation of Japan.
Orix already held 51% in each of these companies and chose to exercise its right of refusal instead of bidding for the stake. It then had to match the sole bid that was received from Gas Authority of India Ltd (GAIL) that, alleges the whistleblower, was at half the valuation at which it originally acquired the stake. The wind power business has since declined and GAIL’s bid was also made without reps and warranties, but it ensured that Orix Corporation got a great deal.
Interestingly, AK Purwar, former chairman of State Bank of India (SBI) represents Orix in India today. Orix and Life Insurance Corporation (LIC) are the two biggest shareholders of IL&FS with a stake of a little over 23% each. SBI was another major shareholder with a 6.42% stake. All of them remained mute spectators to Ravi Parthasarathy’s shenanigans and failed to exercise any oversight or governance rules.
IL&FS Securities Services Ltd. (ISSL): In July 2018, just before IL&FS began to default, IndusInd Bank had signed a deal to acquire ISSL. This was scrapped in November 2018 by the new board. The whistleblower alleges that a Rs300 crore sale was allowed to fall through, while ISSL has since dug itself into a bigger hole in the controversy over stockbroker Allied Financial Services allegedly stealing Rs344 crore of securities from three Puneet Dalmia group entities.
I learn that things were not so simple. ISSL’s sale to IndusInd Bank fell through because it wanted to set off a 45-day bridge loan to the distressed group. The Bank has also set off money owed from on IL&FS entity against dues to another and the matter is under litigation. But the upshot is that fresh bids called for ISSL and IL&FS Settlement and Transaction Services 2018 have been a non-starter.
Cuddalore Project: The case of IL&FS Tamil Nadu Power Company Ltd (ITPCL), which has a 3,840 MW thermal power plant in Cuddalore, is among many controversial joint ventures with the Tamil Nadu (TN) government. The whistleblower wonders why these entities, packed with many IAS (Indian Administrative Service) officers cannot recover dues from Tamil Nadu Generation and Distribution Corporation (TANGEDCO).
Indeed, the TN government owes a hefty Rs1,400 crore to the Cuddalore project and its refusal to pay up is also impacting the sale of these entities.
Surprisingly, S Krishnan, finance secretary with the TN government, is on the board of several joint ventures with IL&FS, including the New Tirupur Area Development Corporation Ltd (NATDCL). This Tirupur project is one of the three where the Union government is paying off the dubious sovereign guarantee extended to two multilateral agencies.
It is strange that nobody is able step in and resolve the impasse caused by TANGEDCO’s refusal to release legitimate dues to the IL&FS subsidiaries, especially when it is driving away potential bidders.
NHAI and Other Dues
According to insiders, it was a Herculean task to get the National Highway Authority of India (NHAI) to approve claims of close to Rs3,000 crore. And, yet, the problem is far from over. NHAI has correctly insisted that interests of operational creditors must be taken care of; but that will depend on the ability to adopt a different distribution formula that has to be cleared by the bankruptcy tribunal.
The sale of GIFT City (Gujarat International Finance Tec-City), a joint venture where the Gujarat government was among the first to step forward and offer to buy out the IL&FS stake, was approved only recently. It is valued at Rs1,200 crore. This was mainly because of the shady, one-sided deal that Ravi Parthasarathy had engineered to benefit IL&FS group entities.
The resolution team has received approximately Rs5,800 crore worth of claims against which IL&FS has counter-claims of around Rs1,500 crore. Although IL&FS announced a 48% cut in its wage bill and 42% drop in operational expenses, this comes at a cost. Many employees have left and others work under constant fear of being blamed for actions under the previous management.
While there is cost cutting on employees and operations, the cost of litigation and fees paid to multiple auditors and consultants continues to soar.
The biggest frustration though, is the apparent lack of support from the government in ensuring quick decisions even at a time when economic growth is flagging and a quick release of funds would be a financial and sentiment booster.
Shareholders of InterGlobe Aviation, the firm which runs the airline IndiGo, on Wednesday, rejected a proposed resolution to amend the company's Articles of Association (AoA).
According to the company, the shareholders voted against the proposed resolution at an Extra-Ordinary General Meeting (EGM) which was called on the request of Rakesh Gangwal, and The Chinkerpoo Family Trust (RG group).
At present, the RG Group comprises of Rakesh Gangwal, Shobha Gangwal and the Chinkerpoo Family Trust, which collectively holds 36.64 per cent of the paid-up share capital of the company.
The company, in a regulatory filing, said that the "special Resolution for Amendments to the Articles of Association of the Company" has not been passed as the votes cast in favour of the resolution were 48.5584 per cent against 51.4416 per cent votes cast against the resolution.
The EGM had been called to consider the proposed resolution to amend articles "1.6 to 1.15, 1.16 to 1.20 and 2A from the company's Articles of Association".
These articles deal with aspects such as transfer of equity shares, acquisition of shares and other provisions on equity shares.
Other proposals include the provisions of "Section 14 and other applicable provisions, if any, of the Companies Act, 2013; Securities and Exchange Board of India Regulations, 2015...."
The shareholders' agreement dated April 23, 2015 was entered amongst the company, the RG group and Rahul Bhatia-owned IGE group. It was amended on September 17, 2015.
