Road construction takes place near the IL&FS building, in Mumbai, India. (Photographer: Abhijit Bhatlekar/Bloomberg News)

Debt-Laden IL&FS Group Submits Revival Roadmap To NCLT

A revival plan presented by Infrastructure Leasing & Financial Services Ltd. was accepted by the National Company Law Tribunal today, paving the way for resolution of the debt-laden conglomerate’s problems.

During the hearing—which was presided over by NCLT bench members VP Singh and Ravikumar Duraisamy—the revival plan was laid out along with insights and steps taken by the conglomerate’s new board. The representative from Ministry of Corporate Affairs told the court that defaults within the IL&FS group and its 347 subsidiaries as of Oct. 8 was Rs 4,776 crore, including defaulted principal amounts and interest payments.

The new board at the IL&FS group, chaired by Uday Kotak, laid out “a universe of options” for deleveraging of the firm’s existing debt, which may be combined to work out the final resolution. The suggested plan is three-tiered and includes steps such as capital infusion (either from existing or new investors), asset monetisation and resolution with the creditors, considering the complex structure and scale of the group.

  • At the group level, the board will consider capital infusion from a credible and financially strong investor to ensure continuity of operations and employees at the subsidiaries.
  • At the business vertical or platform level, the board will seek private equity and strategic players, which have focused interests in roads, renewables, real estate and thermal power subsidiaries.
  • Asset-level resolution, the third option, includes asset-by-asset solution explored through asset monetisation and as a last resort, through liquidation of assets.

The new board intends to implement the complete resolution process in stages, after getting a go-ahead from the central bank, markets regulator and Competition Commission of India, within six to nine months, according to the detailed plan filed with the exchanges.

The next hearing of the matter is scheduled on Dec. 3.

The Problems

During its assessment of the group’s financials, the board found that because IL&FS and its subsidiaries operated as a single enterprise with “no boundaries of legal entities and separate managements”, it led to a contagion impact on its creditors.

Even as the financial records of the group revealed several irregularities, the report said that the board was unable to validate whether the earlier management followed due processes for various asset monetisation activities, due to inadequate reasoning and lack of supporting data. One of the reasons for that, according to the new board, was the lack of a central financial control function or a bank repository to maintain records of information at the group level. That made extracting data and consolidating outputs difficult as “the data has been stored in different formats and different ERP systems across the IL&FS Group,” the report said.

The report also stated examples of IL&FS Financial Services Ltd.—which had outstanding loans and investments worth Rs 5,728 crore, Rs. 5,127 crore, and Rs. 5,490 crore in the fiscal years 2016, 2017 and 2018, respectively—leading to a negative capital adequacy in the last three years, against the regulatory requirement of 10 percent capital to risk weighted assets ratio for systemically important non-deposit taking non‐banking finance company (NBFC‐ND‐SI).

Also, borrowings of over Rs 900 crore from other companies within the group such as to Hill County Properties Ltd. and IL&FS Employee Welfare Trust were not consolidated into the accounts, as the erstwhile management recognised it as “internal debt”. The IL&FS Group, the report said, circuited transactions of over Rs 1,500 crore through eight of its subsidiaries, in order to circumvent regulatory prescriptions.

The report also raised concerns on how 55 of IL&FS’ retired employees of the company were hired as consultants at an annual cost of Rs 16.5 crore. Six properties, with total monthly lease rent of Rs 15.1 lakh and with a deposit of Rs 2.26 crore, were also found to be owned by select employees (or their relatives) as guest houses of group companies.

Steps Taken So Far

While resolution seemed distant, the government-appointed board at the IL&FS Group had begun taking corrective measures. The report highlighted a few of them, such as:

  • Control of cash flows, as all material payments of over one crore rupees must be approved by Vineet Nayyar, vice chairman and managing director of the group.
  • All future contractual commitments being executed were put on a standstill.
  • Sitting fees of board members and its committees was lowered, along with a 10 percent reduction in employee salaries for packages of Rs 50 lakh and above.
  • 69 retired employees who were hired as consultants were discontinued.
  • Even the maximum limit for company-owned cars was cut to half to Rs 25 lakh and Diwali gifts distribution was discontinued.
  • The new board conducted a full financial audit of the group and some of its subsidiaries by the statutory auditors for six months ended Sept. 30. A special audit of past management actions was also being considered.

New nominee directors were appointed for eight subsidiaries within the group in the Oct. 18 board meeting. The board also appointed Arpwood Capital Pvt. Ltd. and JM Financial Services Ltd. as joint financial and transaction advisors, while Alvarez & Marsal were retained as resolution consultants to advise on the resolution process.

Contagion Woes Prior To Takeover

IL&FS was taken over by the government after it defaulted on debt payments multiple times, sparking fears of a contagion in India’s financial markets. The new board, chaired by Uday Kotak, found that the group, with a debt of about Rs 91,000 crore, is far more complex than expected with a maze of 347 subsidiaries and associate companies. The Serious Fraud Investigation Office is also investigating IL&FS and its subsidiaries amid concerns of financial irregularities.

Troubles at the group had been intensifying since July, when company founder Ravi Parthasarathy stepped down, citing health reasons. The defaults began in August, adding to pressure on corporate bond yields and sparking a sell-off in the stock market. IL&FS’ investors include Life Insurance Corp., India’s largest life insurer; State Bank of India, its largest bank; and Housing Development Finance Corp, its largest mortgage lender. Japan’s Orix Corp. is the company’s second-largest shareholder.

Fixing the liquidity crisis at IL&FS is crucial for reviving confidence in the country debt markets especially when the economy is already grappling with rising global crude oil prices and a falling rupee.

Earlier today, IL&FS withdrew its application that was filed under Section 230 of the Companies Act, 2013. The previous board had filed an application under this section, seeking restructuring of the company’s operations. Section 230 empowers the National Company Law Tribunal to make an order that allows a company and its creditors to arrive at a compromise or arrangement.