Government takes control of infrastructure group IL&FS to stem contagion

India on Monday took control of Infrastructure Leasing and Financial Services (IL&FS), in a rare move that it said was needed to protect the country's financial system and markets from potential collapse.

The government applied to the National Company Law Tribunal (NCLT) on Monday to remove the board of IL&FS, warning that the continuance of the current directors in their jobs would be prejudicial and not in the interest of the public.

The NCLT approved the government's interim application to replace IL&FS's board with six selected nominees, on Monday.

"The current IL&FS crisis could have an adverse impact on the financial stability of the economy," Sanjay Shorey a lawyer for the government told the NCLT, a quasi-judicial body for corporate grievances, on Monday.

He said a collapse of IL&FS, an Indian infrastructure financing and construction group, could threaten the stability of mutual funds and the non-banking financial services sector.

A string of defaults by IL&FS in recent weeks has led to a series of credit rating downgrades on the company and its subsidiaries that hold some of its 910 billion rupees ($12.48 billion) debt pile. Its rapid fall from grace has spooked financial markets and sparked fears that its troubles could cause a crisis in the non-banking financial services sector.

ILFS's problems could threaten India's economic growth as lenders cut exposure to what are known as non-banking finance companies (NBFCs) in India or shadow banks.

These firms have played a major role in lending growth in India in the last two years, as Indian banks, saddled with some $150 billion of bad debt, slowed lending.

India has rarely stepped in to take control of a private company. The government's attempt to take control of debt-laden realty firm Unitech Ltd in late 2017 was stalled by the Supreme Court.

The government did take control of Satyam Computer Services in 2009 when an accounting scandal at the firm shook investor confidence in the information technology sector.

The new six-member IL&FS board named by the NCLT includes the managing director of Kotak Mahindra Bank Uday Kotak as IL&FS' non-executive chairman.

The NCLT ruled that IL&FS must make its response to the tribunal by October 15. It set a follow-up hearing for October 31.

Restructuring plan 

The government's intervention could cast doubt on IL&FS' restructuring plan for which it has just secured shareholder support.

"The government decided to intervene ... could be disruptive at this stage," Shriram Subramanian, managing director at proxy advisory firm InGovern, said.

IL&FS on Sunday said its shareholders had approved a plan to raise funds via debt and equity issuances. Earlier, the company had said its board would develop a "comprehensive" restructuring plan including asset sales and a rights issue.

India's Life Insurance Corp Ltd, which is IL&FS' biggest shareholder with a more than 25 per cent stake, said last week it would participate in the rights issue.

The state-owned insurer has often stepped in to help bail out troubled entities. Earlier this year LIC agreed to acquire a 51 per cent stake in IDBI Bank.

IL&FS's other large investors are Japan's ORIX Corp with a 23.54 per cent stake and Abu Dhabi Investment Authority (ADIA) with 12.56 per cent.

India's biggest lender by assets, State Bank of India (SBI), also owns a 6.42 per cent stake in IL&FS.

LIC and Orix did not respond to requests for comment on the Indian government's move to seize control of IL&FS on Monday.

SBI and ADIA declined to comment, while IL&FS said it would not comment.