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In a landmark regulation on anti-counterfeiting, US president Donald Trump has shifted the liability for counterfeits from third parties to platforms like Amazon. Jeff Bezos, the chief of Amazon, has been able to sidestep any liability for counterfeit goods, but the Trump Administration's crackdown on counterfeit goods have backed the retail giant into a corner, says a report from CCN.
It says, "The new customs and border protection framework shifts the burden of responsibility to Amazon. Now warehouses and fulfilment centres, most notably Amazon, will be legally and financially liable. Jeff Bezos’ company will have to bear more of the costs of policing for counterfeits on its platform."
"The Trump administration will now require e-commerce platforms like Amazon to turn over vast amounts of third-party vendor data for additional scrutiny. The government says the new rules not only protect US intellectual property but also ensure public safety. But national security interests are also important," the news report says.
Mr Bezos is facing a massive counterfeit goods problem on his platform and Amazon has defended itself from a number of lawsuits by brands who have found counterfeits for sale on the platform. But so far, Amazon has prevailed in court.
Mr Bezos has been able to sidestep any liability for counterfeit goods. His lawyers have successfully argued in court that Amazon is a platform, not a seller. But the Trump Administration’s crackdown on counterfeit goods have backed the retail giant into a corner, the report from CCN says.
The US department of homeland security (DHS)’s office of strategy, policy, and plans had prepared and submitted to Mr Trump, a report titled 'Combating Trafficking in Counterfeit and Pirated Goods'. The report is based on a memorandum from President Trump signed on April last year.
The DHS report says, "The rapid growth of e-commerce has revolutionised the way goods are bought and sold, allowing for counterfeit and pirated goods to flood our borders and penetrate our communities and homes. Illicit goods trafficked to American consumers by ecommerce platforms and online third-party marketplaces threaten public health and safety, as well as national security. This illicit activity impacts American innovation and erodes the competitiveness of US manufacturers and workers."
Counterfeiting is no longer confined to street-corners and flea markets. The problem has intensified to staggering levels, as shown by a recent Organisation for Economic Cooperation and Development (OECD) report, which details a 154% increase in counterfeits traded internationally — to $509 billion in 2016 from $200 billion in 2005.
Responding to a query from the President, OECD reported that e-commerce platforms represent ideal storefronts for counterfeits and provide powerful platform for counterfeiters and pirates to engage large numbers of potential consumers.
The sale of counterfeits away from so-called underground or secondary markets like street corners and flea markets to e-commerce platforms is reshaping consumer attitudes and perceptions.
Where in the past, consumers could identify products by relying on 'red flag' indicators—such as a suspicious location of the seller, poor quality packaging, or discount pricing—consumers are now regularly exposed to counterfeit products in settings and under conditions where the articles appear genuine.
A summary of the annual intellectual property right (IPR) seizure statistics collected by US customs and border protection (CBP) in FY2018; including items from all modes of transportation. Apparel and other types of accessories, along with footwear, top the list at 18% and 14% of seizures, respectively. Commonly counterfeited items in these categories include brand name shoes such as Nike and Adidas, as well as NFL jerseys.
Watches and jewellery follow at 13% of total seizures. During the Mega Flex operation on 21 August 2019, for example, CBP officers seized counterfeit Rolex watches valued at over $1.4 million. Handbags and wallets represented nearly 11% of all seizures, including counterfeits of luxury brands such as Louis Vuitton, Michael Kors, and Gucci. Consumer electronics represented 10% of seizures, including products such as iPhones, hover boards, earbuds, microchips, and others.
Pharmaceuticals and personal care items account for only 7% of total seizures. However, DHS says, many of the products in these categories pose significant dangers to the consumer. Fake prescription drugs can lack active ingredients, contain incorrect dosages, or include dangerous additives. Fake personal care items such as cosmetics have been found to contain everything from harmful bacteria to human waste. Between 2017 and 2018, CBP and ICE Homeland Security Investigations (HSI) seized over $31 million in fake perfumes from China, it added.
DHS says, while e-commerce has supported the launch of thousands of legitimate businesses, e-commerce platforms, third-party marketplaces, and their supporting intermediaries have also served as powerful stimulants for the trafficking of counterfeit and pirated goods. This is because, selling counterfeit and pirated goods through ecommerce platforms and related online third-party marketplaces is a highly profitable venture.
"For counterfeiters, production costs are low, millions of potential customers are available online, transactions are convenient, and listing goods on well-known platforms provides an air of legitimacy. When sellers of illicit goods are in another country, they are also exposed to relatively little risk of criminal prosecution or civil liability under current law enforcement and regulatory practices. It is critical that immediate action be taken to protect American consumers and other stakeholders against the harm and losses inflicted by counterfeiters," the report says.
This report submitted to President Trump identified a set of strong government actions that DHS and other federal agencies can begin executing immediately to address a crisis that is undermining America’s trust in e-commerce even as it is exposing the American public to undue and unacceptable risks.
"Additionally, this report has proposed a set of best practices for private sector stakeholders thatDHS believes should be adopted swiftly. As the longstanding experiences of brick-and-mortar stores demonstrate, the private sector is capable of operating businesses that sell legitimate, not illicit, goods to American consumers. We should expect the same level of care from online third party marketplaces that we expect from the stores physically located in our communities," the report concludes.