A pedestrian walking past the Bombay Stock Exchange (BSE) is reflected in a puddle in Mumbai, India. (Photographer: Dhiraj Singh/ Bloomberg)

India Seizes Control of Indebted Lender in Surprise Move

(Bloomberg) -- India’s government will immediately seize control of a shadow lender whose defaults have caused widespread upheaval at mutual funds, a rebuke that’s only happened to one other firm.

Government officials were granted approval to oust Infrastructure Leasing & Financial Services Ltd.’s board and a new six-member board will meet before Oct. 8, the National Company Law Tribunal said on Monday. India’s richest banker Uday Kotak and ICICI Bank Chairman G.C. Chaturvedi will be part of the proposed board, which will elect a chairperson themselves. The nation’s corporate affairs ministry has sought to take control of a company on just two prior occasions, and only followed through once, with Satyam Computer Services Ltd. in 2009.

India Seizes Control of Indebted Lender in Surprise Move

The dramatic move, which unfolded within the span of a hectic day in Mumbai, underscores the government’s concern about IL&FS’s defaults spreading to other lenders in the world’s fastest-growing major economy. Considered systemically important, the group has total debt of $12.6 billion, 61 percent in the form of loans from financial institutions. The ripple effects of its defaults have already seen mutual funds post mark-to-market losses, a slump in corporate bond issuance and a brief but sharp sell-off in equities.

“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 finance ministry said in a statement. “Restoration of confidence” across markets and the financial system in IL&FS group “is of utmost importance for the financial stability of capital and financial markets.”

The newly-constituted IL&FS board must devise a plan for the group and file a response to the National Company Law Tribunal by Oct. 15. The tribunal will next hear the matter on Oct. 31. The other board members named on Monday include former head of the Securities and Exchange Board of India GN Bajpai and retired bureaucrat Vineet Nayyar.

“The solution would need to address how to prevent massive write downs by the banks, not merely by regulatory engineering -- as that would simply defer the real problem by a few years,” said Krishnava Dutt, a managing partner at law firm Argus Partners. “As I see it, someone now needs to bite the bullet.”

Shares of the group’s listed subsidiaries climbed in Mumbai before the decision was announced. IL&FS Transportation Networks Ltd., which develops and maintains toll highways, surged nearly 19 percent to close at 26.80 rupees, paring the year’s slump to 68 percent. Fund manager IL&FS Investment Managers Ltd. advanced about 10 percent.

Restructuring Process

The new board will inherit a restructuring process that just saw IL&FS shareholders sign off on a non-convertible debt sale, a higher borrowing limit and a rights offering. Some bankers to IL&FS have been hesitant to provide fresh cash injections without more details on asset sales, people familiar with the matter have said.

The beleaguered group can raise 600 billion rupees by selling assets, according to its biggest shareholder Life Insurance Corp. of India. The nation’s largest life insurer is open to subscribing to IL&FS’s rights offer, LIC Chairman V.K. Sharma said last week.

Other investors in IL&FS include Japan’s Orix Corp., the second-largest shareholder in the company, Abu Dhabi Investment Authority and Housing Development Finance Corp., India’s biggest mortgage lender.

“Dismissal of the IL&FS board will raise uncertainty on the firm’s plans to sell off assets and pay off debtors,” Sunil Pachisia, vice president at brokerage Pratibhuti Viniyog, said by phone. “There is a fear that the lenders may have to take deeper hair cuts once the government steps in.”

Rock Solid

IL&FS funds infrastructure projects across Asia’s third-largest economy. Its defaults on commercial paper, once considered rock-solid, from August sparked concern among households holding mutual funds invested in such debt, and forced banks, mutual and pension fund managers to brace for further losses.

There was also concern that the group’s troubles could spread to other shadow banks and crimp Prime Minister Narendra Modi’s infrastructure plans before elections next year.

©2018 Bloomberg L.P.