NCLAT allows banks to declare defaulting IL&FS, group companies as NPAs

NCLAT had in February restraining banks from classifying either IL&FS or its group companies as an NPAs

The National Company Law Appellate Tribunal (NCLAT) on Thursday allowed banks to declare accounts of Infrastructure Leasing & Financial Services (IL&FS) and its 300 group companies non-performing asset (NPA) if they had defaulted on payments. The appellate tribunal, however, said the lenders would not be able to initiate the recovery process against these accounts or debit money from them. The lenders, the NCLAT observed, must not withdraw their support from IL&FS until a final resolution for the company and its subsidiaries was found.

The order came on a plea moved by the Reserve Bank of India (RBI), which had said that banks had an obligation to mark bad loans as NPA in the cases of non-payment, after the default of 90 days. The lenders, the RBI had pleaded, could not be relieved of this duty. 

The banking sector regulator had moved the NCLAT for the modification of a February 25 order in which the appellate tribunal said that accounts of IL&FS and its 300-odd subsidiaries could not be classified NPAs without approval. The tribunal’s directions had come during a hearing on the government’s plan for the resolution of IL&FS group companies.

Later, when the RBI had approached the NCLAT, the appellate tribunal had observed that the RBI should not “make it a prestige issue”.

It had also said the central bank could not restrict the appellate tribunal from passing orders in the issue. 

The RBI, on the other hand, had said that reflecting such loans as NPA on the books of banks was important as it acted as an early warning signal for the sector. The February 25 order of the NCLAT, the RBI had said, would lead to a “situation where statutory instructions/guidelines/circulars issued by the RBI become infructuous”. 

The RBI had then said it was not on the question of the resolution process of IL&FS and just wanted a modification to the order, which would allow banks to record NPAs on their books in terms of the master circular, which was also upheld by the Supreme Court. 

On February 11, the central government and the new board of IL&FS had submitted an affidavit detailing three categories — green, amber, and red. 

Companies with no cash and not in a position to pay any creditor were classified as red, while those with enough to pay secured creditors but not unsecured ones were put under the amber category. The firms which have enough money to service all their debts, to the secured as well as unsecured creditors, were classified as green. During the hearing on February 11, the NCLAT had allowed 22 companies, in the green category, to service their debt obligations.

The major group companies in the green list include IL&FS Investment Managers, IL&FS Securities Services, IL&FS Paradip Refinery Water, Tamil Nadu Water Investment, IL&FS Asian Infrastructure Managers, IL&FS Urban Infrastructure Managers, IL&FS Infra Asset Management, North Karnataka Expressway, IL&FS Solar Power, Tadas Wind Energy, Khadke Wind Energy, Etesian Urja, Kaze Energy, Wind Urza India, Maytas Logiparks, Lalpur Wind Energy, Jharkhand Infrastructure Invest Company, IIML Asset Advisors, and IISL Settlement & Transmission Services. The total outstanding loans of the IL&FS group are about Rs 60,000 crore, while debt of the group is over Rs 91,000 crore.

LIC is the largest shareholder in IL&FS with a fourth of the equity in the company, while Orix Corporation of Japan owns 23.5 per cent. Other shareholders include Abu Dhabi Investment Authority with a 12.5 per cent stake, IL&FS Employees Welfare Trust with 12 per cent, HDFC with 9.02 per cent, while Central Bank of India holds 7.67 per cent and State Bank of India holds 6.42 per cent as of March-end 2018.