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New Delhi : The Union Finance Ministry on October 1, 2018, approached the National Company Law Tribunal (NCLT) under section 241 read with 242 of the Companies Act, 2013, to order supersession of the present Board of Directors of Infrastructure Leasing & Finance Services (IL&FS) and its substitution by the new Board of Directors. The supersession of the existing Board and its replacement by a new Board of IL&FS is the necessary first step towards restoring the confidence of the financial market in the IL&FS Group.
The Government, after analysing the emerging situation of the IL&FS Group, came to the conclusion that the governance and management change in IL&FS Group is very necessary for saving the Group from financial collapse, which required an immediate change in the existing Board and management and appointment of a new management. Continuance of the present Board had become prejudicial to the interests of the company and its members and this management was affecting public interest because of its adverse impact on financial stability and making capital markets so adversely affected.
The Government was compelled to take this extraordinary step under section 241(2) of the Companies Act, 2013, to apply to the Tribunal for an order to prevent further mismanagement in order to protect public interest. The decision to supersede the existing board was taken after careful consideration of a report received from the Regional Director, Mumbai, under the Ministry of Corporate Affairs which clearly brought out serious corporate related deficiencies in the IL&FS holding company and its subsidiaries. The restoration of confidence of the money, debt and capital markets, the banks and financial institutions in the credibility and financial solvency of the IL&FS Group is of utmost importance for the financial stability of capital and financial markets.
It was noted that the consolidated financial statement of IL&FS holding company and its subsidiaries, associates and joint ventures projected a picture through highly exaggerated depiction of non-current assets in the form of intangible assets amounting to over Rs 20,000 crore. Besides, bulk of revenue was in the form of receivables, around 50% which was locked up in litigation and arbitration. Added to this, there has been a sharp increase in bank deposits held in lien, which rose by Rs 1,681.59 crore in FY 2017-18. Overall, the company has negative cash flows from operations, according to a PIB release.
Further its net outflow was Rs 7,020 crore in 2017-18. From August 2018, the company has been making repeated defaults. It has been noted that there is deep-rooted mismatch in the debt-equity ratio because of excessive leveraging, which has put a question mark on its ability to continue as a going concern if allowed to continue in the hands of the present management.
The high debt stress was clearly visible in the company and its main subsidiaries for the last so many years, but was camouflaged by misrepresentation of facts. Besides, the fact that the company continued to pay dividends and huge managerial payouts regardless of looming liquidity crisis shows that the management had lost total credibility. There have also been serious complaints against some of the companies for which an SFIO investigation has been ordered into the affairs of IL&FS and its subsidiaries.
The Government is committed to ensuring the financial solvency of the IL&FS Group with a view to maintaining the financial stability in the country. Towards this end, the Government is committed to ensure that ILFS Group receive much needed temporary liquidity support. It is hoped that financial institutions would be supportive in providing urgent liquidity.
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.
IL&FS, incorporated in 1987, is a large Systemically Important Non-Deposit Accepting Core Investment Company (CIC-ND-SI). It has 169 group companies, as in 2017-2018, including subsidiaries, joint venture companies and associate entities. A series of defaults by IL&FS Group companies in August and September, 2018 on term-deposits, short-term deposits, inter-corporate deposits, commercial paper and non-convertible debentures and the rating downgrades in some and default on some other financial instruments has resulted into massive effect in the financial markets causing redemption pressure on the mutual funds.